Saman Bank’s Ratings Affirmed with a Stable Outlook

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of Saman Bank (SB) at ‘B-’ and ‘B’, respectively. At the same time, CI Ratings has affirmed SB’s Bank Standalone Rating (BSR) of ‘b-’ and Core financial Strength (CFS) rating of ‘b-’. The Outlook for the LT FCR and BSR remains Stable.

The ratings reflect the Bank’s weak financial profile and CI’s expectation that key credit metrics are unlikely to improve significantly in the intermediate term given the worsened operating environment in Iran. Key constraining factors include the Bank’s very low capital adequacy and severely impaired capital base. While net profitability has improved in recent years, backed by non-recurring income items, core pre-provision profitability remains weak and insufficient to restore the capital adequacy ratio (CAR) to the regulatory minimum requirement.

The Extraordinary Support Level (ESL) is Uncertain. CI considers the likelihood of sufficient and timely official support being made available to SB in the event of financial distress to be uncertain, and, consequently, does not incorporate such support into the Bank’s LT FCR. Moreover, even if the government may be willing to provide extraordinary support in case of need, its financial capacity to do so is limited, as indicated by Iran’s sovereign ratings (‘B’/‘B’/Negative). In CI’s opinion, SB’s shareholders are unlikely – under the current circumstances – to be able to provide sufficient capital injections that are needed to restore the low CAR to the regulatory minimum requirement.

The Bank’s BSR is based on a CFS rating of ‘b-’ and an Operating Environment Risk Anchor (OPERA) of ‘c+’, indicating high risk. OPERA takes into account both current and projected economic and financial conditions in Iran, as well as the strengths and weaknesses of the banking sector. The CFS rating is mainly constrained by the Bank’s weak CAR, which continues to hover at a level significantly below the regulatory minimum requirement. This is a result of low profitability including a net loss in FY17, combined with rapid balance sheet growth in FY18-20 and into FY21 (which ended in March). The still relatively high non-performing financings (NPF) ratio and significant level of unprovided NPFs are also important caveats regarding capital. Furthermore, the extremely difficult operating environment over the past few years, which has been affecting the banking sector in general, continues to weigh on the Bank’s asset quality despite the fall in the NPF ratio and improvement in the financing loss reserve (FLR) coverage in full year FY21, based on unaudited preliminary figures. Operating conditions have become even more difficult due to the impact of Covid-19 on economic activity. Although the authorities have gradually eased lockdown restrictions, GDP in 2021 has been adversely impacted on both the demand and supply sides. Due to the ongoing effects from the US sanctions, real GDP growth might also settle at a lower level for some time after the pandemic is contained. These risk factors combined with the reduction in incomes and business turnover will inevitably place additional pressures on SB’s financing asset quality going forward.

The ratings continue to be supported by SB’s good market position in trade finance and corporate banking, together with its growing and resilient customer deposit franchise, which comfortably funds the Bank’s financing portfolio and results in sound financing-based funding metrics. Also supporting the ratings is the avoidance of undue concentration risks in the Bank’s deposit base.

SB is one of the leading private banks and ranks among the medium-sized private sector institutions in terms of assets and customer deposits in the Iranian banking sector. Over the years the Bank has built a sizeable branch network in Iran, focusing on corporate clients and SMEs, although individual borrower concentration increased to some extent in FY21. The large branch network facilitates better access to customer deposits. On the liability side, the high proportion of customer deposits obtained from retail customers bestows SB with granularity, as well as relatively low reliance on more volatile segments, such as deposits from corporate customers. Despite the difficult economic and political environment in recent years, SB continues to be a trusted partner for international correspondent banks, with a very good track record in honouring letters of credit and letters of guarantee obligations. This remains a key strength for SB in light of the Bank’s developed trade finance operation, and especially given the further deterioration of the operating environment after the onset of Covid-19. The Bank is trying to capitalise on its reputation through its newly opened branch in Frankfurt from where it expects to generate good fees from increased trade finance volumes.

SB – in common with most Iranian banks – continues to report a thin (and negative in recent years) net financing margin due to ceilings set by the CBI on deposit and lending rates, which in turn produces negative net financing income and renders its business model unsustainable. Therefore, profitability at the operating level is dependent on non-core revenues, at a time when SB is trying to build up its low FLR coverage and concurrently generate the much needed capital to act as a buffer for future losses. While the sale of non-core assets at significant gains in the last three years has served to alleviate pressure on SB’s profitability and ROAA, such gains are not recurring, and as such, CI does not attribute any franchise value to this non-core business activity. CI expects further pressure on operating profitability and possibly on net profit and ROAA in the short term, given that such gains may not be repeated and in view of the need to boost FLR coverage from the currently moderate level.

In CI’s opinion, SB’s capital position is very weak and continues to significantly weigh on the ratings. Despite satisfactory retained earnings in the last three years to FY21, SB’s CAR remains below the regulatory minimum requirement, and is also subject to impairments. As such, SB’s thin CAR does not provide a cushion against unforeseeable losses, particularly in view of the prevailing high credit risk. CI understands that paid-up capital is planned to be raised by IRR40tn to IRR51.5tn in FY22. More than half of the amount (IRR24tn) would come from fixed asset revaluation, while another IRR8tn should be received by means of cash contribution from existing shareholders. The residual IRR8tn will come from capitalising reserves. Even after the revaluation and the planned rights issue are completed, CAR is expected to stay below the regulatory minimum, and SB will need to report net profits that are similar to those in FY21 in the near to medium term before CAR is reinstated to an adequate level. Furthermore, although the said revaluation will improve regulatory capital ratios, such a measure would further decrease the proportion of core equity within SB’s regulatory capital base.

Notwithstanding an improvement, asset quality also continues to weigh on the ratings, reflecting the still challenging conditions encountered by many sectors in Iran as a result of US sanctions. Despite a decrease in NPFs in recent years, SB has a still moderately high NPF ratio, while renewed growth cannot be ruled out given the worsened economic conditions together with heightened credit risk, which have been aggravated by Covid-19. At the same time, FLR coverage remains moderate, albeit strengthened to some extent in FY21 based on preliminary figures, following the transfer of a significant amount from operating profit to provisions. While unprovided NPFs are more than covered by collateral, CI views security as being a partial loss mitigant rather than a direct source of repayment.

Benefiting from a developed and rapidly growing customer deposit franchise based on its superior technology and quality of service, SB continues to boast very sound funding metrics. This in turn bestows SB with high granularity and low concentrations by depositor, while the predominant retail nature of the deposit franchise enhances the stickiness of such deposits. At the same time, utilisation of wholesale funding was moderately low, reducing refinancing risk to a large extent. In terms of liquidity, while key ratios appear satisfactory, supported by a large stock of bank placements, this is subject to limitations given that a big part of such balances is tied up with commitments under LCs.

Rating Outlook

The Stable Outlook indicates that the ratings are likely to remain unchanged over the next 12 months. The outlook takes into account CI’s view that current risks to the Bank’s financial profile from the difficult operating environment are adequately reflected in the ratings.

Rating Dynamics: Upside Scenario

The Outlook could be revised to Positive if total CAR is raised to the regulatory minimum threshold as stated by management’s plans and if profitability strengthens substantially, in particular at the operating level. This, in turn, would enhance SB’s capacity to step up provisions and FRL coverage of NPFs. A final resolution of the Bank’s long-lasting disputes with Bank Pasargad and the CBI, without a negative impact on its risk and financial profile, could also exert positive pressure on the Outlook.


Contact

Primary Analyst: George Panayides, Senior Credit Analyst
Secondary Analyst: Kathleen Gamper, Senior Credit Analyst
Committee Chairperson: Morris Helal, Senior Credit Analyst

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