Export Development Bank of Iran's ratings reinstated after review; Still on 'Negative' outlook

The Rating continues to be supported by the Bank's strong capital adequacy, its clearly defined business model, and its privileged access to low cost funding.

The major rating constraints are the weakening asset quality, a high level of contingent commitments and borrower concentration risks, as well as the challenges posed by the international economic sanctions on Iran.

The 'Negative' Outlook reflects what is now significant downward pressure on the FSR, from the expectation of further deterioration in asset quality, particularly if this were not mitigated by corresponding growth in the capital base.

The Support Rating is affirmed at '3', predicated on the expectation of a high likelihood of liquidity, as well as shareholder support for EDBI by the Iranian Government.

Accordingly, the Long- and Short-Term Foreign Currency (FC) Ratings are also reinstated at 'BB-' and 'B', respectively, on 'Negative' Outlook. The FC Ratings remain at the level of Iran's current Sovereign FC Ratings and would automatically be adjusted downwards if the latter are lowered, or in the event of worse than expected deterioration in the Bank's financial condition, or in its operating environment, which might affect its overall credit profile.

Despite the growing effects of international sanctions on Iranian exports and the recent shock to the economy caused by the sharp depreciation of the exchange rate, the longer-term trend growth in non-oil exports is expected to resume. As a sanctioned entity itself, however, it is increasingly difficult and costly for the Bank to conduct its international operations, and this has raised EDBI's operational risk profile.

At the same time, EDBI's asset quality continues to weaken because of the squeeze on corporate liquidity on account of tighter control of government payments to corporates and their restricted access to key raw materials. Loss reserve coverage has now fallen to a less than adequate level and is beginning to impair EDBI's otherwise strong capital adequacy. However, the Iranian government is committed to support the Bank's capital needs and it is expected that this should enable EDBI to maintain a sound capital base.

The Bank's return on average assets (ROAA) remains satisfactory based on its low operating cost base and resilient net financial income differential. However, growth in gross income and operating profit are expected to be limited or negative in FYE 13 and FYE 14, while bottom line profit is also likely to decrease on account of continued growth in non-performing facilities and higher loss provisions.

EDBI is a policy bank established by an Act of Parliament in 1991 in order to promote Iran's non-oil exports by providing financial services to exporters of Iranian goods and services, such as L/C facilities and export finance. EDBI continues to perform an important policy role as Iran redoubles its efforts to increase and diversify its non-oil exports.