Iran Commercial Banking Report

Key Issues

The Iranian economy is anticipated to grow by 5.85% in 200 6driven by government spending, in turn funded by increased oil revenues. BMI anticipate that end of year inflation will reach above 15% in 2006, but risks remain to the upside. This inflation level is a risk to the outlook for the economy. The other main risk to the outlook for the Iranian economy, and by implication the banking sector, is the world's response to Iran's stated programme for nuclear enrichment. Despite the passing of the UN Security Council (UNSC) deadline on August 31, demanding Iran suspend uranium enrichment, diplomatic efforts to resolve the nuclear dispute are set to continue, although the chance of sanctions, albeit minor initially, has increased. Tehran's reply on August 22 to the P5+1 incentives package, offering serious talks, and the prospect of suspension as a result of talks has meant that Russia and China have been kept on side and are unlikely to back sanctions for now. However, the Lebanese crisis, while bolstering Iran's regional status has also confirmed perceptions among Washington hawks of the danger of a nuclear armed Islamic Republic. As such, there is a danger that Tehran may over-play its hand and provoke a harsher response from the major powers than initially intended by those states.

Given a positive economic backdrop driven by high oil prices, the banking sector in Iran is enjoying strong growth, albeit from a low base. In local currency terms assets, loans and deposits have grown by 26%, 29% and 27% respectively, placing Iran banking sector around the 14^th-highest growth banking sectors of the 59 countries we surveyed. Iran's loan/deposit ratio at 102.2% is high, suggesting deposit growth is required alongside loan growth to enable the deposit base to fund the loan growth. Iran banks are not significantly exposed to the bond market given they hold only 1% of their assets in bonds.

The risk levels for Iran and the outlook for the banking sector have increased in the last quarter due to rising inflation and Iran's nuclear enrichment programme. The growth has been strong due to the nominal growth of the economy but this lending may prove reckless should a downturn occur in the economy.

Changes To This Quarter's Commercial Banking Forecast

We have made a number of improvements to the commercial banking reports this quarter. In particular, we have collated information about banks' capital and bond portfolios.

We have looked at capital primarily because we wanted to produce a clearer picture of the banks' balance sheets and, in particular, the liabilities side. We are now much better able to quantify liabilities that are not deposits.

We collated information about the bond portfolios because we wanted to gain additional insights about the risks with which the banks are involved. Across all the countries that we have surveyed, the commercial banks are major investors in government securities. In some instances, the banks are large holders of bonds - by any standard. In other instances, the banks' holdings of securities represent a very substantial portion of their total assets.