A lot of banks we are meeting up within the last weeks where always asking, what will change tomorrow in case of. Most of them think in directions like Corporate Governance, Compliance etc. Obviously this is pretty correct, but the most dangerous pitfalls come from the business itself. Within the next few blogs, I will try to deepen this topic…
Still low competition in the market - what market?
In the recent times, we have been in negotiations with Iranian banks. Thus we realized how many banks are there. As most of the people are surely aware of the big banks like Bank Mellat, Bank of Industry and Mine or Bank Sepah, there are today about 40 different banks in Iran. And this are solely domestic banks! The range of products is more or less comparable to the well-known and expectable products, a bank under an Islamic non-interest regime should offer. But some things are very interesting and start, for my opinion to be the challenge for future success.
Situation today is that on domestic currency accounts one may gain a profitability of 20 % a year. On currency accounts this goes in a direction of about 7-8 % yield. As this is paradise for all saving accounts holders, this bears problems on the refinancing side as well as for the stock market, both well blasting in the corporate world of Iran. The most obvious problem for the industry is a real problem for either Iranian economy or the Iranian banks industry. No company can earn an EBIT margin high enough to cover such financial costs, especially not in the very money consuming production industry, dominating right now the economy in Iran. Beside the influence of currency changes, with the lift of sanctions foreign banks can see the potential and offer respective forms of refinancing. This is not only a valid option for export oriented companies but for all companies, showing reasonable financial figures. The problem starts then with this for the Iranian banks, when they have to keep up with the lower margins and to cover their costs with this reduced margins.
The long long trail to finance a company?
But now the second topic mentioned above comes into the game. As it is not really interesting for Iranian investors to go the stock market due to the high domestic bank account returns, banks have not so much options for gathering additional business beside the collection of money and reallocation of this cash funds to debtors. So as banks see themselves, beside the real investment banks, in their origin business only for funds reallocation. Without cross selling into other bank business, beside also todays insurance business, which is not their own home turf, but enhancing the product range, banks have no second pillar for future profits. The effects on the stock market due to this financial situation is coming back to the corporate world of Iran as the demanded risk-free financial gains for investor have also been delivered on the stock market. Thus makes it less attractive for companies to go for a listing from this point of view.
But these aspects as swell as the threads for the banking business coming from low rate of invention and nearly no competition will be discussed in another blog…
Your K-Street6 team