Rial’s Slide Necessitates Bank M&A

EghtesadOnline: A senior banking official said the steep fall in the value of rial against the US dollar has strained banks’ balance sheets by dealing a blow to their capital levels.

News ID: ۷۴۶۰۱۵

17 September 2018

Kouroush Parvizian, the head of the Association of Private Banks and Credit Associations, wrote in a commentary published on the website of Tehran Chamber of Commerce, Industries, Mines and Agriculture that the forex rate surge in recent months has devalued banks’ capitals, lowering the capital of some of these banks to below $1 billion.

In the wake of the 2015 nuclear deal between Iran and world powers, which led to the lifting of sanctions, many Iranian banks started to improve their financial statements and bring their practices in line with international standards. Private lenders have been at the forefront of these efforts.

According to Parvizian, one solution proposed by Central Bank of Iran officials pertains to the merger and acquisition of banks, Financial Tribune reported.

“Bank mergers, which have been put forward in recent months, is among the effective methods of the banking system,” he wrote.

“In my view, the merger of several banks into one bank is the correct decision and all the parts and components of the banking system should assist this process because some banks do not have a good status under these conditions.”

Parvizian, who is also the managing director of Parsian Bank, said the reduction of banks’ Capital Adequacy Ratios come as many shareholders are unwilling to pitch in to increase banks’ CAR.

The senior banker argued that CARs are one of the most important factors for banks’ international presence and their competition with their global peers. He regretted that the capital of some of the biggest Iranian banks are below $1 billion that is not adequate for trade transactions, exports, imports or bank guarantees.

Parvizian alluded to the scheme currently underway to consolidate military banks into Bank Sepah, saying the decision has been approved by the Leader Ayatollah Seyyed Ali Khamenei and is being pursued by the government and armed forces.

The volatility in currency and gold markets intensified after US President Donald Trump announced in May that he is pulling his country out of the multilateral nuclear deal Iran signed with world powers in 2015.

Earlier this month, Washington reimposed sanctions on Iran’s purchase of US dollars and its trade in gold, precious metals, metals, coal and industrial software.

CBI is trying to calm the volatile currency and gold markets through market mechanisms and less intervention.

On August 6, it eased foreign exchange rules and allowed moneychangers to resume work at open market rates, as part of the latest rescue package devised to calm the markets.

The fresh strategy came after the government decided to unify the US dollar’s exchange rate at 42,000 rials on April 9 in response to the rial’s freefall.

Parvizian acknowledged that bank mergers could also have their own critic and that consolidation is only one solution to the banking system’s woes.

“The acquisition of one bank by another bank is among other methods if the Money and Credit Council were to agree with it or Iranian banks partnering with international peers can also be effective in normal times,” he wrote, adding that selling Iranian banks’ shares in international markets and attracting foreign investment are another likely strategy.

Mergers and acquisitions in Iran’s banking industry are aimed at creating bigger, stronger and more efficient banks.

Farshad Heydari, former CBI deputy for supervision, had announced in May that three financial institutions, namely Hekmat Iranian, Ghavamin and Kowsar, are to be merged in the next fiscal year (starting March 21).

Heydari also discussed the idea of merging the two newly-created banks into a major efficient bank.

“The planned consolidation is a watershed event in reducing the influence of shadow banks and making the Iranian banking system more efficient,” he said.