Iran Commercial Banking Report Q3 2008

Over the last year, the crisis in the inter-bank market, and the soaring prices of oil and other raw materials, tended to obscure several other important trends. In most of the developing world (i.e. the vast majority of the countries whose banking industries are surveyed by BMI), lending has been growing quickly. In many emerging markets, inflationary pressures have been boosted by a rapid increase in credit. In a number of emerging markets, macro-economic imbalances are evident.

The figures on the tables above provide a snapshot of the banking sector in Iran and the changes that have taken place within it over the last year. To place the figures in context, it may be useful to bear in mind certain aspects of the 59 countries whose banking sectors are currently surveyed by BMI. Across this sample, the median growth in assets in local currency terms was 21.3% (in Colombia). The median loan growth was 21.6% (in India). The median growth in deposits was 17.9% (in Brazil).

On their own, the ratios of loans to deposits, assets, and GDP mean little: however, they can provide useful hints when combined with other data. Across the 59 countries, the median loan/deposit ratio is 92.3% (in Greece). The median loan/asset ratio is 56.0% (in Poland). The median loan/GDP ratio was 63.9% in India.

From Q308, we have included a new section that examines the risks associated with each countrys banking sector in a new way. We have essentially sought to ask this question: to what extent will the banking sector likely need to source funding from banks in the rest of the world over the course of 2008.

Given that the answer is not necessarily, on its own, meaningful, we have looked at other key issues such as the size and recent movement in the loan/deposit ratio, macro-economic developments and recent movements in financial markets.

Booming oil prices and, in Iran at least, highly inflationary monetary policies have led to a surge in bank lending in much of the Middle East and North Africa. It is not clear that all of this lending has been prudent. Nevertheless, the massive current account surpluses being achieved by many of the countries in the region indicate that quite unlike Southeast and East Asia in 1997-8, for instance the currencies are undervalued. There is no reason why the boom should stop anytime soon. The Middle East and North Africa should, collectively, continue to be a significant supplier of capital to the rest of the world.

However, in part because of the relative underdevelopment of financial services and banking in most countries, relatively little of this money should come directly through the local banks.

As in previous reports, we include a SWOT analysis for Iran. A general theme of this report is that the long-term problems facing Irans banking sector few of which are of the banks own making are such that it compares unfavourably with its peers in the rest of the world. A country which, for political reasons, is isolated commercially from global markets, where the Central Bank is not independent and where the government for a long time has emphasised high inflation as a way of reducing the value of its substantial borrowings is not a country where strong banks thrive. Of the 58 other countries whose banking sectors are surveyed by BMI, Venezuela is the one where the structural challenges are most similar to those faced in Iran. As we explain in this report, the government of Mahmoud Ahmadinejad is unlikely to end the rampant inflation anytime soon.

Since Q108, we have calculated, on a consistent basis, a Commercial Bank Business Environment Rating (CBBER) for each of the 59 countries surveyed. The CBBER includes an assessment of the limits of potential returns: it does this by taking into account the size, growth potential and bancassurance potential of the banking sector, as well as aspects of the economy in 2007. The CBBER also depends on an assessment of the risks to the realisation of potential returns: this reflects BMIs assessments of overall country risk, together with the regulatory and competitive environment.

CBBER for Iran Irans overall CBBER of 46.7 is towards the lower end of the countries in the Middle East and Africa region that are surveyed by BMI. This score is underpinned by a solid if not spectacular score of 54.4 on the heavily weighted banking market structure of the limits to potential returns element. This is reflective of the sheer scale and entrenched position of the Iranian banking system within the Iranian economy, which is comparatively large for the region, rather than a high level of development.