Export Development Bank of Iran - LT FCR and BSR Outlook Revised to Stable Following Sovereign Rating Action

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI), today announced that it has revised the Outlook on the Long-Term Foreign Currency Rating (LT FCR) and Bank Standalone Rating (BSR) of Export Development Bank of Iran (EDBI) to Stable from Negative. At the same time CI Ratings has affirmed the LT FCR and Short-Term Foreign Currency Rating (ST FCR) of EDBI at ‘B’ and ‘B’, respectively. The Bank’s BSR of ‘b’, Core financial Strength (CFS) rating of ‘b’ and Extraordinary Support Level (ESL) of Moderate have also been affirmed.

The rating action follows the recent revision of the Outlook on Iran’s sovereign ratings to Stable from Negative. The change in the outlook on the sovereign’s LT FCR of ‘B’ reflects the easing of budgetary and external liquidity pressures due to the upturn in hydrocarbon and commodity prices, which CI expects will remain at favourable levels over at least the next two years. These encouraging developments have in turn had a positive impact on the amount of funds available to the Iranian government, a part of which is channelled to EDBI during the ordinary course of business through the country’s National Development Fund, or the Central Bank of Iran. CI notes that being a government-owned policy bank, EDBI’s CFS, BSR and FCRs are explicitly linked to the rating and Outlook of the sovereign. Dependence on shareholder support for injections of additional capital is currently high, while being a policy bank, EDBI receives low-cost funding from the government, which it channels to exporters at very competitive rates.

EDBI’s BSR is based on a CFS rating of ‘b’ and an Operating Environment Risk Anchor (OPERA) of ‘c+’, indicating high risk. OPERA reflects the difficult political and economic environment in Iran, aggravated by Covid-19, as well as geopolitical pressures. It also stresses the low strength of the Iranian banking system.

The CFS rating is constrained by the Bank’s impaired capital base owing to frozen FX liquidity, which is in turn due to international sanctions and volatility given the high FX reserve constituent. Although financing-based liquidity ratios are sound, the high level of contingent commitments constrains the CFS as it could tighten both liquidity and capital ratios if drawn before new funding from official sources is made available. Also constraining the CFS is the substantial growth in NPFs in FY21 (which ended in March), sustaining the NPF ratio at a comparatively high level. EDBI’s financing portfolio is characterised by high borrower concentration given its policy of financing large projects, and this also weighs on the CFS.

The CFS rating is supported by EDBI’s privileged access to low cost funding given its official policy role. The Bank’s sound operating profitability – mainly the result of the provision of low cost funding and capital from the government as well as low operating expenses – reflects good loss absorption capacity, and has facilitated more than full financing loss reserve cover of NPFs.

The ESL assessment does not result in an uplift for the Bank’s LT FCR because the BSR is already at the sovereign level. The likelihood of extraordinary support in the event of need is deemed to be moderate. While CI believes the willingness of the government to provide support remains high, its financial capacity is limited as indicated by Iran’s sovereign ratings (‘B’/‘B’/Stable).

EDBI continues to perform a vital policy role in supporting efforts to increase and diversify Iran’s non-oil exports. As one of the country’s four specialised state-owned banks with direct access to regular government funding, EDBI boasts a sound franchise and rather stable business model, which involves financing key sectors of the economy.

 
Rating Outlook

The Stable Outlook indicates that the ratings are likely to remain unchanged over the next 12 months and that EDBI will continue receiving the necessary funding and capital from the government. The Bank’s ratings and outlook are closely correlated with the sovereign’s creditworthiness. Any upgrade or downgrade of the sovereign ratings and/or a change in the Outlook could have a corresponding effect on EDBI’s ratings.

Rating Dynamics: Upside Scenario

An upward revision of the ratings or Outlook would require an improved assessment of sovereign risk in the next 12 months. This could occur if Iran and the US agree on reviving the nuclear agreement, US sanctions are lifted, and external political tensions decrease evidently.

Rating Dynamics: Downside Scenario

The Bank’s ratings or Outlook could be revised downwards in the event of a downward reassessment of sovereign and broader operating environment risks. The ratings or Outlook could come under downward pressure if financing asset quality deteriorates, leading to elevated provisions and reduced capitalisation.

Contact

Primary Analyst: George Panayides, Senior Credit Analyst; E-mail: george.panayides@ciratings.com
Secondary Analyst: Kathleen Gamper, Senior Credit Analyst
Committee Chairperson: Morris Helal, Senior Credit Analyst

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