Iran banks pressed to retreat from asset speculation

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Cranes crowd an 11,000sq metre patch of prime property in one of north Tehran’s most affluent areas as workers race to build a 19-storey tower that will encompass a huge shopping mall.

An adjacent hoarding announces that the main contractor of what will be the Atlas Mall is the Iranian Atlas Company, a private construction group. But this enterprise is in fact owned by Bank Ansar, which is affiliated to the elite Revolutionary Guards.

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Iran has eight state-run and 19 “privately owned” banks – although these are frequently subject to interference from the state, with their shares bought by entities affiliated to power centres, which then influence banking policies and exploit funds – all of which have invested heavily in the ownership and management of commercial entities outside the banking sector.

The fat profits the sector has made from its commercial investments is thought to be why many power centres, such as the Revolutionary Guards, have established their own banks.

The centrist government of President Hassan Rouhani decreed last month that banks’ investments in the non-banking sector cannot exceed more than 40 per cent of their capital, and has given the banks three years to sell the buildings, land and stocks belonging to their affiliated companies and meet the new requirement.

The move is designed to push the banks to lend to Iran’s moribund industries, which have been hit by a combination of populist policies under the previous president, Mahmoud Ahmadi-Nejad, and the tightening of international sanctions over the country's nuclear programme.

“Banks have no right to use people’s deposits and take risks to buy land and gold mines, or to construct buildings, shopping malls and steel factories,” said one senior banker.

“When they make profits from such activities, they reward themselves without sharing those profits with depositors, but when they lose, the government has to compensate.”

The value of the banks’ investments and properties is unclear. The central bank has requested banks hand over a list of the properties and companies they “directly or indirectly” own by mid-September. But official figures suggest their investments in their own companies are around 245tn rials ($9.2bn), while their capital stands at about 460tn rials.

Industrialists, meanwhile, complain that one of the reasons many of them went bankrupt or have been forced to run at less than 50 per cent capacity in recent years is because banks refused to give them loans or have charged them interest rates as high as 35 per cent.

Iran’s banking sector has also been squeezed. Not only is it undercapitalised and poorly regulated, but it has been hit by international banking sanctions and by populist policies, such as being forced to give loans to the poor at half the inflation rate.

The combination of misguided policies and international restrictions has shattered Iran’s economy to the extent that, according to a senior foreign banking expert, it is experiencing postwar conditions that could take decades to fix. Iran’s economy shrank by 5.8 per cent, 6.8 per cent and 1.9 per cent over the past three Iranian fiscal years.

The government of Mr Rouhani has been credited by economists with stabilising the currency market and reducing inflation from about 40 per cent a year ago to about 25 per cent. It has promised that by next March the country will no longer be in recession and should see economic growth – but banking sector reforms will be vital to the turnround.

Whether the government can overcome resistance from vested interests to carry out the reforms remains to be seen.

“Banks will bargain and resist as much as they can,” said Vali Nadi Qomi, managing director of Novin Investment Bank, affiliated to Eghtesad Novin – a privately owned bank. “Under the current economic circumstances, pure banking operations are not very profitable and the private sector is not strong enough to buy the companies and properties owned by banks.”

He blamed previous monetary policies by which banks were forced to give loans at low interest rates besides an inefficient capital market.

Bankers are concerned that a rush to sell properties could suppress prices and further weaken banks.

Iranian banks already struggle with 870tn rials in non-performing loans – according to official figures – although economists say the real figure could be at least 30 per cent higher as banks reschedule the due date to make records healthier. Bad loans constitute about 25 per cent of all loans given, which could technically make most Iranian banks bankrupt.

Valiollah Seif, governor of the Central Bank of Iran, acknowledged recently that at least four state-run banks – Melli, Industry and Mine, Agriculture and Sepah – were incurring losses. Analysts believe that most of the other banks are more or less in the same situation, but have survived partly thanks to their non-banking commercial activities.

Meanwhile, Iran’s central bank faces another challenge of illegal credit institutions that have grown in number – possibly into the dozens – but are not accountable to the government, even though they handle about 25 per cent of banking operations. Many are believed to be affiliated to the Guards.

The central bank, state-run Bank Melli and privately owned banks of Ansar, Saderat, Mellat, Pasargad and Parsian refused to comment. Pasargad and Parsian are considered the leading private banks in non-banking operations.

“Perhaps 50 per cent of the banks will face serious problems when they are under pressure to be more focused on banking activities,” said the senior banker. “But the government is not going to use the clean oil money to help them increase their capital.”

FT.com