Iranian banks to struggle with bad balance sheets: Fitch

Amid tightening US sanctions, coupled with deteriorating domestic economic conditions, Iranian banks will continue to struggle with bad balance sheets and large operating losses, noted a report by Fitch Solutions Macro Research (a unit of Fitch Group).

“We see very limited scope for Iranian banks to engage with international counterparts amid tightening US sanctions. As such, Iranian banks will continue to struggle with bad balance sheets and large operating losses,” the report added.

However, it noted that risks of an outright collapse of the sector nevertheless appear contained due to Iran's non-reliance on foreign funding.

The vast majority of international banks are vulnerable to the US sanctions due to the dominant role of the US and the dollar in the global economy and financial system. As such, they will look to eliminate any exposure to Iran, Fitch noted.

Iran's parliament recently passed legislation to bring domestic banking sector regulations is in line with international standards, While noting this was a positive step, the report said it would not substantially impact international banks’ perceptions of risks associated with operating in the Iran, as long as US sanctions remain in place.

It said even beyond sanctions, the Iranian banking sector’s structural vulnerabilities will restrict international engagement.

Iranian banks, most of which are state-owned or state-linked, have exceptionally high levels of bad debt, with non-performing loans (NPLs) estimated at 13 percent of gross loans in 2017, Fitch report said.

In addition, capital adequacy is very low, standing at less than 6 percent in that same year, compared with the Basel III-stipulated 8 percent.

Nevertheless, the report adds that the risks of an outright collapse of the sector nevertheless appear contained, not least due to Iranian banks' non-reliance on foreign funding, which means that repayment capabilities will not be affected by ongoing rial weakness.