According to CI, the FSR is supported by the bank’s sound and increased capital adequacy, its privileged access to low-cost funding and its well-managed cost base. The high non-performing financing (NPF) ratio, together with unprovided NPFs, is an important caveat regarding capital.
FSR is constrained by a difficult operating environment, sovereign risk and the low amount of usable liquid assets held by the bank. Although financing-based liquidity ratios are sound, the high level of contingent commitments constrains the rating as they could tighten both the liquidity and capital ratios, if drawn before new funding from official sources is made available.
High borrower concentration remains a feature of EDBI’s financing portfolio, given the bank’s policy of financing large projects, which also constrains the rating. As EDBI is a state-owned policy bank, its FSR is explicitly linked to the sovereign rating and cannot exceed the long-term Foreign Currency Rating (FCR) of ‘BB-’ for Iran, according to Financial Tribune.
Due to its special remit, EDBI’s Support Rating is affirmed at ‘2’, which indicates a very high likelihood of further foreign currency liquidity and capital support by the Iranian government. The bank’s Long- and Short-Term FCRs are both affirmed at ‘BB-’ and ‘B’, respectively, with a negative outlook, and remain at the level of Iran’s sovereign FCRs (‘BB-’/ ‘B’/ ‘Negative’).
Negative Outlook
The negative outlook on the ratings for EDBI (and other Iranian banks whose ratings were constrained by the sovereign rating) was assigned in May 2018, following a similar change in the outlook for Iran’s sovereign rating.
CI Ratings notes that in common with the other Iranian banks, EDBI’s ratings are increasingly pressured by heightened sovereign risk factors, as well as the rising external political risks that: a) weigh on future economic prospects; b) impede Iran’s efforts in repatriating export proceeds and accessing foreign external assets; and c) restrict the amount of foreign direct investment made by foreign entities after the reimposition of US secondary sanctions.
The ratings for EDBI and other Iranian banks could be lowered, if Iran’s FCRs are lowered. At the same time, despite the marked improvement in FYE18, if financing asset quality deteriorates again either in terms of higher NPF ratio and/or lower loss coverage of NPFs, this will likely put downward pressure on the bank’s ratings.
EDBI continues to perform a vital policy role in supporting efforts to increase and diversify Iran’s non-oil exports, which have followed a growing trajectory since the lifting of sanctions in January 2016.
Given its sound business model as one of Iran’s four specialized state-owned banks with direct access to regular government funding, EDBI stands to benefit significantly from the improving economy and lower inflation.
Asset Quality
Asset quality, however, remains a key constraining factor for the ratings. Its deterioration reflects the still challenging conditions encountered by many sectors in Iran as a result of the sanctions, as well as government arrears arising from delays on the completion of large government projects.
NPFs rose significantly in FYE17 and into H1 2018, resulting in a much higher NPF ratio, while loss coverage of NPFs declined to a low level despite ongoing high provisioning.
The bank’s management recently informed CI that based on preliminary unaudited figures, NPFs more than halved as of March 2018 thanks to sizable collections from the government and other state guarantees, resulting in a substantially lower NPF ratio and a sound financing loss reserve coverage.
With regard to the underlying credit risk on buyer credit granted to foreign importers, EDBI's management has assured CI that currently all overseas buyers’ credit bears a guarantee from EGFI, although in the not-too-distant past the bank had granted buyer credit without insurance from the Export Guarantee Fund of Iran.
Conventional liquidity ratios are of limited relevance, given the nature of the business model and especially the low dependence on customer deposits, although the latter have been on a growing trajectory in recent years. Instead, another key supporting factor is the bank’s direct access to regular medium- and long-term government funding.
Supported by a capital increase of 10 trillion rials ($238 million) in H1 FYE18, the bank’s capital adequacy ratio increased to a very comfortable level and remains a key supporting factor, although capital remains susceptible to the volume of unprovided NPFs. Nonetheless, the capital position is sound and it is expected that the bank will receive additional endowments that are necessary to support further growth.
EDBI is a state-owned policy bank with export development as its main goal. This renders profitability a secondary concern for management, although the bank has always tried to operate as efficiently as possible.