A Closer Look at Bank Mergers in Iran

EghtesadOnline: A senior former banker says the planned merger of five banks affiliated to the armed forces with the government-owned Bank Sepah can be a step in the right direction in that it would cut costs.

News ID: ۷۸۴۵۵۷

10 March 2019

Ahmad Hatami Yazd, a former chief executive of Bank Saderat Iran, however, warned that if the government resorts to the central bank for reimbursing depositors of the five lenders, it would entail great risks for the economy.

The Central Bank of Iran said earlier this month the merger of Bank Sepah with five banks and credit institutions affiliated to armed forces with Bank Sepah is in the making.

The move is in line with an earlier decision by the Money and Credit Council - a major monetary decision making body - and the Supreme Council of Economic Coordination – a body comprising heads of three branches of government formed at the behest of Leader Ayatollah Seyyed Ali Khamenei to address major economic issues, according to Financial Tribune.

"As part of efforts to centralize the capability and capacity of the entities, namely Ansar Bank, Bank Hekamt Iranian, Mehr Eqtesad Bank, Ghavamin Bank, and Kosar Credit Institution are being merged into one efficient and stable bank," the CBI said at the time.

In a talk with the Financial Tribune, Hatami Yazd noted that Iranian trade laws lack a section for "mergers" and as a result this globally common practice does not exist in Iran in the true sense of the word.

Form his perspective what is done in Iran is a sort of "unification" of entities and as in the case of uncertified credit institutions in the past, a company takes over assets and liabilities of the dissolved the entity.

"In this case for example, all branches of these lenders will be handed over to Bank Sepah.  This indeed is an example of unification and could very well be that before these branches are unified with Sepah, they are first integrated as one," Hatami Yazd said.

If this unification means some branches of these lenders are shut down, it will be a step forward in that “it would reduce costs, not the least of which would be wages and the high cost of running the large number of branches.”

There are five banks with five chief executives and five boards of directors (each board having five members) meaning that 30 people will be reduced to five and work will be more efficient and effective, he added.

"However it's a whole different world when you consider assets and liabilities of such banks because the banks owe money to their depositors. Large numbers of people have money in these banks which the banks gave in loans to assorted organizations and businesses a large part of which  turned out to be sour.”

The issue of non-performing loans looms large over at least four of these merging banks, he said.

Although no official figures have been released about financial books of these banks, Hatmai Yazd estimates that figure to be in the region of 700 trillion rials ($5.3 billion ).

Poor CARs

He went on to say that almost all Iranian banks have poor capital adequacy ratios but these 5 banks score much worse. He warned that if the Central Bank of Iran resorts to printing money to bail out the aforementioned banks - as was the case when reimbursing depositors of shadow banks – it would lead to another major upsurge in the volume of liquidity and by extension much higher inflation rates.

According to President Hassan Rouhani, to reimburse depositors of insolvent money institutions in the recent past, the government had to spend 350 trillion rials ($2.7 billion) at today’s forex rates, but almost $10b at that time).

The senior banker note that the government cannot carry the burden of new unpaid debts of military-affiliated banks because it already has a mountain of pending debts of its own.

"The government should either sell its properties or the CBI will have to create new money if they want to repeat the same model as for the credit institutions in the past."

CBI chief Abdolnaser Hemmati said earlier that the regulator is trying to overhaul the banking system and the merger of armed forces banks and credit institutions with Bank Sepah is a key feature of the long-awaited reform plans.

Hemmati said the merger will take four months, adding that 24 million people have close to 2,150 trillion rials ($16.5 billion) in deposits with the merging entities.