Reasons for the Decline of Bank Stocks in Tehran Stock Market

According to Iranian media, the value of shares of banks in the country has decreased by nearly 20% from September 2016 to late November of this year, resulting in equivalent losses for bank shareholders. Reports specifically indicate that the profit margins of two major banks, namely Bank Tejarat and Bank Saderat, have sharply declined. Meanwhile, despite an increase in liquidity in the economy, the intensity of banks' liquidity absorption has decreased. Concurrently with the release of these reports, Abolfazl Hassanbeigi, a member of parliament from Damghan, states that the activities of seven thousand credit unions and seven thousand eight hundred financial institutions in the country have diminished the credibility of banks. However, this is not the only issue, as the Iranian banking system suffers from greater and more complex disarray. What factors have led to the reduction of the credibility of the Iranian banking system? Although the activities of thousands of credit unions and financial institutions are one reason for the decline in the credibility of the Iranian banking system, this is not the whole story. The lack of transparency in the Iranian banking system, widespread financial corruption, the provision of fictitious financial statements, and the simultaneous dominance of military and security institutions over them, along with the prevalence of money laundering, are also contributing factors to this loss of credibility. Furthermore, the credibility of banks today, as an economic infrastructure, increases in coordination with the legal system and international risk management, which the Iranian banking system does not comply with global standards—such as the Basel III international regulations or anti-money laundering regulations. Large overdue debts and a low capital adequacy ratio are also other factors contributing to the decline in the credibility of the Iranian banking system. Unhealthy competition among banks is another challenge facing the Iranian banking system that exacerbates its disarray. In support of this, Parviz Aghili, CEO of Middle East Bank, stated at a conference held recently in Zurich: 'Over the past years, Iranian banks, under intense competition, have consistently paid depositors more than they themselves earn, in order to attract depositors and compete with other banks, which has resulted in losses amounting to thousands of billions. Despite various resolutions from the Central Bank to adhere to the announced frameworks, banks still pay no attention to this issue.' This banking official added: 'A large number of Iranian banks, at least half of them, must be closed or merged within the next six years because they need updating due to the provision of bad loans over the years.' Which groups are behind these large overdue debts? Various figures of overdue debts to banks have been published, which are inconsistent with each other. However, as indicated, the problem of overdue debts has not only not been resolved but has increased. Over time, the accumulated interest on these debts increases their volume. This volume of overdue debts, especially without the necessary guarantees and adherence to banking regulations, is astonishing and indicative of disorder, rent-seeking, and corruption in the banking system. Such a trend is, of course, intertwined with management corruption in the political and administrative spheres; otherwise, banks should not be lending these large amounts without the necessary guarantees. Meanwhile, many individuals face various obstacles when trying to obtain small bank loans. Recently, Ahmad Tavakoli, a former member of parliament and head of the Transparency Watch, threatened to expose the major debtors of the Thamen al-Hojaj institution, stating that most of the debtors of this institution are the children of clerics, experienced judges, and political figures. This judgment can to some extent be generalized to the entire Iranian banking system, with large and overdue debts related to influential individuals and factions within the government, including clerics and their affiliates, military personnel, bureaucrats, and dependent private sectors. Given the current political-economic situation in Iran and the inability of supervisory institutions and the judiciary and legal system in Iran, it is unlikely that a significant portion of the overdue debts to banks will be recovered in the short term, especially since these overdue debts lack the necessary guarantees. Even assuming guarantees exist, legal actions in such cases are usually very costly and often do not yield satisfactory results, as some of the large bank debtors have political and administrative influence and thus enjoy a form of immunity. Some of these funds have also been transferred abroad under the pretext of foreign purchases, and the Iranian administrative and legal system has no access to them. Why is banking risk management important? The global banking system is currently considered one of the transnational financial, informational, and credit infrastructures that significantly impacts economic growth or the emergence of economic crises. The capillaries of this global digital network, which affects the stock exchanges of various countries, have unified the banking system. As a result, a banking crisis in one country can quickly spread to other countries and engulf their economies. This is why global banks have established regulations known as Basel or anti-money laundering regulations to reduce banking system risks. The Iranian banking system is outdated and isolated, which is why it has not been able to adapt to modern standards so far. This is one reason why reputable and large global banks refrain from cooperating with the Iranian banking system. Therefore, it is natural that the Iranian banking system cannot benefit from the advantages of international interbank cooperation. Consequences of the decline in banking credibility: Within the framework of the banking economy, the basis for the amount of liquidity absorption and its distribution in the market, which is the basis for bank profitability, is this credibility, and with the decline in bank credibility, the value of bank stocks also decreases. It is no coincidence that, according to Iranian media reports, the value of bank stocks has decreased by about 20% since last September, and the industry is now the only loss-making industry in the stock market. Furthermore, given this massive amount of overdue debts, a significant portion of the country's liquidity is locked up and cannot play a significant role in the economic recovery process. Thus, the Iranian banking system has now become a challenge for economic recovery.