Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
WorldDecember 1 2011

Iranian investment banking market is still left wanting

Since awarding the first dedicated investment banking licence in Iran in 2007, the country's Securities and Exchange Organisation has moved slowly, granting only two more licences despite the proliferation of banks looking to expand into the space. But licences are not the only thing lacking in Iranian investment banking; the dearth of large private companies and investment banking expertise is also stunting its growth.
Share the article
twitter-iconcopy-link-iconprint-icon
share-icon
Iranian investment banking market is still left wanting

With Iran’s media coverage dominated by nuclear sanctions, trade embargoes and political wrangling, the recent boom in the country's retail banking market has gone largely unnoticed. But given the proliferation of new banks over the past few years, Iran’s retail banking sector has become increasingly competitive and is now reaching saturation point. In 2007 there were 15 banks with retail operations, by 2011 this figure reached 27. Competition is intensified further by the existence of about 45 credit institutions.  

Amid shrinking profit margins, banks are trying to find new ways of generating revenue and investment banking is proving increasingly popular, given the government’s concerted effort to speed up privatisation. The Iranian Privatisation Organisation (IPO) divested $80bn-worth of government-owned assets in 155 companies between 2005 and March 20, 2011.

Going private

Since 2005, state oil companies have dominated the listings market, generating $27.6bn. A further $11.5bn was raised from the sale of shares in the Telecommunication Company of Iran – the largest mobile company in the Middle East. The petrochemicals sector has raised $9.8bn, while the country’s power plants and banking and insurance sector have raised $4.8bn and $4.3bn, respectively. A further $12.5bn from the sale of assets is expected to be raised over the next four years.

“The retail banking market is now very saturated so there needs to be some consolidation,” says Ali Mashayekhi, head of investment banking at Turquoise Partners, a Tehran-based fund manager that has a total of $250m in assets under management – $120m of which are invested in equities. “Investment banking is very new in Iran and I expect to see the same growth in this space as we have seen in retail banking over the past 10 years. The opportunities are immense.”

Investment banking is very new in Iran and I expect to see the same growth in this space as we have seen in retail banking over the past 10 years. The opportunities are immense

Ali Mashayekhi

Investment banking only started to be practised in Iran in its regulated form in 2007 when the country's Securities and Exchange Organisation (SEO) granted the first licences to Eghtesad Novin Bank and Amin Investment Bank in order to expedite the country’s privatisation drive in key economic areas – principally petrochemicals, telecoms and banking. Article 44 of the Iran Constitution envisaged some 80% of state-owned companies eventually being transferred to the private sector.

Bank Mellat became the third investment bank in Iran when it received its licence in early 2011. Saderat Bank has applied to the SEO for a licence to open an investment banking division – to be known as Sepeha – which is expected to be approved in early December 2011, and Pasargad Bank is also in the process of having its investment arm licensed.

Apart from the pack

Turquoise Partners launched its investment banking department in October 2010 but is not formally licensed by the SEO because it does not meet the regulatory body’s requirements of having a minimum share capital of $100m. Brokerage companies can, however, receive all the advisory licences that investment banks have, and therefore carry out most of the same activities.

“We are issuing $20m-worth of bonds for a household utilities company in December. That is a fairly small ticket size for the London market but is quite a big deal in Tehran,” says Mr Mashayekhi.

Turquoise is also advising a printing company valued at between $70m and $100m that is planning to list on Iran’s over-the-counter market – known as the Fara Bourse – in four to six months’ time. “We also have a pipeline of about six other companies that want to list in the next year or two. We tend to go after privately owned small and medium-sized enterprises,” adds Mr Mashayekhi.    

In this way, Turquoise is setting itself apart from the other investment banks, which tend to be more focused on working with state-owned companies.

“Most of the investment banks are engaged in issuing bonds but do not carry out real initial public offering advisory and there is very little merger and acquisition [M&A] activity taking place,” says Cyrus Razzaghi, president and chief executive at Tehran-headquartered consultancy Ara Enterprise. “Even the way the bond market functions is very different to typical investment banking markets as it is dominated by large government projects. It is not private corporations that are raising money.”

Unhealthy appetite?

While the private sector is now being encouraged to take the controlling stake in the listings of state-owned companies, there is often very little incentive to buy these companies because many of them have accumulated debt and are highly inefficient. Even so, the appetite to move into the investment banking space remains strong, with the majority of lenders applying for a licence. “Many banks have been waiting to be granted a licence for a few years,” says Mr Razzaghi. “But the vetting process is pretty stringent.”

While opinion is divided over the speed at which the SEO is approving licences, the consensus is that it is being deliberately circumspect because it thinks some banks are not up to the job. Although Iran has a well-educated population – as reflected in its literacy rate of 98% and a pool of 400,000 annual graduates – the fact that it is such a fledgling industry means there is a dearth of bankers with the necessary skills. Consequently, investment banks that are setting up are either hiring ex-retail bankers or recruiting fresh graduates.

“There is a real talent shortage when it comes to investment bankers,” says Mr Mashayekhi. “Investment banking is more specialist than other types of banking and there is a shortage of bankers with these skills across the Middle East.”

Furthermore, the growing discontent in Iran, in light of the subsidy cuts and tightening sanctions, is leading to a significant brain drain effect. Of course, Western institutions are eager to lend their expertise in this field, but while some large international banks such as Bank of Tokyo-Mitsubishi and Intesa Sanpaolo already have representative offices, there are currently no foreign bank branches operating in Iran.

Investment banking is more specialist than other types of banking and there is a shortage of bankers with these skills across the Middle East

Ali Mashayekhi

On November 9, 2011, the Organisation for Investment, Economic and Technical Assistance of Iran (OIETA) announced it had received a total of 22 applications from foreign banks expressing their interest to set up branches in the country. OIETA’s head, Behrouz Alishiri, says the organisation is in talks with the banks to finalise the details, but would provide no further information.

Taking control

For its part, the SEO has been ushering in a raft of positive reforms since approving the launch of mutual funds in early 2008. Today, there are nearly 40 registered funds of this type, which are managed by brokerage firms and investment banks and range in size from between $1m to $50m.

Founded in 1967, the Tehran Stock Exchange’s market capitalisation now stands at just under $87bn, with 341 listed companies. Foreign investment accounts for only about 2% of total trading. In an effort to boost this further, in early 2010 the SEO increased the maximum foreign equity holding for strategic investors from 10% to 20%, while non-strategic investors will now be allowed to acquire up to 10% from a previous 5%.

The SEO is also in the process of lowering the current minimum share capital requirement for investment banks from $100m to $20m. Given the scale of most investment banking activities in Iran today, the $100m share capital is now viewed as being too large. The new regulation is scheduled to be approved in the next three to five months but industry insiders think a more realistic target is late 2012. 

Efforts are also being made to try to facilitate greater M&A activity by updating the limitations in the current Iranian commercial law.

“It [Iranian commercial law] is derived from French law and was drawn up roughly 70 years ago, so it's pretty outdated and therefore any companies trying to merge tend to run into legal issues,” says Mr Mashayekhi. “Meanwhile, the legal framework for acquisitions helps facilitate a company looking to buy 100% of another company’s shares but is not really set up for the integration of some parts of a business.”

The revamped commercial law is slated for approval by the end of 2012, but again, most industry insiders believe this is an overly ambitious target and that a three-year timeframe is more likely.  

False start

Largely speaking, the SEO is widely respected in Iran and considered to be a dynamic and forward-thinking organisation that is playing a hugely important role in modernising the country’s financial infrastructure. But while Tehran is undoubtedly making progress down the path of privatisation and reform, there is still a long road ahead.

With the state continuing to dominate the economy, M&As remain infrequent and there remains a lack of sizeable independent private companies that could benefit from using the bourse to raise capital. 

When Iran’s banks will be able to fully engage in all aspects of investment banking – from arranging and executing deals to asset management and private banking – will depend on the speed at which the SEO approves both the new legislation and the new institutions. The knowledge and skills gap also needs to be bridged if Tehran is to fully harness the opportunities in investment banking.

In the short to mid-term, it is unlikely that foreign banks will want to enter the market given the renewed international sanctions that have targeted the country’s financial sector.  

Given the nascent stage of its development, Iran has the potential to become one of the most exciting investment banking markets in the Middle East, but as with all matters in Tehran, what is clouding the picture is the political dimension.  

Was this article helpful?

Thank you for your feedback!

Read more about:  Middle East , Iran