Saudi banks to benefit from strong sukuk market growth

Updated 19 June 2013
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Saudi banks to benefit from strong sukuk market growth

The Saudi sukuk market will continue to grow over the next 12-18 months, a credit positive for Saudi banks, following a new record SR 25.2 billion ($ 6.7 billion) issuance of riyal-denominated sukuk in 2012, says Moody's Investors Service in a new special report published yesterday. Strong sukuk issuance has continued in 2013, with SR 11.6 billion already issued during Q1, leading the rating agency to expect that 2013 sukuk issuance will surpass 2012 levels.
"We believe that the growing sukuk market will be credit positive for Saudi Banks because it will provide a deeper pool of Shariah-compliant securities to facilitate liquidity management and support profitability at Islamic financial institutions (IFIs)," says Khalid Howladar, VP — senior credit officer and co-author of the report. "We also believe that growth will support more term funding for all banks and ultimately encourage the reduction of persistent asset-liability mismatches, while facilitating further loan growth given regulatory constraints on loan-to-deposit ratios," adds Howladar.
With limited investment options available, IFIs tend to maintain higher levels of very low-yielding cash and Islamic interbank placements on their balance sheet, thus partly sacrificing profitability to sustain their liquidity positions. A larger sukuk market would facilitate liquidity management through a pool of higher-yielding Shariah-compliant securities and offer a profitability boost to local IFIs.
Moody's believes that a deeper sukuk market in Saudi Arabia also provides a competitively priced longer-term funding option in domestic currency, which will allow conventional and Islamic banks to diversify and lengthen their funding profiles and ultimately help reduce contractual mismatches in the maturity profiles of assets and liabilities.
"We expect that increased term funding in the form of sukuk will support banks' loan growth and franchise development, given rising loans-to-deposits ratios in Saudi Arabia," says Christos Theofilou, assistant vice president. "As more banks approach the regulatory 85 percent net loans-to-deposits ratio, both the availability and cost of deposits will be slightly affected, making sukuk issuance more attractive to banks and likely encouraging further sukuk issuance," explains Theofilou.
Moody's says that the record issuance is being driven by strong investor demand, with a marked preference for Islamic financing in the Kingdom; increased financing opportunities to fund the country's large-scale infrastructure projects; and a developing yield curve following the sovereign-guaranteed benchmark sukuk issuance by the General Authority of Civil Aviation in early 2012.


Iran sanctions shadow falls on smaller German banks

Updated 27 May 2018
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Iran sanctions shadow falls on smaller German banks

  • Some German companies plan to press on with Iran dealings
  • German exports to Iran rose 15.5 percent last year

Germany’s biggest lenders have shied away from business with Iran after past penalties for breaching US sanctions, but smaller banks have leapt on opportunities afforded by the nuclear deal rejected by Donald Trump.

There are just months to go until a November deadline issued by Washington after the US president abandoned a hard-fought agreement that loosened business restrictions on the Islamic Republic in exchange for Tehran giving up its pursuit of nuclear weapons.

But some firms plan to press on in their dealings with Iran despite the looming threat of penalties.

“We will continue to serve our clients,” for now, said Patrizia Melfi, a director at the “international competence center” (KCI) founded by six cooperative savings banks in the small town of Tuttlingen in southwest Germany.

The center, which supports companies operating in sensitive markets like Iran or Sudan, has seen demand “rising sharply in the last few years, from firms listed on the Dax (Germany’s index of blue-chip firms), from all over Germany and from Switzerland,” she added.

German exports to Iran have grown since the nuclear deal was signed in 2015, adding 15.5 percent last year to reach almost €2.6 billion ($3.0 billion) after 22-percent growth in 2016.

Such figures remain vanishingly small compared with Germany’s €111.5 billion in exports to the US — its top customer.

Nevertheless, the KCI will “wait and see what the sanctions look like” before turning away from Iran, Melfi said.

Already, firms dealing with Tehran must take great care not to fall foul of US restrictions.

Transactions are carried out in euros, and the KCI does not deal with businesses that have American citizens or green card resident holders on their boards.

What’s more, products sold to Iran cannot contain more than 10 percent of parts manufactured in the US.

One of the most important inputs for the business is “courage among our managers” given the high risks involved, Melfi said.

Germany’s two biggest banks, Deutsche Bank and Commerzbank, avoid Iran completely after being slapped with harsh fines in 2015 over their dealings there, with Deutsche alone paying $258 million in penalties.

DZ Bank, which operates as a central bank for more than 1,000 local co-op lenders, is withdrawing completely from payment services there, a spokesman told AFP.
That left KCI to seek out the German branch of Iranian state-owned bank Melli in Hamburg.

Even that linkage could break if Iran’s biggest business bank appears on a US list of barred businesses as it has before.

Meanwhile, among Germany’s roughly 390 Sparkasse savings banks, business with the regime is mostly limited to producing documents linked to export contracts.
“We will be looking even more closely at those” in the future, a person familiar with the trade told AFP.

Elsewhere in the German economy, the European-Iranian Trade Bank (EIH) founded in 1971 is another conduit to Tehran.

Also based in Hamburg, it for now remains “fully available to you with our products and services,” the bank assures clients on its website, although “business policy decisions by European banks may result in short term or medium term restrictions on payments.”

Neither does the Bundesbank (German central bank) believe that much has so far changed for business with Iran.

“Only the European Union’s sanctions regime will be decisive,” if and when it is changed, the institution told AFP.

Any payment involving an Iranian party would have to be approved by the Bundesbank if things return to their pre-January 2016 state.

German banking lobby group Kreditwirtschaft has called on Berlin and other EU nations to clarify their stance — and to make sure banks and their clients are “effectively protected against possible American sanctions.”

KCI’s Melfi said time is running out for EU governments to act.

“Many firms just want to stop anything with Iran, since they can’t calculate the risk of staying,” she noted.

On Friday for the first time since the Iran nuclear deal came into force in 2015, China, Russia, France, Britain and Germany gathered in Vienna — at Iran’s request — without the US, to discuss how to save the agreement.

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