9 Exchange-Listed Banks Drown in Sea of Red Ink

EghtesadOnline: The Iranian banking conundrum is getting more complicated every day. The Central Bank of Iran’s officials have announced plans to merge several failing banks, causing many depositors to contemplate withdrawing their money from those lenders.

News ID: ۷۴۲۵۰۰

04 July 2017

Most of the banks in question have had their shares frozen on Tehran Stock Exchange and Iran Fara Bourse for well over a year now.

Latest statistics indicate that most of the exchange-listed banks barred from trading are bleeding cash on a daily basis and have lost nearly half their nominal capital so far.

According to Bourse Press, nine publicly-traded banks with a combined capital of 170 trillion rials ($4.53 billion) lost more than 84 trillion rials ($2.2 billion) in the last fiscal year (ended March 20, 2017). The losses were calculated based on statements published for a range of periods from 90 to 365 days of last year, Financial Tribune reported.

So, the total losses incurred by the nine banks for the entire fiscal year are well above $2.2 billion.

heaviest losses

The state-owned Bank Saderat, which is the largest bank among the nine in terms of capital, suffered the heaviest losses: 43 trillion rials ($1.16 billion), i.e. 753 rials per each of its 57 billion shares. The period under review was last fiscal year’s three quarters (March-December 20, 2016), based on latest data published by the bank.

The data further indicate that Saderat bled an average of 161 billion rials ($4.29 million) every day.

Saderat’s trading symbol, alongside those of Bank Mellat, Tejarat and Post Bank, was frozen back in July 2016 by CBI and the Securities and Exchange Organization. In order to end the banks’ practice of giving out dividends that had no real financial backing, they were mandated to prepare their financial statements based on International Financial Reporting Standards.

Saderat’s ticker has yet to open after about a year.

Next in the line was Parsian Bank, which incurred 621 rials in losses for each of its 23.7 billion shares during the same nine-month period. The total loss amounted to 14 trillion rials ($393 million) with an average of $1.45 million for the 270 days the lender has published its financial statement. Parsian’s trading symbol has been closed for about eight months.

This is while Parsian has been mandated by CBI to reimburse the 10,000 depositors of the now defunct Samen al-Hojaj Finance and Credit Institution. According to the bank’s managing director, Kourosh Parvizian, the payments will start by July 11.

Tourism Bank was third on the list with a total of 10 trillion rials ($293 million) in losses for nine months of last year, i.e. 1,833 rials per 6 billion shares. Its average daily loss stood at $1.08 million.

Iran’s first private bank, Eghtesad Novin was next. It incurred 6.2 trillion rials ($166.6 million) in losses during last year’s first half (March-September 21, 2016)–about $925,000 per day on average.

Tejarat Bank was fifth. Its losses for the last fiscal year (started March 20, 2016) amounted to 42.9 trillion rials ($114.5 million)–94 rials for each of its 45.7 billion shares. The average daily loss was $313,848 per day.

Bank Day was next, with an average daily loss of $665,600 for 90 days reaching a total of 2.2 trillion rials ($59.9 million) for last year’s first quarter (March 20-June 20, 2016).

It was followed by Bank Sarmayeh with a total loss of 1.9 trillion riala ($51.73 million), Iran Zamin Bank with 430 billion rials ($11.62 million) and Ghavamin Bank with 220 billion rials ($5.97 million). The three banks’ published records were for the nine-month period.

Banks on the Rocks

Iranian lenders were in their prime back in the 2000s. Former president, Mahmoud Ahmadinejad, eased banking regulations and allowed private and state-owned banks to flourish.

A boom in oil revenues during the period translated into rampant government spending and explosion in money supply. However, lack of oversight and a weakened CBI combined with the government forcing lenders to finance its extravagant projects meant things were going in a wrong way.

Then came international sanctions imposed against Iran over its nuclear program. The housing market stagnated and businesses went bust. Consequently, banks were unable to sell their properties to recoup their loans. No bank went under though, as they simply brushed the losses under the carpet. They covered the bad loans with new loans and eventually filled their balance sheets with bad debt.

In order to address the sea of red ink, CBI mandated banks to adopt the International Financial Reporting Standards for enhancing transparency. Yet, most banks went on to report huge losses under IFRS, prompting exchange officials to freeze several banks’ trading symbols to prevent a market panic.

Bank Mellat and Tejarat returned to trading in early 2017 and rocked the market, causing a massive nosedive in TSE’s main index, as well as a 37% and 33% decline respectively in their share values. The two banks had published their updated balance sheets, which signified the losses they had endured. This, combined with the investors’ frustration, led to a major selloff.

Investors have repeatedly voiced concerns regarding the large number of frozen stocks, including the large-cap banking shares.

Progress in IFRS Implementation

Iranian banks’ progress in adapting their financial statements with IFRS was around 20-30% during the previous Iranian year, according to a private bank’s board member.

“Another part of IFRS compliance will be implemented in the current year, as it is a prerequisite for establishing connections with international banks,” Asghar Pourmatin, a board member of Eghtesad Novin Bank, was quoted as saying by Securities and Exchange News Agency.

However, he added, it would be better if CBI could make these changes through a step-by-step process, say in a five-year period, to prevent any shock to the banking system.

“If banks are forced to suddenly implement the required changes in their financial statements, they would face numerous problems as they are already dealing with soured assets and non-performing loans,” he added.

The IFRS-based balance sheet templates were first released by CBI in February to improve financial transparency and the international operations of Iranian banks.

CBI has seriously pursued the complete implementation of IFRS and other international banking requirements such as Basel Accords.

IFRS are a single set of accounting standards, developed and maintained by the International Accounting Standards Board for application on a globally consistent basis by developed, emerging and developing economies.

These standards help provide investors and other users of financial statements with the ability to compare the financial performance of publicly listed companies on a like-for-like basis with their international peers.

After the lifting of sanctions imposed on Iran’s banking system, the necessity of conforming to IFRS was crucial to ease and speed up the process of absorbing foreign resources.

IFRS standards are now mandated for use by more than 120 countries, including the European Union and by more than two-thirds of G20 countries.