Saman Bank – Ratings Upgraded

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) has upgraded the Long-Term Foreign Currency Rating (LT FCR) of Saman Bank (SB) to ‘B’ from to ‘B-’. Similarly, CI Ratings has upgraded the Bank Standalone Rating (BSR) to ‘b’ from ‘b-’ and the Core Financial Strength (CFS) rating to ‘b+’ from ‘b’. At the same time, SB’s Short-Term Foreign Currency Rating (ST FCR) of ‘B’ and Extraordinary Support Level (ESL) of Uncertain have been affirmed. The Outlook on the LT FCR and BSR has been revised to Stable from Positive.

The ratings upgrade reflects the significant improvement in asset quality in FY22 and into H1 FY23, with both the non-performing financings (NPF) ratio and financing loss reserve (FLR) coverage improving to a sound level in FY23, based on the unaudited figures. As a result, the capital base is no longer impaired by unprovided NPFs. Profitability has also improved, supported by higher operating income, particularly core recurring revenues. The improved operating profitability has strengthened SB’s loss absorption capacity, which is vital given the challenging operating environment and heightened credit risks in Iran. The rating action also takes into account the increases in the capital adequacy ratio (CAR) to 7.1% in FY23 and, more recently, to 8.1% (marginally above the regulatory minimum threshold of 8%) in September 2023, according to preliminary unaudited figures provided by management. Capital quality has also improved, with the loss-absorbing Tier 1 component increasing as a share of total regulatory capital.

The Bank’s BSR is derived from an improved 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 which have severely reduced the access of Iranian banks to the global banking system.

The ratings are 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, as well as CAR.

The ratings are mainly constrained by the still modest capital position together with a somewhat high component of Tier 2 capital, and the moderately high reliance on non-core revenues. The latter continues to weigh on the quality of earnings to some degree. CI also notes that the Bank’s qualified financial statements for the period FY22 could trigger capital impairments when the outstanding issues flagged by the auditor are finally resolved. Operating conditions remain challenging due to the difficult political environment and the impact of sanctions on economic activity – this continues to weigh on the ratings.

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 FY23. The current 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 branch in Frankfurt which 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 FY21-22 and into FY23, reducing the NPF ratio to a low 2% in FY23, according to unaudited figures. At the same time, management continued to transfer a considerable part of operating profit to provisions, achieving more than full FLR cover (134%) in H1 FY23. Initial calculations for FY23 suggest that FLR cover remained at the same sound level of 135%, with NPFs remaining broadly unchanged. Nevertheless, renewed growth in NPFs cannot be ruled out given the challenging conditions in many economic sectors in Iran as a result of ongoing US sanctions.

In terms of profitability, the Bank improved its net financing margin (NFM) in FY22 and into H1 FY23 to a satisfactory level, buoyed by a “fee” charged on borrowers together with a lower funding cost. This, combined with higher business volumes, has significantly increased net financing income (NFI). Recurring revenues have also been boosted by a considerable rise in fees and commissions income (FCI), supporting earnings quality to some degree. As a result, reliance on non-core revenues such as FX gains and profits on revaluation/sale of foreclosed properties has diminished – although the latter remained significant in FY22 and FY23. This, in turn, has improved SB’s operating profitability and loss absorption capacity, together with its ability to build capital internally. Net profitability and ROAA have also strengthened, despite elevated provisions. CI expects a sustained recovery in full year FY23, aided by sound NFI and FCI generation, as well as gains on sale of properties. However, we note that such gains may not recur in the medium to long term.

The Bank’s capital position had been weak until quite recently, due to low profitability and rapid asset growth. Management addressed this, initially through a fixed assets revaluation in FY22 and, subsequently, by concluding an IRR8tn rights issue in FY23. This, together with strengthened profitability, has served to gradually increase CAR to a level slightly above the regulatory minimum of 8% in September 2023 – as per initial calculations – compared to a very low 2.1% in FY21. CI considers SB’s current improved CAR to be just adequate and to provide a mild cushion against unforeseeable losses. Equally, the lower quality supplementary Tier 2 capital formed a much-decreased proportion (34% in FY23) of total equity compared to 80% a year earlier. More positively, SB’s capital is no longer impaired by unprovided NPFs, as SB achieved more than full FLR cover in H1 FY23. CI considers the significant improvement in capital adequacy and capital quality positively, and expects the Bank to maintain CAR above the minimum threshold, aided by strengthened profitability and retained earnings.

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, despite some tightening in FY22 and into H1 FY23. While growth in financings surpassed customer deposit expansion, funding metrics remained very sound in the context of the Iranian banking sector, and in a global context. At the same time, utilisation of wholesale funding was low, reducing refinancing risk to a large extent. While key liquidity ratios appear satisfactory, reflecting a large stock of bank placements, the latter may be subject to limitations given a large share 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 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 would be limited as indicated by Iran’s sovereign ratings (‘B’/’B’/Stable).

Rating Outlook

The Stable Outlook indicates that the ratings are unlikely to change in the next 12 months. It also balances SB’s improved financial profile against a challenging operating environment.

Rating Dynamics: Upside Scenario

The Outlook on the Bank’s LT FCR and BSR could be revised to Positive in the next 12 months if there is a similar action on Iran’s sovereign rating including an improvement in the OPERA assessment, coupled with a significant further improvement in the Bank’s financial fundamentals, including its capital base.

Rating Dynamics: Downside Scenario

The Outlook could be revised to Negative if the Bank’s CAR decreases below the 8% minimum in the next 12 months, and/or if the Bank’s asset quality and in particular FLR cover deteriorates. These risk factors would in turn have a negative impact on SB’s profitability and capital through elevated provisions.
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