Capital Intelligence (CI), the international credit rating agency, announced that it has assigned a first time Financial Strength Rating (FSR) of ‘B’ to Saman Bank (SB), Iran, on ‘Stable’ Outlook. The Long and Short-Term Foreign Currency Ratings (FCR) are both set at ‘B’, reflecting the Bank’s credit metrics and coinciding with the Sovereign Ratings of Iran. The Outlook on the FCR is ‘Negative’, reflecting the current Outlook on Iran’s Sovereign Ratings. A revision to the Outlook on the Sovereign Ratings is likely to lead to a revision to the Outlook on the Bank’s FCR, provided other FSR metrics remain stable or improve. A Support Rating of ‘4’ is assigned, which on balance indicates only a moderate level of support is likely. Although SB’s shareholders have supported the Bank’s growth in the past through capital contributions, neither they, nor the CBI are likely under current circumstances to be able to provide significant capital or foreign currency liquidity support until foreign exchange availability improves significantly in Iran.
The FSR is supported by the Bank’s improved liquidity, which reflects the strength and diversified nature of its deposit franchise, as well as its successful business model and diversified financing portfolio. The rating also takes into account SB’s good L/C payment record, which demonstrates the Bank’s prudent approach in pursuing this business in a manner which has spared it loss of access to foreign exchange in the aftermath of the October 2012 exchange rate crisis. It is also evidence of its willingness to meet its obligations.
The FSR is primarily constrained by very weak asset quality and capital adequacy, as well as by sovereign risk factors. The operating environment remains very challenging, due in large part to the effect of economic sanctions on Iran. Despite of the recent political agreement between Iran and the P5+1 nations, CI is of the opinion that the sanctions are likely to be eased gradually but not lifted for some time. The Outlook on the FSR is ‘Stable’. For the FSR to be raised there would need to be a significant improvement in both asset quality and capital adequacy. The FSR is premised on the assumption that contingent losses on the Bank’s account balances with the Central Bank of Iran (CBI) will not crystallize and that there will be no losses on balances held with foreign banks.
The Bank recorded a slightly lower non-performing facility (NPF) ratio at end-September 2013. Strong emphasis by SB on improved risk management is expected to lead to a further moderation in the rate of accretion of NPFs. As a base case scenario, CI expects that asset quality will continue to improve, but only gradually. Assuming sanctions are gradually eased, liquidity should also improve qualitatively if counterparty concentration risks are reduced and if the Bank is able to freely access and mobilise all the foreign currency balances it holds with foreign banks.
The Bank’s income generation is low and dependent on trading gains. SB’s risk absorption capacity is limited relative to the need for greater provisions, due to pressure on funding costs and growth of operating expenses. Although improved in the six months to end-September 2013, ROAE profitability is weak when compared to the rate of inflation. As a result, much needed cash contributions to capital through rights issues may be difficult to achieve. A significant improvement in capital adequacy is therefore seen as unlikely, unless there is a substantial cash capital increase unrelated to dividend reinvestment. Over the long term, capital adequacy can only improve if internal capital generation rises to a much higher level than at present. This in turn would require an upward step change in profitability at the net level.
SB was the first private credit institution to be established in Iran, in September 1999. Amongst the founding shareholders were pension funds, as well as a number of investment companies, entrepreneurs and professionals who maintain their stakes in the Bank today. With total assets of IRR183.4 trillion ($7.4bn) as of end September 2013, SB holds an 11.6% market share of deposits amongst the top 6 privately held Iranian banks. SB operates a network of 150 branches, mainly concentrated in Tehran city and province and other large cities. As one of the first Iranian banks to develop internet banking SB has been able to develop a strong deposit franchise. SB serves a broad spectrum of customers in the retail, SME and corporate segments with an array of financing and investment deposit products. Unlike most other Iranian banks, SB only has a very small equity and industrial investment portfolio.
Senior Credit Analyst
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