Saman Bank – Ratings Outlook Revised to Positive

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has revised the Long-Term Foreign Currency Rating and Bank Standalone Rating (BSR) Outlook of Saman Bank (SB) to Positive from Stable; the Bank’s LT FCR and BSR of ‘B-’ and ‘b-’, respectively, have been affirmed. At the same time, CI Ratings has raised SB’s Core Financial Strength (CFS) rating to ‘b’ from ‘b-’. SB’s Short-Term Foreign Currency Rating (ST FCR) of ‘B’ was affirmed.

The Positive Outlook on the LT FCR and BSR reflects CI’s expectation that the Bank will succeed, as planned, in raising its CAR to the regulatory minimum of 8% within the next 12 months. CI also expects the quality of capital to improve, with the loss-absorbing Tier 1 component increasing as a share of total regulatory capital.

According to the Bank, CAR increased to 5.6% in H1 FY23 (which ended in September 2022) from 4% at end FY22, and is on course to reach 8% in FY23 (which ends in March). The increase is due to a combination of higher net retained profit and a rights issue of IRR8tn. The latter was approved by the Bank’s Board in November 2022 and is expected to be completed by March this year.

The rating action, and upward adjustment of the CFS, also takes into account the significant improvement in asset quality in FY22, with both the non-performing financings (NPF) ratio and financing loss reserve (FLR) coverage improving to a satisfactory level at end-March 2022, based on unaudited figures provided by management. As a result, the Bank’s capital base is no longer significantly impaired by unprovided NPFs.

SB’s profitability has also improved, supported by higher gross income, particularly core recurring revenues such as net financing income (NFI) and fee and commission income (FCI). The Bank’s improved operating profitability has strengthened loss absorption capacity, which is vital given the challenging operating environment and elevated credit risks in Iran.

The Bank’s BSR is derived from a CFS rating of ‘b’ and an Operating Environment Risk Anchor (OPERA) of ‘c+’ (indicating high risk). OPERA considers both current and projected economic and financial conditions in Iran, as well as the strengths and weaknesses of the banking sector. In particular, it takes into account the economic fallout from the Covid pandemic, the economy’s limited diversification and large external political tensions. While Iran exhibits very low levels of external debt, its external debt repayment capacity is constrained by US financial sanctions as the latter have severely reduced the access of Iranian banks to the global banking system. In addition, substantial risks to political stability emanate from widespread public dissatisfaction with the current economic and social situation and a polarised domestic political environment.

The CFS rating is mainly constrained by the Bank’s relatively weak CAR, which even after the expected capital increase will only just be at the regulatory minimum. In addition, the thin net financing margin (NFM), together with still high reliance on non-core revenues – namely gains from securities, FX revaluations and the sale of foreclosed properties – continues to weigh on the quality of earnings. CI also notes that the Bank’s qualified financial statements could trigger capital impairments when the outstanding issues flagged by the auditor are finally resolved. Operating conditions remain challenging because of a difficult political environment and the impact of Covid on economic activity. Due to the ongoing adverse impact of US sanctions, real GDP growth might also settle at a lower level for some time after the pandemic is contained, and this could have negative issues on the Bank’s asset quality.

The ratings are nevertheless supported by SB’s good market position in trade finance and corporate banking, together with its sound funding profile due to a growing and granular customer deposit franchise. The latter comfortably funds the financing portfolio. Also supporting the ratings is the marked improvement in the Bank’s asset quality and profitability.

SB is among the leading medium-sized private sector banks in Iran in terms of assets and customer deposits. Over the years, the Bank has built a sizeable branch network, focusing on corporate clients and SMEs – although individual borrower concentration remained high in H1 FY22. The large branch network facilitates better access to customer deposits. On the liability side, the high proportion of deposits gathered from retail customers bestows SB’s funding base with granularity and, equally, relatively low reliance on more volatile 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 reflecting its developed trade finance operation. The Bank is trying to capitalise on its reputation through its newly-opened (2021) branch in Frankfurt from where it has started to generate good fees from increased trade finance volumes.

Supported by repayments (including debt for asset swaps), NPFs decreased in absolute terms in H1 FY22, producing an NPF ratio in the single-digit territory. The improvement in SB’s asset quality continued in H2 FY22, with preliminary unaudited figures suggesting a further fall in the NPF ratio to a low 3.3%. At the same time, management continued to beef up FLR cover, with the latter increasing to 95% in March 2022, as per initial calculations. Nevertheless, renewed growth in NPFs cannot be ruled out given the challenging conditions in many economic sectors in Iran as a result of US sanctions.

The Bank’s NFM turned positive in FY21, having been negative for several years due in part to ceilings set by the Central Bank of Iran (CBI) on deposit and lending rates. This together with solid growth in core fees and commissions contributed to a recovery in core pre-provision profitability. As a result, SB’s capacity to absorb unforeseen losses or to build capital internally has improved. Net profitability and ROAA have also strengthened, assisted by lower provisions, while a further recovery is expected in FY22, supported again by non-core gains. However, CI does not consider such gains to be recurring in the medium to long term, while provisions are likely to erode a major part of operating profit in the short term as renewed NPF growth is not to be ruled out given the challenging operating environment.

Although improving, SB’s capital position remains relatively weak and is a key ratings constraint. The Bank’s CAR was still below the regulatory minimum of 8% in FY22, with lower quality supplementary Tier 2 capital forming the majority of total regulatory capital. CI understands from management that paid-up capital is due to be increased by IRR14tn in FY23, with IRR6tn coming from capitalised reserves and IRR8tn from current shareholders via a cash contribution. When these transactions are concluded management forecast CAR to reach the minimum 8% requirement by end FY23. For this to be achieved, in our opinion, SB’s net profit in FY23 will also have to be maintained at a level similar to that seen in FY22, in addition to the completion of the rights issue and capitalisation of reserves.

Supported by a developed and rapidly growing customer deposit franchise based on its good brand name, superior technology and quality of service, SB continues to boast a sound funding and liquidity profile. While growth in financings surpassed customer deposit expansion, funding metrics remained very sound in terms of the Iranian banking sector, as well as in a global context. At the same time, utilisation of wholesale funding was low, reducing refinancing risk to a large extent. In terms of liquidity, while key ratios appear satisfactory, reflecting 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.

In terms of extraordinary support, 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. Even if the government was willing to provide extraordinary support, its financial capacity to do so is limited as indicated by Iran’s sovereign ratings (‘B’/‘B’/Stable).
 
Rating Dynamics: Upside Scenario

The LT FCR and BSR could be upgraded by more than one notch or by one notch with a Positive Outlook in the next 12 months if there is a significant further improvement in the Bank’s financial fundamentals, including its capital base and asset quality, and if there is a similar action on Iran’s sovereign ratings.

Rating Dynamics: Downside Scenario

The Outlook could be revised back to Stable if the Bank’s CAR does not reach the 8% minimum in the next 12 to 18 months, and/or if the Bank’s asset quality deteriorates, which would in turn have a negative impact on profitability through elevated provisions. The Outlook could also be revised to Stable if the quality of capital does not improve to a satisfactory level.

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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