Annual Report and Financial Statements of Karafarin Bank, March

Transcription

Annual Report And Financial Statements
of
KARAFARIN
BANK
Year Ended March 20th, 2007
Contents
Financial Highlights ............................................................................................ 3
Background and Services .................................................................................... 4
The services currently available are:...................................................................... 4
Board of Directors ............................................................................................ 5
Report of Board of Directors to General Assembly of the Shareholders ......................... 8
Background ..................................................................................................... 9
Board of Directors and Executive Board ................................................................. 9
Capital ........................................................................................................... 10
Some of the more significant activities of the Bank .................................................. 12
Management .................................................................................................... 22
Branches ........................................................................................................ 22
Economic Survey .............................................................................................. 24
Overview ........................................................................................................ 25
Real Sector..................................................................................................... 26
Fiscal Policy .................................................................................................... 28
Price Trends ................................................................................................... 30
Employment ..................................................................................................... 31
Monetary Sector ............................................................................................... 32
Banking System ............................................................................................... 34
Tehran Stock Market ......................................................................................... 36
External Position............................................................................................... 37
Risk Management Report .................................................................................... 41
Financial Reports For the Year Ended March 2007 .................................................. 48
Report of the Auditors to the Annual General Meeting of Shareholders of Karafarin Bank .. 49
Notes To The Accounts ..................................................................................... 51
nb
- One USD is approximately equal to 9220 rials.
- The Iranian year begins on the 21st of March and ends on 20th of March of the
following year.
2
(billion rials)
Financial Highlights
ϭϯϴϱ
Deposits
Investments
Loans & Advances
Guarantees Issued
Gross Revenue
Interest Paid
Expenses
Net Income before Tax
Capital Adequacy Ratio (%)
No of Staff
No of Branches
3
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ϮϬϬϱ-Ϭϲ
ϮϬϬϰ-Ϭϱ
ϮϬϬϯ-Ϭϰ
8.3
10.5
9.8
12.5
16,774 11,387 5,856
1,583 1,374
691
11,313 7,310 3,973
4,889 2,890 1,822
2,552 1,571
849
1,684 1,029
530
186
124
64
530
350
216
842
45
599
26
414
18
3,008
871
1,574
1,094
488
275
34
157
282
12
ϭϯϴϭ
ϮϬϬϮ-Ϭϯ
1,455
556
645
630
205
100
16
80
20
170
7
ϭϯϴϬ
ϭϯϳϵ
ϭϯϳϴ
ϮϬϬϭ-ϬϮ
ϮϬϬϬ-Ϭϭ
ϭϵϵϵ-ϬϬ
42
-
-
360
212
245
251
43
23
8
19
99
4
80
42
45
95
11
2
4
3
49
1
9
15
16
4
1
0
1
1
22
1
Background and Services
Karafarin Bank started its operation as Karafarin Credit Institution in 1999 with a capital of 30
billion rials. The founding shareholders were members of the Association of Industrial
Managers of Iran, the Association of Construction Companies of Iran, the Association of
Mechanical and Electrical Engineers, the Iranian Society of Consulting Engineers, and the
Association of Architects and Urban Development Engineers, together with a group of senior
bankers and, of course, the public. The Institution was registered with the Companies
Registrar's Office of Tehran under registration number 157915 on December 9th, 1999.
After the enactment of the "Law for Establishment of Non-State-Owned Banks" in April 2001,
and ratification of the operating regulations by the Central Bank of Iran, the Board of Directors
of Karafarin Credit Institution decided to opt for a banking license. The most obvious
advantage of the conversion was authorization to offer current accounts under a banking
license. Upon receipt of the preliminary approval from the Central Bank, the capital of the
Credit Institution was increased in two stages first to 100 billion rials and later to 200 billion
rials (just over $25 million). Later after completion of the formalities, the Central Bank of Iran
issued its final authorization for the credit institution to operate as a full-fledged bank on
December 25th 2001.
Karafarin Bank is now in full operation offering all the services that state-owned banks
provide. It reports to and is under the supervision of the Central Bank of Iran. The employees
are either experienced bankers or young educated individuals who are internally trained. They
form a dedicated task force equipped with the latest banking technology available in Iran and,
under the banner of 'customer service' and 'transparency', are committed to make a difference in
the banking industry in Iran.
The services currently available are:
-Current accounts, savings accounts and term deposits; on-line services in all branches.
-Competitive rates of interest and profit-sharing on deposits.
-ATM services day & night.
-Telephone-banking.
-Bonding and guarantee facilities for contractors.
-Credit facilities for individuals and medium-sized manufacturing companies.
-Foreign currency transactions.
-Foreign currency deposit accounts, interest payable in the same currency.
-Letters of credit for importers and exporters through a wide network of Correspondent banks.
-Inward and outward letters of guarantee in foreign currencies.
-Credit facilities in foreign currencies for exporters and others with foreign Currency income.
-Consulting services, particularly for those who require foreign or local partners.
-Investment banking services, undertaking bond issues, syndication and underwriting of debt
and equity.
-Safety Deposit box services.
4
Board of Directors
Khalili, Mohsen – Chairman
Chairman of the Confederation of Iranian Industries
Chairman of the Association of Industrial Owners/Managers
Chairman & Managing Director of Butane Company
Chairman of Irano-Belgian Chamber of Commerce
Chairman of the Association of Liquid Gas Employers
Adab, Bahaedin – Deputy Chairman
Chairman of the Association of Iranian Contractors
Chairman of the Association of Engineering & Building Controllers
Deputy Chairman of the Confederation of Iranian Industries
Chairman of Karafarin Insurance Co.
Deputy Chairman of the Iranian Basketball Federation.
Aghili, Parviz – Managing Director
Deputy Chairman of Karafarin Insurance Co.
Chairman of Karafarin Leasing Co.
Amiri, Mahmood – Director
Chairman of Iran Office Machines Group
Chairman of Nestle Iran
Member of the Board of the Association of Informatics Companies
Afkhami, Ali – Director
Member of the Board of Tadbir Investment Co.
Member of the Board of Mdaber Investment Co.
Member of the Board of Kowsar Economic Organization
Ayatolahi, Ataolah – Director
Managing Director of Jooyabe-now Consulting Engineers
Dadkhah, Amir – Director
Chairman of the Iranian Syndicate of Electrical & Mechanical Contractors
Chairman of C.T.U.
Member of the Association of Chamber of Commerce
Member of the Board of Karafarin Investment Co.
Hoorazar, Saeid – Director
Chairman & Managing Director of Pilekar Construction Co.
Managing Director of Pilekar-Harrison Power Plants Const. Co.
Member of the Board of Energy Industries Development Co.
Member of the Board of Sakht Ajand Construction Investment Co.
Member of the Board of Karafarin Insurance Co.
Member of the Board of Karafarin Leasing Co.
5
Nayebi, Khosrow – Director
Former Director-General of Supervision Dept. of the Central Bank of Iran
Managing Director of Iran Hedayat Financial Services
Member of the Association of Iranian Certified Accountants
Salimi, Hossain – Director
Chairman and Managing Director of Karafarin Investment Co.
Chairman of Iran Gatch (plaster) Co.
Chairman of the Association of Joint Venture Companies of Iran
Member of the Board of the Association of Indust. Owners/managers
Member of the Association of Chamber of Commerce
Tabeghanoon, Mehdi – Director
Chairman & Managing Director of Kar & Andisheh Eng.Corp
Member of the Board of the Iranian Syndicate of Electrical & Mechanical Contractors
Member of the Board of Directors of the Iranian Techno-Engineering Enterprise
Member of the Board of Karafarin Insurance Co.
Member of the Board of Karafarin Leasing Co.
Alternate Board Members
Hossaini, Seid Alireza– Alternate Member
Managing Director of Daroopakhsh Co.
Director of Alborz Co.
Director of Teyf Iran Co.
Director of Kimidaroo Co.
Director of Abooreihan Pharmaceutical Co.
Director of Abidi Pharmaceutical Co.
Khakpoor, Parviz– Alternate Member
Managing Director of Genoo Consulting Engineering Co.
Member of the Board of Association of Exporters of Technical Services
Member of the Board of International Construction Co.
Member of the Board of Sakht Ajand Construction Investment Co.
Azad, Ali- Alternate Member
Managing Director of Fari-Rah Co.
Member of the Board of Iran Kar Co.
6
Executive Board
The Bank's Executive Board is composed of the following board members:
Aghili, Parviz- Chairperson
Amiri, Mahmoud- Member
Hoorazar, Saeed- Member
Nayebi, Khosrow- Member
Tabeghanoon, Mehdi- Member
7
Report of Board of Directors to General
Assembly of the Shareholders of
KARAFARIN BANK
for the Year Ended March 20th, 2007
8
Report of Board of Directors to General Assembly of the Shareholders of
KARAFARIN BANK ĨŽƌƚŚĞzĞĂƌŶĚĞĚDĂƌĐŚϮϬth͕ϮϬϬϳ
It is our pleasure to welcome you to your Bank's Fifth Annual General Assembly of the Shareholders
and present to you our report for the year ended March 20th, 2007.
ϭ-
Background
As you are aware, Karafarin Bank was initially established as a non-bank Credit Institution
with a capital of 30 billion rials. The founding shareholders were members of the Association
of Industrial Managers of Iran, the Association of Construction Companies of Iran, the Utility
Engineers Society and the Architects and Urban Development Society, together with a group
of senior bankers and, of course, the public. It was registered with the Companies Registrar's
Office of Tehran under registration number 157915 on 1378/09/18 (December 9th, 1999) and
continued to operate as a non-bank credit institution until the third quarter of 1380 (December
2001).
Upon approval of the "Law for Establishment of Non-State-Owned Banks" on 1379/01/21
(April 10th, 2000) and the regulations ratified by the Central Bank of Iran, the Board decided
to opt for a banking license. On December 5th, 2001, the Central Bank issued its preliminary
approval authorizing conversion of our license into a banking one. Later after completion of
the formalities and receiving the final approval of the Central Bank, we started operating as
Karafarin Bank on December 26th, 2001.
Ϯ-
Board of Directors and Executive Board
Your bank is managed by a Board of Directors, consisting of eleven members elected by the
General Assembly of the Shareholders convened in Extraordinary session on 1384/08/19.
Members of the board are appointed for a period of two years. The credentials of these
members had previously been approved by the Central Bank of Iran.
Your Directors are:
Khalili, Mohsen
Adab, Bahaedin
Aghili, Parviz
Amiri, Mahmood
Ayatollahi, Ataollah
Dadkhah, Amir
Hoorazar, Saeid
Mellat Investment Co.
Nayebi, Khosrow
Salimi, Seid Hossain
Tabeghanoon, Mehdi
9
Chairman
Deputy Chairman
Member of the Board & Managing Director
Member of the Board
"
" " "
"
" " "
"
" " "
"
" " "
"
" " "
"
" " "
"
" " "
The Alternate members are:
Azad, Ali
Hossaini, Seid Alireza
Khakpoor, parviz
The Executive Board is composed of the following members:
Aghili, Parviz
Amiri, Mahmood
Hoorazar, Saeid
Nayebi Ahranjani, Khosrow
Tabeghanoon, Mehdi
Chairperson
Member of the Board
"
" " "
"
" " "
"
" " "
There were 47 Board of Directors meetings and 71 Executive Board meetings convened in
1385. Moreover, there are a number of specialized committees, in which some members of
the Board of Directors, together with outside experts, regularly participate.
ϯ-
Capital
As your Bank's assets have been growing considerably, particular attention has been paid by
the Management to make sure its capital is sufficient to comply with the standards of capital
adequacy. This is the ratio between a bank's base capital and the risk carried by its various
assets. For this purpose, each asset is given a weight according to the risk it is considered to
carry.
As it is well known, this ratio is being adopted internationally and serves, not only to protect
banks against unforeseen exigencies, but also to strengthen the depositors' confidence in an
individual bank, as well as, the banking system as a whole. It also makes international and
domestic comparisons easier and more meaningful, as the same standards are applied to
arrive at a unique ratio, by all banks.
The base capital consists of a bank's paid in capital and retained earnings (Tier I) plus its
complementary capital (Tier II). According to the regulations, permissible exposure to
various assets, including exposure to a single client, is defined according to the base capital.
10
Our Bank's base capital has been as follows for the past three years;
(million rials)
ϮϬϬϲ-Ϭϳ
a-Tier I
Paid-up capital
Statuary reserves
Retained profits
Total
b-Tier II
General Reserves*
Total Base capital
Assets weighted according to risk
Capital Adequacy Ratio
ϮϬϬϱ-Ϭϲ
,
191,391
64,152
955,543
169,783
1,125,719
13,582,613
8.3%
ϮϬϬϰ-Ϭϱ
,
115,434
61,270
9,229,936
10.5%
4,901,614
9.8%
*Adjusted according to the standards of capital adequacy
As a result, upon approval of the Extraordinary General Assembly of 1383/10/17, the Bank's
capital was to be raised from 350 billion rials to 2,000 billion rials within a period of three
years and authorized the Board of Directors to act accordingly. Subsequently, the Board of
Directors, having already obtained the approval of the Central Bank and Tehran Stock
Exchange, in its meeting of 1385/12/25 proceeded with the capital increase from 350 billion
rials to 700 billion rials. In 1386, the Bank's capital will have to be raised from 700 billion
rials to 2,000 billion rials in two stages. According to the approval of the Board, in the first
stage the capital will be raised to 1,050 billion rials through capitalization of the 1385
retained profits and, in the second stage, it will be raised to 2,000 billion rials through cash
injection by the shareholders.
The following table presents the composition of the Bank's shareholders by the end of 1385:
Groups
Real persons
Legal persons
Total
No. of persons
4580
249
4829
No. of shares
439,131,747
260,868,253
700,000,000
% of ownership
63%
37%
100%
Appointment of Legal Inspector and Auditor
The General Assembly of the Shareholders convened in extraordinary session on 1385/04/01
appointed KPMG Bayat-Rayan Chartered Accountants as Legal Inspector and Mr.
Manouchehr Bayat as Alternate Inspector.
11
ϰ-
Some of the more significanƚĂĐƟǀŝƟĞƐŽĨƚŚĞĂŶŬŝŶϭϯϴϱ (Year
ĞŶĚĞĚDĂƌĐŚϮϬƚŚ͕ϮϬϬϳ)
Deposits received
During the year under review, in order to reduce the loss incurred by lowering the rate of
'profits' (interest) by the authorities, while the Bank remained contractually-bound by its
outstanding long-term fixed rate deposit, it was decided, as a matter of strategy’ to reduce our
long-term deposits and not to accept deposits longer than one year. Nonetheless, the Bank's
deposits grew considerably both in terms of amounts and numbers. The balance of our
deposits at the end of 1385 stood at 16,774 billion rials, which showed an increase of %47
over the previous year. The following table and chart show the trend for the past three years:
(billion rials)
1385
Sight-saving deposits
Term deposits
Other deposits
Total
Number of account
2006-07
1,568
13,549
1,657
16,774
136’471
1384
1383
2005-06
2004-05
972
8,896
1,519
11,387
114’064
731
4,217
908
5,856
56’362
Changes in Deposits
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Ϯ,ϬϬϬ
Ϭ
Sight-saving
deposits
Term deposits
Other deposits
Facilities granted
The outstanding balance of credit facilities granted at the end of 1385 amounted to 11,313
billion rials, compared to 7,310 billion rials for 1384, which showed an increase of 55
percent. The following table shows the outstanding balance of credit facilities granted for the
past three years:
12
(Billion rials)
1385
Facilities granted (gross)
Future interests
Facilities granted (net)
2006-07
12,073
-760
11,313
1384
2005-06
8,286
-976
7,310
1383
2004-05
4,663
-690
3,973
The following table presents the correspondence between the maturities of the Bank's assets
and liabilities at the end of 1385:
(billion rials)
Maturities
Assets
Less than 1 year
More than 1 year
Total
16,900
1,573
18,473
Percentage
91%
9%
100%
Liabilities
& Equity
14,727
3,746
18,473
Percentage
80%
20%
100%
Guarantees Issued
During the year under review,
billion rials, which compared
percent. During the year 5,794
was extended. The outstanding
the chart below:
the outstanding balance of the guarantees issued stood at 4,899
to 2,890 billion rials for 1384, showed an increase of 70
new guarantees were and the due date of 4,408 old guarantees
balance of the guarantees for the past three years is shown in
(billion rials)
Guarantees Issued
ϱ,ϬϬϬ
ϰ,ϬϬϬ
ϯ,ϬϬϬ
Ϯ,ϬϬϬ
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Ϭ
13
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Foreign exchange activities
The Bank was authorized to engage in all foreign exchange activities on 1380/09/07
(November 28th, 2001). The table below summarizes these activities:
(million dollars)
1385
1384
2006-07
Foreign exchange transactions
Letters of credit
Foreign exchange guarantees
2005-06
414
540
6
203
385
35
1383
2004-05
191
220
3
Main Balance Sheet and Income Statement Figures
1385
Deposits
Credit facilities
Guarantees issued
Marketable sec. (Bonds & Stocks)
Fixed assets
(billion rials)
1384
2006-07
1383
2005-06
16,774
11,313
4,899
1,410
380
2004-05
11,387
7,310
2,890
1,280
327
5,856
3,973
1,822
684
267
Main Balance sheet Items
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14
Deposits
Credit
facilities
Guarantees
issued
Marketable
sec. (bonds &
Stocks)
Main Income Statement Figures
(billion rials)
Income Statement
1385
Revenue earned on loans
Interest & dividend on market. sec.
Commission on guarantees
Total Revenue
Less:
Interest Paid to Depositors
Provision for doubtful debts
General expenses
Profits before tax
Taxes
Profits after tax
1384
1383
2006-07
2005-06
2004-05
1,685
151
186
530
(37)
493
1,029
67
124
350
(19)
331
530
39
64
216
(8)
208
1,806
437
309
2,552
1,112
292
166
1,570
578
194
77
849
Main Income Statement Items
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Total Revenue
Profits before tax
Profits after tax
At the end of the year; the share of depositors in ‘profits’ (interest) accrued under Islamic
Banking regulations, amounted to 1,536,731 million rials while the Bank had actually paid
the sum of 1,672,133 million rials to its depositors during the year. Consequently, no extra
payment need to be paid to the depositors at the end of the year.
15
New branches
To expand our network of branches, we have undertaken the following activities in 1385:
Branches opened:
In Tehran:
Dowlat Branch
Gholhak Branch
Baharan Branch
Sattarkhan Branch
Erfan Branch
In the Provinces:
Bandar Abbas Branch
Gorgan Branch
Kish Branch
Semnan Branch
Sanandaj Branch
Oroomieh Branch
Marivan Branch
Shiraz, Branch no. 2
Sarrey Branch
Mashhad, Branch no. 2
Ghom Branch
Babol Branch
Ahvaz Branch
Abadan Branch
Branches being refurbished for opening:
In 1386, 35 branches will be opened, of which 20 will be in Tehran and 15 in the Provinces.
The number of active branches and those being opened is shown in the following table:
1386
No. of branches beginning of the year
No.of branches opened during the year
No. of branches at the end of the year
16
2007-08
45
35
80
1385
2006-07
26
19
45
1384
2005-06
18
8
26
1383
2004-05
12
6
18
Investments
Investments in non-Stock exchange companies
In 1385, the Bank established two fully-owned subsidiaries, a leasing company and an
insurance brokerage firm. The following table highlights the profitability of four companies
in which the Bank has important stakes:
Karafarin
Karafarin
Karafarin
Karafarin
Name
Insurance Co.
Bank Investment Co.
Leasing Co.
Brokerage Co.
Paid-up
capital
140,000
100,000
50,000
25,000
% of
investment
10%
80%
100%
100%
(million rials)
Financial
year
1384/12/29
1385/06/31
1385/12/29
1385/06/31
Profit
1,960
9,893
5,372
883
As these companies have been established very recently, it is hopes their profitability will
increase in the future.
Investment in Participation Bonds
Participation Bonds are risk free and most liquid, which makes them an ideal instrument for
short term investments. During the year under review we invested most of our excess cash in
these instruments and received 358 billion rials of 'profits' (interests).
Investment in shares quoted in the Stock Exchange
Under the current economic situation and calm in the Stock Exchange, transaction in stocks
has been reduced to the minimum. In 1385, 21,930 million rials profit and 779 million rials
capital gains were realized. Meanwhile, we have set aside a specific reserve against fall in
share prices amounting to 11,599 million rials at the end of 1385. The following table shows
the net profit realized out of investment in shares quoted in the Stock Exchange:
Profit distributed in general assemblies
Profit earned through transaction in shares
Provision for falling share prices
Net profit
17
Amount
21,930
779
(11,599)
11,110
Our Share Prices and the Tehran Stock Exchange (TSE) Share Price Index
After we were granted a banking license, we applied for admission to the Tehran Stock
Exchange (TSE) in early 2002, in order to facilitate transfer of our shares, as well as benefit
from tax and other advantages. Various technical investigations were undertaken and our
application was finally approved by the Admissions Committee on January 31, 2003. As the
first Iranian bank admitted to the TSE after the Revolution, our shares were traded for the first
time on 1382/04/14 (4/7/2003) at 3,521 rials. Thenceforth, until the end of 1385, 376,370,545
of our share, for a value of 2,671 billion rials have been traded on the floor of the Exchange.
The following chart compares the TSE share price index with variations in the price of our
shares up to the end of 1st quarter of 1386:
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ϭϮ,ϬϬϬ
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ϰ,ϬϬϬ
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A summary of the transactions in our shares in 1385 is given below:
No. of purchases
No. of shares traded
Value of transactions(million rials)
Lowest price (rial)
Highest price (rial)
Last price on 1385/12/28 (rial)
8,750
118,789,734
495,192
1,940
3,930
3,794
Human Resources
The following table shows the distribution of our personnel according to position:
1385
Managerial
Specialist
Operational
Total
18
2006-07
204
110
528
842
2005-06
2004-05
ϭϯϴϲ/Ϭϯ/ϯϬ
ϭϯϴϱ/ϭϮ/Ϯϵ
ϭϯϴϱ/Ϭϴ/ϯϬ
ϭϯϴϱ/Ϭϰ/ϯϭ
ϭϯϴϰ/ϭϮ/Ϯϵ
ϭϯϴϰ/Ϭϴ/ϯϬ
ϭϯϴϰ/Ϭϰ/ϯϭ
ϭϯϴϯ/ϭϮ/Ϯϵ
ϭϯϴϯ/Ϭϴ/ϯϬ
ϭϯϴϯ/Ϭϰ/ϯϭ
ϭϯϴϮ/ϭϮ/Ϯϵ
ϭϯϴϮ/Ϭϴ/ϯϬ
ϭϯϴϮ/Ϭϰ/ϯϭ
ϭϯϴϮ/Ϭϰ/ϭϰ
TSE
KB
The distribution according to the level of education is given in the table below:
1385
Doctorate & Masters
Bachelors
Post-diploma
High-School Diploma
Elementary education
Total
2006-07
32
599
24
152
35
842
2005-06
27
2004-05
17
Training Courses
During the year under review, 759 members of our personnel and management participated in
89 training courses and seminars, as enumerated below:
213 persons participated in 14 training courses for new employees.
540 persons participated in 69 courses and seminars in Iran.
6 persons participated in 6 courses and seminars abroad
We are further planning to offer basic courses in computer science, language and accounting
and educational institutes are being evaluated for carrying out such programs.
Special projects to increase staff motivation
Project for participation of the staff in the profits of the Banks
Late in 1384, in order to further motivation of the staff, the Board of Directors approved
a project for the participation of the personnel in the Bank's profit. Accordingly, some
21,696,518 share of the Bank were purchased for the employees and entrusted with
Tehran Stock Exchange authorities, to be transferred upon settlement of the last
installment.
Projects in the course of implementation in 1386
Strategic planning
In the latter part of 1384, studies were made, together with a firm of management
consultants, to set up a comprehensive strategic plan for the Bank. During the year
under review, the outline of such a plan was approved by the Board and much
progress was made towards its implementation with full cooperation of the staff.
It is hoped that when this plan comes to fruition, Karafarin Bank will become the
most trusted bank in Iran.
19
Karafarin Investment Fund
Karafarin Investment Fund is the first mutual fund in Iran, set up with the
initiative of Karafarin Bank, under the Iranian Securities Act. This is an ‘open
end’ fund with the aim of channeling savings into investment in fixed income
securities. The investors can enter and leave the fund as they please and they
benefit from guaranteed liquidity and a quarterly paid, minimum return of 16.5%.
The shares will be up for subscription in the first half of 1386.
Purchase of a building as our headquarters
In 1383, the bank headquarter, a 19-storey high building in Nahid Blvd, Tehran,
was purchased. All the necessary formalities have been taken care of and the
building is being refurbished. It is expected to be completed in 1386.
Recommendations and acknowledgements
Distribution of profit
The Board proposes the following distribution of profits:
Proposed for1385
Profit before tax
Tax on profit
Total distributable profits
To be appropriated as follows:
Legal reserves
Board of Directors bonus
Dividend
Undistributed profits at the beginning of the
year
Undistributed profits at the end of the year
Approved in 1384
million
rials
ϱϮϵ͕ϵϰϵ
(ϯϲ͕ϵϯϱ)
ϰϵϯ͕Ϭϭϰ
rials per
share
ϳϱϳ
(ϱϯ)
ϳϬϰ
billion
rials
ϯϱϬ͕ϭϴϵ
(ϭϴ͕ϴϯϬ)
ϯϯϭ͕ϯϱϵ
rials per
(ϳϯ͕ϵϱϮ)
(ϯ͕ϱϬϬ)
(ϯϴϱ͕ϬϬϬ)
ϯϯ͕ϱϴϵ
(ϭϬϲ)
(ϱ)
(ϱϱϬ)
ϰϴ
(ϰϵ͕ϳϬϰ)
(ϯ͕ϭϮϱ)
(Ϯϰϱ͕ϬϬϬ)
ϱϵ
(ϳϭ)
(ϱ)
(ϯϱϬ)
-
ϲϰ͕ϭϱϭ
ϵϭ
ϯϯ͕ϱϴϵ
ϰϳ
share
ϱϬϬ
(Ϯϳ)
ϰϳϯ
Approval of transactions subject to Article 129 of the Commercial Code
All transactions between the Bank and others with mutual-board-membership have been reported to the
Bank's Auditors. These transactions have been undertaken according the provisions of the Commercial
Code of Iran and treated as normal business of the Bank. The terms and conditions of these transactions
are in line with those without mutual-board-membership. Considering the Auditors corroboration of the
above statement, the Board hereby requests the General Assembly of the Shareholders to approve these
transactions.
20
Approval of the Board Members’ honorarium
The Board proposes that Members be paid an honorarium of one million rials per meeting.
Approval of the Financial Statements of the Bank
The financial statements of the Bank have been audited by Bayat Rayan (KPMG) and reviewed by the
Legal Inspector appointed in last year's General Assembly of the Shareholders. Your Directors hereby
request the General Assembly of the Shareholders to approve these statements pursuant to the reports of
the Auditors and the Inspector of the Bank.
Note of Gratitude to the shareholders and the employees
The Board of Directors of Karafarin Bank extends its thanks to each and every one of the shareholders
for the support and confidence they have shown us from the very first day of Karafarin Bank's
establishment.
The Board also sincerely thanks the Bank's Managing-Director, managers and employees for their
dedication and effort. Without their commitment and hard work, Karafarin Bank could not have
achieved any of its objectives.
21
ϱ-
Management
Aghili, Parviz – Managing Director
Ghoddousi, Ahmad – Deputy Managing Director
Javadi, Javad - Assistant Managing Director
Ahmadi, Saeid– Advisor to Managing Director
Edalat, Alireza – Advisor to Managing Director
Jamalian, Mohammad-taghi – Advisor to Managing Director
Rad, Massoud – Advisor to Managing Director
Safarian, Majid -Executive Manager, Branches & Procurement,
Almaei, Esmail – Senior Manager, Legal Dept.
Baghia, Ali-Reza- Senior Manager, Internal Control Dept.
Deravi, Farhad- Senior Manager, Branches affair Dept.
Jariri, Farkhonde – Senior Manager, International Dept.
Javadi, M.Hosseyn-Senior Manager, Planning
Meskarian, A.Reza – Senior Manager, Procedures & Systems Dept.
Mirzai-Ghomi, Esmaiil-Senior Manager, Information Technology Dept.
Noorbakhsh, Iman-Senior Manager, Risk Management
Parsa, Mehdi – Senior Manager, Credit Dept.
Sadegh-Vishekaii, Gholam-Reza – Comptroller.
Safe-Kordi, Mehdi- Senior Manager, Credit Information Dept.
Taherkhani, Gitti- Senior Manager, Procurement.
Tayefe, Hossein – Senior Manager, Human Resource,
Azimi-Panah, Nadereh - Assistant Manager, International Dept.
Bathai'I, Seyd-Hossein - Assistant Manager, Credit Dept.
Kamkar-Haghighi, Ali - Assistant Manager, Financial Dept.
Kimia-Ghalam, Saeed - Assistant Manager, Procurement Dept.
Maddi Nejad, Hmid- Assistant Manager, Inspection Dept.
Massihi, Vartan -Assistant Manager, International Dept.
Sharif Mohseni, Hedayatollah - Assistant Manager, Procedures & Systems Dept.
Roozbahani, Mehrnoosh - Assistant Manager, Branches affair Dept.
Soroosh Hagh, Batool - Assistant Manager, customer service Dept.
Zianak Shouri, Hosseyn - Assistant Manager, Procedures & Systems Dept.
22
ϲ-
Branches
In Tehran
Central
Afrigha
Apadana
Baharan
Bolvar Keshavarz
Dowlat
Farmanieh
Gholhak
Jomhouri
Kargar Shomali
Mehrabad
Pasdaran
Saadatabad
Sattarkhan
Vanak
Zafar
In Provinces
Abadan
Ahmadabad (Mashhad)
Ahwaz
Amirkabir (Shiraz)
Ardebil
Asalooye
Bandar Abbas
Babol
Bolvar Beheshti (Kermanshah)
Bolvar Haft Tir (Karaj)
Ferdowsi (Mashhad)
Ghazvin
Ghom
Gorgan
Abroad
Soleimanieh, Iraq
23
Karimkhan Zand (Shiraz)
Kerman
Kish
Marivan
Mir (Esfahan)
Motahari (Esfahan)
Mehrvila (Karaj)
Oroumieh
Rasht
Sanandaj
Sari
Semnan
Tabriz
Yazd
Economic Survey
24
Overview
During the year ended on March 20,2007 (Mar.20,2006-07 in Persian Calendar is1385)1,
according to the preliminary estimates of the Central Bank for the first 9 months of the year, the
Iranian economy grew by 5.3%, which was about the same as the year before. The enlarged oil
revenue continued to fuel the economy, while rapidly growing liquidity made it difficult to
contain prices. With this oil revenue, a generous import policy was adopted which probably
prevented a hyper-inflationary environment. Nonetheless, at current prices, according to the
Central Bank data, the 12-month moving average reached 13.6%, or 1.5 percentage points
higher than the corresponding rate of the year before.
Government expenditure continued to rise and by the end of the year was 22.1% above the year
before. The budget deficit at $17.5b was 93% more than the figure of the previous year. But, its
likely inflationary effect was largely contained by the fact that it was financed through the Oil
Stabilization Fund. Consequently, dependence on the oil revenue reached 61%, which was
almost the same level as the year before.
The lowering of bank lending 'profit' (interest) rates by the Currency & Credit Council of the
Central Bank and the process of adaptation it entailed, kept the banking community
preoccupied for a good part of the year. Like before, this was harder on the privately-owned
banks, who were trying to increase their market share.
During the year under review, the rate of growth of all the main monetary indicators (except
one) increased sharply. The jump was even higher than the year before. The rate of growth of
the money supply (M1) increased from 25.8% to 30.4%. The corresponding figures for
liquidity were even higher, rising from 34.3% to nearly 40%. The same goes for private sector
credit, growing by 41.7%. The rate of increase of the monetary base at 23.9% was high, but
below the exceptional figure of 45.3% for the previous year. Of course the effect of this
escalated rate of increase in liquidity was felt throughout the year under review.
Improvement in the balance of payments continued, reinforcing the country’s already
substantial foreign exchange reserves. This was mainly brought about by rising oil prices,
which approached and surpassed the average of $55 per barrel for Iranian crude during the year
(compared to $51.3 for the year before).
The oil revenue was reported to have reached $60b, an increase of 23% over the year before;
and, non-oil exports reached $15.9b. Based on the Central Banks Governor’s declaration (press
conference of May 22, 2007), imports were no more than $41b for the year, almost the same
amount as the previous year. The result, based on CBI's data, was the unprecedented surplus
trade balance of $34.9b. The only significant drop was in the capital account, which registered
an outflow of $3.0 billion during the first half of the year. Consequently, overall reserves must
have nearly reached $65b. Our external obligations, as stated by the Governor of the CBI
amounted to $45.3b. Accordingly, our debt/reserve ratio fell from 81% for the year before to an
estimated 75% in the year under review.
- Iranian year starts on March 21st and ends on March 20th the following year. See calendar at the end of the
survey.
1
25
There were also some signs of reversal of recessionary tendencies in stock prices during the
year. TSE Index which had reached its lowest point by the end of the previous year, or 9460
points, followed an upward trend during the year, except for some fluctuations, and at the end
of the year was up by 3.8%, compared to the end of the year before. The volume of transactions
however, declined by 2.1%. The corresponding declines of the year before were 26% for the
Index and almost 50% for the volume of transactions.
Another indicator of business climate was some 86.9% increase in the amount of dishonored
promissory notes in Tehran during the year under review. The increase in the number (as
against the amount) of dishonored promissory notes was only 13.7%. This could be interpreted
as more problems for larger businesses. Both these figures continued the trend of the previous
year.
We may, therefore, conclude that the salient features of the Iranian economy in the year ended
March 20, 2007, consisted of improved balance of payments, high liquidity and inflationary
signals which was somewhat checked by a rather relaxed import policy.
Major Economic Indicators
2002-03
GDP (Fixed Price 1997)
Oil Revenue
Imports
Balance of Payments
Budget Deficit
Unemployment
Private Sector Credits
Liquidity
Inflation (average)
Budget Deficit / GDP
.0
.0
2003-04
Value
2004-05
2005-06
.0
2006-07
.0
**
( billion dollars)
2002-03
7.6%
18.8%
21.6%
85.9%
3.1%
30.1%
-
Growth rates
2003-04
2004-05
2005-06
6.8%
4.8% 5.4%
19.1% 32.8% 34.4%
34.1% 29.2% 7.3%
86.9% 166.0% 54.5%
7.8% 16.8% 3.1%
- 37.6% 38.3%
26.1% 30.2% 34.3%
-
2006-07
5.3%*
22.9%
1.1%
92.6%
93.3%
41.7%
39.4%
-
* 9-month estimate of the CB
** Rough estimate.
Real Sector
For the year under review, according to the Central Bank's preliminary estimates, quarterly
GDP growth rates were 5.1%, 4.7% and 6.2% for first, second and third quarters respectively.
Therefore, the average (GDP) growth rate at constant prices, reached 5.3% for the first 9months of the year. This was 0.2 percentage points less than the year before.
Construction grew by 5% in the first quarter of the year compared to 11.4% growth in the first
quarter of the year before. But there must have been a boom in this sector later in the year, as
the number of construction-permits issued in the urban areas of the country during the 9months of the year, increased by 15.8% compared to 8.9% decline during the same period of
the year before.
26
For the Industry, the first quarter growth rate was 6% compared to 10.6% for the corresponding
quarter of the year before. But there were no data available for the second and third quarters of
the year under review.
Water, electricity & gas, the last sub-sector of Industry, mainly Government-owned and
controlled, registered a rate of growth of 11.8% in the first quarter of the year compared to
4.1% growth for the corresponding quarter of the year before.
It seems that Agriculture did well in the first quarter with a rate of growth of 6.9%. Usually
seasonal factors play an important role in this sector. The 2nd quarter production normally
accounts for almost half of the annul value added, while the 4th quarter is much less important.
It is also a fact that unlike other sectors, Agriculture does not much react to public or investors’
mood and even if it did, it would react more slowly.
The Oil sector declined by 3% in the first quarter of the year compared to 3.8% growth in the
same period of the year before. As it was recently declared by the Ministry of Oil, investment
in the oil fields has been declining; and, unless it is revived, no increase in production may be
expected in the near future.
In the first quarter of the year, Services registered a growth of 5.8%, against 6.4% growth for
the same period of the year before. This sector is the most important sector of the Iranian
economy, as it accounts for more than 50% of the value added.
During the first 9-months of the year under review, according to the Central Bank's data, Gross
Fixed Capital Formation registered a growth of 8.1% (compared to 3.6% in the same period of
the year before).
According to the Fourth Economic Plan, GDP growth rate for the year under review was
supposed to reach 7.4%.
(billion Dollars)
Gross Domestic Product (at Constant 1997 Prices)
Agricultural
Oil
Industry
Manufacturing & Mine
Construction
Other
Services
Less:
Commissions
GDP
*1st quarter figures
** 9-month estimate
27
Value
2003-04
2004-05
2005-06
*
2006-07
2004-05
**
13.6
4.8
2.2
2.6
8.4
12.0
324.7
-75.3
4.6
%Change
Share in Growth
2005-06
2006-07
2004-05
2005-06
2006-07*
12.0
5.4
26.7
5.3**
0.1
4.8
0.1
5.4
0.3
4.7*
7.1
0.6
6.7
7.1
4.4
6.4
5.6
6.9
-3.0
6.3
5.9
5.0
11.8
5.8
0.3
0.3
2.0
2.0
-0.2
0.1
2.4
1.0
0.1
1.6
1.3
0.2
0.1
2.9
1.0
-0.4
1.4
1.1
0.2
0.1
3.0
Fiscal Policy
In the year under review, Government revenue amounted to $45b, which was 6.8% above the
year before. Government expenditure (including repayment of loans) increased by 22.1%
reaching $62.5b. As a result, the deficit increased by 93% and reached $17.5b. Based on a
rough estimate of the GDP for the 4th quarter of the year, the deficit hovered around 8.3% of
the GDP, compared to 4.9% in the year before. The ratio of Government expenditure/GDP
reached almost 30%, which was 2 percentage points above the year before.
The composition of government revenue was more or less similar to the year before; and most
revenue forecasts were generally realized. The oil revenue, by definition, corresponds almost
exactly to the forecast, as all revenues beyond the approved budget go to the Oil Stabilization
Fund (OSF) account. Tapping the OSF has become a routine event as it has almost become the
lone source of financing budget deficits.
The direct share of the oil revenue amounted to $19.9b, which was about 44.2% of the total
revenue, compared to 48.3% for the year before. Taxes amounted to $16.5b and accounted for
36.6% of total revenues, but fell short of the budget forecast by $2.8b. Notwithstanding, tax
receipts were 12.7% higher for the year compared to the year before. This item includes a 5%
tax levied on the NIOC’s turnover for the first time. In effect a sales tax on oil, including
domestic consumption, and, therefore, could be considered as part of the oil revenue.
The share of direct taxes ($10.6b) to total taxes was about 64.4%; and, three quarters of it was
income tax on corporations including $2.8b from NIOC (the newly levied 5% tax). Indirect
taxes amounted to $5.9b, up by 6.6% over the year before. Amongst indirect taxes, import
duties made up 73% of it. Even though the amount actually collected was 30% less than the
budget forecast, import taxes were 10.6% more than the figure of the year before.
The last revenue item, “other revenues”, amounted to $8.6b, up by 20.8%, over the previous
year. By examining the item "other revenues" in comparison with previous years, a radical
change in its components is observed. Up to last year ago it was composed of levies and duties
and proceeds of sales of assets, as well as, a notional figure (both as revenue and expenditure)
to indicate energy subsidies. The first part is self-explanatory. The second part, energy
subsidies, consisted of the difference between international prices of energy products and the
domestic price actually paid for them. The aim was to make the budget more transparent. In the
budget for the year under review, the second part - by far the larger portion- no longer appears
in it.
As for Government expenditures, current expenditure at $62.5b registered an increase of 22.1%
over the previous year, and made up about 72.3% of all expenditures for the year. This was two
percentage points above the figure of the year before. On the other hand, capital expenditure
reached $15.8b, which fell short of the forecast by $3.3b or 17.3%, while its percentage share
remained almost the same as the year before. During the recent past, every government has had
a free-hand with respect to the current expenditure and when it was under pressure to contain
the deficits, it has done so at the expense of the development budget.
The last part of the budget deals with repayment of loans, or acquisition of financial assets,
under the new nomenclature. In the year under review, some $1.5b was allocated to repayment
of loans and commitments, which was 97% of the budget forecast.
28
The budget deficit amounted to $17.5b and was almost twice the amount of the year before. It
was financed by lifting from the OSF account, once again, as it was considered to be the easiest
and cheapest source. The share of various sources in financing the deficit was as follows: the
OSF 88.5%, 'participation' bonds 7.5%, privatization 0.5%, foreign loans 0.4% and other
sources 7.5%. It has to be pointed out again, that our definition of budget deficit (or surplus)
from the point of view of its economic effects as an expansionary (or contractionary) force,
differs from the official version. According to the latter, repayment of the loans has not been
taken into account; and therefore, the budget deficit was stated to be $16b.
(billion Dollars)
Financial Position of the Government
ϮϬϬϰ-Ϭϱ
Budg.
Revenues:
Oil & Gas
Taxes
Others*
Total
Expenditures:
Current*
Capital
Acquisition of Assets
Total
Surplus/Deficit
Financed by:
Participation Bonds
Foreign borrowing
Privatization
Oil Stabilization Fund
Actual
1
ϮϬϬϱ-Ϭϲ
Budg.
Actual
2
ϮϬϬϲ-Ϭϳ
Budg.
3
-
-
-
-
-17.8
Others
Total
* Without energy subsidies.
2002-03
Budg.
Participation Bonds
Foreign borrowing
Privatization
Others
Total
Actual
Actual
.0
ϭϯϴϯ
7.2%
0.0%
23.9%
50.7%
18.2%
100%
Actual
ϭϯϴϰ
ϭϯϴϱ
ϭϯϴϯ
% Share
ϭϯϴϰ
-2.4% 59.4% 48.3% 44.2%
12.7% 33.1% 34.7% 36.6%
20.8% 7.5% 17.0% 19.2%
6.8% 100% 100% 100%
23.7%
59.4%
243.3%
52.0%
30.1%
-2.0%
30.4%
21.5%
18.1%
42.7%
62.7%
-28.6%
40.3%
3.3%
25.7%
23.7%
-39.3%
22.1%
93.3%
60.6%
274.8%
11.1%
13.6%
-22.1%
18.1%
-44.6%
117.8%
-36.5%
8.8%
212.5%
3.3%
-27.0% 15.3% 8.2% 3.1%
7.5% 0.4% 0.8% 0.4%
-54.2% 3.5% 2.1% 0.5%
105.5% 79.0% 83.3% 88.5%
156.1% 1.9% 5.6% 7.5%
93.3% 100% 100% 100%
-17.5
Budg.
Actual
2005-06
Budg.
Actual
69.1% 70.3% 72.3%
21.5% 25.0% 25.3%
9.4% 4.8% 2.4%
100% 100% 100%
-
2006-07
Budg.
Actual
11.2% 15.6% 15.3% 6.1% 8.2% 0.1% 2.7% 0.4% 2.7% 0.8% 3.7% 26.6% 3.5% 26.0% 2.1% 82.1% 53.2% 79.0% 61.0% 83.3% 2.8% 1.9% 1.9% 4.3% 5.6% 100% In recent years, with the rise in oil price, the government expenditure and the corresponding
deficit have increased. But rather than financing this "Rial-deficits" by borrowing, the
29
ϭϯϴϱ
17.3%
29.7%
39.5%
22.7%
Financing Budget Deficit
2003-04
2004-05
Budg.
% Increase
government has increasingly relied on the OSF. Therefore, it should be pointed out that, in a
sense, there was no budget deficit in the year under review, as the shortfall was mostly financed
by drawing on the OSF.
For the past three years, the official presentation of the budget is correctly based on the concept
that "oil" is an asset and therefore, proceeds of its sales in not "revenue". In this sense, the oil
revenue should be treated as an exogenous factor and accounted for independently. Then the
OSF, which usually takes on much less than 50% of the annual oil revenue, must at least be
treated as a "Trustee Account".
Price Trends
In the year under review, according to the statistics of the Central Bank of Iran, the twelve
months average of monthly-price-rises (twelve months of the year under review vs. the
corresponding months of the previous year) reached 13.6%, which was 1.5 percentage points
higher than similar computation for the year before. This rate is 3.7 percentage points above the
rate of inflation stipulated in the Fourth Five-Year Development Plan (2005-09). Moreover, an
upward trend in monthly prices can be detected during the year under review. These monthly
rises for the twelve months of the year starting with the first month and continuing with
subsequent months respectively, were as follows: 6.5%, 8.9%, 11.0%, 12%, 12.9%, 14.6%,
15.1%, 14.7%, 15.9%, 17.3%, 17.6%, and 16.6% for the last month. The more moderate price
hikes of the first two months should be attributed to the exceptionally high prices of the
corresponding months of the year before; and resulting in lower rates of inflation in the first
two months of the year under review.
Movement of prices during the last two years is shown in the chart below:
Monthly Inflation
ϭϮ-month moving average
ϮϬ
Monthly rate
ϭϱ
%
ϭϬ
ϱ
ϮϬϬϳ-Ϭϴ
ϮϬϬϲ-Ϭϳ
ϮϬϬϱ-Ϭϲ
ϮϬϬϰ-Ϭϱ
Ϭ
It may then be surmised that had it not been for the considerable imports of the past few years,
and subsidies on many services supplied by state-entities, the combined pressures of highliquidity, expanded credit and lowering of interest rates, would have probably resulted in a
more serious inflationary-environment during the year under review.
30
During the period under consideration, the price-rise has been most conspicuous in the item
“food” with the weight of 32.5%, rising gradually from -3.2% April 2006 and +3.6% in May
2006), to 22.6% by the end the year (March 2007), while despite favorable conditions in
agriculture, fruits and vegetables rose by some 40.3%. “Housing” with the weight of 27.04%,
registered a rise of 19%, from 12.8% in the beginning of the year.
The whole sale price index also confirms the above trend. The average annual whole sale price
rise in March 2007 was about 18%, compared to 5.7% for the last month of March 2006.
It is also noteworthy that the average annual rate of inflation foreseen in the Fourth Five-Year
Development Plan (2005-09) is 9.9%.
Employment
During the last quarter of the year under review, according to the estimate of the Iran Statistical
Center, unemployment reached 12.1%, which was unchanged compared to the same period the
year before. The average rate of unemployment for the 4 quarters of the year, however, reached
11.2%, which was 0.2 percentage points less than the year before. In recent years, the rate of
unemployment has persisted around 11-12 percent and despite inflationary conditions, which
usually favor lower unemployment, there seems to have appeared no clear indication of a
downward trend.
Unemployment has continued to affect mostly the youth entering the labor market, and for the
15-24 year-old age-group reached 25.4%, up by 0.5 percentage points over the same period the
year before. As for differences in sex, unemployment for men remained stable at 11%, while
the rate for women decreased by 0.4 percentage points and reached 16.7%.
Nor was the rural versus urban unemployment much altered. In urban areas it remained stable
at 13.8%, while in rural areas it was down by 0.1 percentage point and reached 8.8%.
Unemployment 10+
Total
Male
Female
Urban area
Rural area
15-24 age-group
Q1
11.9
10.3
18.0
14.6
7.2
23.8
2005-06
Q2
Q3
10.9
9.5
16.1
13.7
6.0
21.7
10.9
9.4
16.7
13.0
6.7
22.4
Q4
12.1
11.0
17.1
13.8
8.9
24.9
Q1
11.0
10.1
14.3
13.3
6.8
22.6
2006-07
Q2
Q3
10.2
8.8
15.4
12.9
5.3
20.9
11.6
10.2
17.6
13.5
7.9
24.7
Q4
12.1
11.0
16.7
13.8
8.8
25.4
These data are the outcome of the new sampling surveys undertaken as of 2005-06, with some
methodological improvements. A coherent system of registration of the unemployed not yet
become fully operative, and in order to be able to reconcile the unemployment figures, the
number of people entering the labor market, the number of jobs created and the amount of
investment required to create new jobs.
31
Inflation and Unemployment (1995-07)
ϮϬϬϲ-Ϭϳ
Inflation
ϮϬϬϱ-Ϭϲ
ϮϬϬϯ-Ϭϰ
ϮϬϬϮ-Ϭϯ
ϮϬϬϭ-ϬϮ
ϮϬϬϬ-Ϭϭ
ϭϵϵϵ-ϬϬ
ϭϵϵϴ-ϵϵ
ϭϵϵϳ-ϵϴ
ϭϵϵϲ-ϵϳ
ϭϵϵϱ-ϵϲ
Unemployment
ϮϬϬϰ-Ϭϱ
ϱϯ%
ϰϴ%
ϰϯ%
ϯϴ%
ϯϯ%
Ϯϴ%
Ϯϯ%
ϭϴ%
ϭϯ%
ϴ%
According to the 4th Economic Development Plan, during the year under review unemployment
was supposed to reach 10.6%. On the basis of Iran Statistical Center forecast, it was supposed
to reach 10.1%. Either way, the result was not far from the target.
Monetary Sector
The year under review was a record year so far as the main monetary aggregates were
concerned; all indicators, except one, registered considerable growth over the year before, itself
a record year. Liquidity reached $139.5b, which showed a rate of growth of 39.4% over the
year before, unprecedented for the past 5 years. This is not a great surprise, as the year began
with a low 'profit' (interest) rate policy by the Central Bank, followed by an expansionary fiscal
policy and a sizeable balance of payments surplus.
According to the Central Bank data, private sector credit expanded by some 41.7%, and
reached $133.3b. This seems to indicate that despite the rather high level of legal deposits of
17%, at the ruling rates of ‘profit’, demand for funds has exceeded their supply. Public sector
credit also seemed to indicate a slight change in trend. The Central Bank credit to Government
was up by $0.28b, while Government liabilities to the other banks increased by $2.4b, which
included 'Participation Bonds'.
During the year under review, total deposits grew by some 40.5%, amounting to $132.9b,
compared to 35.8% the year before. This was mostly due to another jump in term deposits. The
share of term deposits in total liquidity has increased from 55% in seven years ago to 65% in
the previous year, and 71% during the year under review.
It is also interesting to note that, during the year under review, amongst term deposits, one-year
deposits grew much faster, while the growth of over one-year deposits declined. The
explanation must be the new rate of 'profit', as a result of which many banks were reluctant to
accept long-term deposits, with long-term rate of profit commitment.
On the other hand, sight deposits also attained the record growth of 32.1%, amounting to
$38.4b. As this was still less than time deposits, their share in total deposits continued to fall,
from 38% in 1999-00 to 31% in 2005-06 and 29% in 2006-07. Consequently, liquidity has
32
undergone quantitative, as well as structural changes. The share of notes and coins in liquidity
has dwindled from 11.5% in 1999–00 to 4.8% in 2006-07.
The money supply (M1) grew by 30.4%, compared to 25.8% the year before. This was, as has
been the case in recent years, considerably lower than the rate of growth of liquidity;
nonetheless, it largely exceeded the rates since 2001–02. This increase was mainly brought
about by demand deposits, which accounted for 85.2% of money supply by the end of the year.
The role of notes and coins is now essentially a residual role.
The sole exception was the monetary base, as its rather considerable growth of 26.4% fell short
of 45.3% for the year before. The explanation must lie in the fact that the surge in 2005-06 was
due to the exceptional end-of-the-year legislative authorization and government expenditure by
drawing on the OSF, resulting in a sudden increase in the Central Bank’s foreign assets. The
real effects were carried through to 2006-07.
During the period under review, the banks bought a great portion of the “participation bonds”
issued by the government and the Central Bank (the latter, to make use of it as a tool to replace
open market operations, to mop up liquidity). These bonds were redeemable on demand and
bore 15% and 15.5% interest. They are therefore highly liquid and should be considered a
benchmark for interest rate determination.
The Central Bank issued some $3.3b of bonds, and eventually sold $2.3b. Of this amount,
$1.1b was to replace previous bonds coming to maturity and $1.2b was new issue to help drain
liquidity. Given the money multiplier, some $5.6b must have been mopped up by this measure,
to which we may add the amount of increase in liquidity which would have otherwise been
released had the maturing bonds not been replaced. Thus a total of about $10.8b was mopped
up, without which the growth of liquidity would have topped 50%.
Meanwhile, the Central Bank credit to the banks, which had experienced a negative rate of
growth since 1981, increased by 67% and 53% during the past 2 years. During the year under
review, the increase amounted to $2.1b, which seems to have fully offset the effect of its bond
issue. The Central Bank claim on public sector also registered a jump, from -6.9% during the
year before to +6.5% during the year under review, but its effect on the monetary base was
mitigated by the increase in public sector deposits.
Inflation and liquidity
ϱϬ%
ϰϱ%
ϰϬ%
ϯϱ%
ϯϬ%
Ϯϱ%
ϮϬ%
ϭϱ%
ϭϬ%
ϱ%
Ϭ%
Liquidity
ϮϬϬϲ-Ϭϳ
ϮϬϬϱ-Ϭϲ
ϮϬϬϰ-Ϭϱ
ϮϬϬϯ-Ϭϰ
ϮϬϬϮ-Ϭϯ
ϮϬϬϭ-ϬϮ
ϮϬϬϬ-Ϭϭ
ϭϵϵϵ-ϬϬ
ϭϵϵϴ-ϵϵ
ϭϵϵϳ-ϵϴ
ϭϵϵϲ-ϵϳ
ϭϵϵϱ-ϵϲ
ϭϵϵϰ-Ϭϱ
ϭϵϵϯ-Ϭϰ
ϭϵϵϮ-Ϭϯ
ϭϵϵϭ-ϬϮ
33
Inflation (End of the year)
(billion Dollars)
Monetary Indicators
2001-02
Demand deposits
Term deposits
Total
Notes & coins
Money Supply (M1)
Liquidity (M2)
Monetary Base*
2002-03
Year
2003-04
2004-05
2005-06
2006-07
Credit
Private Sector credit
Public Sector credit
Total
Credit to Public Sector
Central Bank
Banks
Total
Credit to Government
Central Bank
Banks
Total
Credit to State Entities
Central Bank
Banks
Total
* = currency in circulation + bank's sight deposits with Central Bank
% Change
2002-03
2003-04
2004-05
2005-06
2006-07
19.2
27.8
30.1
23.1
11.4
19.0
26.1
7.6
15.7
16.3
30.2
18.1
13.2
25.8
34.3
45.3
21.2
30.4
39.4
23.9
30.0
31.9
31.2
20.8
31.7
27.5
16.4
40.0
31.4
28.5
39.3
35.8
34.9
48.9
40.0
39.1
7.6
26.9
37.6
6.3
27.3
38.3
-0.1
28.0
41.7
-47.1
22.7
59.8
33.1
48.9
3.4
15.0
7.6
-2.7
20.6
6.3
-6.9
8.5
-0.1
6.5
11.0
8.6
-5.3
4.6
2.1
7.9
11.4
10.6
7.6
16.6
14.6
72.7
129.3
78.6
12.6
18.1
16.6
4.9
49.5
10.9
-4.4
42.1
4.0
-9.6
-6.2
-8.8
Banking System
The banking system in Iran is composed of 11 state-owned banks, 6 privately-owned banks,
one fully authorized non-bank financial institutions and a number of non-bank financial
institutions with uncertain status, which are not accounted for in the Central Bank data. At the
end of the year, the government-owned banks accounted for $112.1b, or 84.3% of total deposits
and $114.9b, or 86.2% of total credits. The balance was handled by the privately-owned banks.
But the latter's share has continuously increased ever since their inception.
As pointed out above, during the year under review, the rate of growth of private sector credit
increased by 3.4 percentage points, from 38.3% to 41.7%. However, the rate of growth of credit
granted by state-owned commercial banks increased by 11.2 percentage points, from 28.1 to
39.3. During the previous year, it had decreased by 6.2 percentage points. Contrariwise, the rate
of growth of credit of specialized banks (all government-owned), despite the more attractive
terms and higher subsidies they offered, declined by 5.3 percentage points, from 43.5% to
38.2%. This reversal of the trend may be due to the reduction of the rates and, consequently,
interest rate differential between these 2 categories of state banks.
34
32.1
44.2
40.5
2.6
62.9
17.9
23.7
-11.9
-4.1
The rate of growth of credits granted by privately-owned banks also continued to drop by 52.6
percentage points, from 113.6% to 61.1% (compared to 183% in 2004-05). In this case, the
reason must be attributed to the highly rapid rise in the early years of their activities.
Nevertheless, their rate of growth was some 55% more than the other banks. Their share in the
total facilities granted, has increased from 3% in 2003–04 to 13.8% in 2006-07.
It has to be pointed out that, the ratio of non-interest bearing (sight deposits) in the state-owned
banks is much higher and, therefore, their cost of money is considerably lower than the private
banks. This is not only because they have been offering banking services for a much longer
period; it is also because of some public sector deposits (about $5.7b) held in these banks. The
specialized banks receive direct subsidies as well, and grant subsidized facilities.
An interesting phenomenon, as pointed above, was the relatively greater attractiveness of
Government ‘participation bonds’. As pointed above, during the year under review, the private
banks as well as the specialized banks invested more of their excess credit capacity in these
bonds. Their holdings reached some $1b and $0.67b, respectively, which was twice and 1.6
times the previous year. This was also most probably due to the lowered rates of 'profit' decreed
by the Central Bank.
Another point of significance in the banking system has been the ratio of none-performing
(‘problematic’) assets, (including write offs, doubtful loans and over-dues) to their total assets.
According to the Governor of the Central Bank, this ratio has risen from 6.1% 6 years ago to
8.6% 2 years ago, 12.5% during the previous year, and 13.6% during the year under review.
The Governor of the Central Bank also stated that he considered the ratio of these assets should
not exceed 4% of total assets.
(billion Dollars)
Distribution of Deposits & Credits
PRIVATE CREDT
Bg System
Commercial bks
Specialized bks
Total Gov. bks
Private bks
Total Deposits
Bg System
Commercial bks
Specialized bks
Total Gov. bks
Private bks
35
Amount
Share
2003-04
2004-05
2005-06
2006-07
2003-04
2004-05
2005-06
2006-07
100%
71.2%
25.0%
96.2%
3.8%
100%
69.4%
22.7%
92.1%
7.9%
100%
64.3%
23.6%
87.9%
12.2%
100%
63.2%
23.0%
86.2%
13.8%
100%
83.6%
13.0%
96.6%
3.4%
100%
78.4%
14.6%
93.0%
7.0%
100%
73.0%
15.1%
88.1%
12.0%
100%
69.6%
14.8%
84.3%
15.7%
Distribution of Deposits
Gov. Banks
Total deposits
Demand Deposits
Time Deposits
Private Banks
Total deposits
Demand Deposits
Time Deposits
Amount
2006-07
(billion Dollars)
2004-05
Share (%)
2004-05
2005-06
2005-06
100
100
37.6% 34.2%
62.4% 65.8%
100
34.2%
65.8%
100
11.8%
88.2%
100
4.8%
95.2%
100
8.9%
91.1%
2006-07
Structure of Banking System
Number
Number of branches
Number of staff
Government-owned banks
11
15’961
172’715
Private banks
6
356
6’970
Tehran Stock Market
During the period under review, the stock exchange index rose by 3.8%. The prices picked up
in the early months of the year under consideration, after a year of almost continuous decline.
The year began with the index at its lowest point, some 26% less than the beginning of the year
before. By the end of the 4th month of the year, the index was up by 0.7%. At that point,
following the general assemblies of the companies and distribution of profits, for a few days
there was a sharp drop, and the index fell by 2.6% in a single day. Thereafter, the upward trend
was resumed most probably helped by optimism with regard to the nuclear enrichment
negotiations.
The third quarter began with the decision of Iran Khodro Group, the largest Iranian car
manufacturer, to dispose of all of its 28.8% holdings in Bank Parsian (itself the largest
privately-owned bank). This transaction was declared null and void by the TSE officials on
technical grounds, further to which the management of Bank Parsian was removed from office
by the Central Bank. The Central Bank later announced that the two events were not related. In
the meantime tension over the nuclear enrichment issue was revived to some extent and TSE
index began to fall.
During the fourth quarter, up to the middle of the last month of the year, stock prices remained
fairly stable. There were several factors working towards relative stability of prices. For one
thing, world metal price rises helped boost mining companies’ profits. Zinc prices are just
below $500, the price above which, some experts suggest, alternative materials could be
substituted. Pharmaceutical companies also benefited from the authorization to raise their
prices. The third factor is the intervention by many companies to avoid substantial fall in the
price of their stocks.
36
During the 1st 6 months of the year under review, no new company was admitted to the Stock
Exchange. This was due to the process of reorganization. In the 3rd quarter, the new
management was appointed and during the fourth quarter, three companies were admitted.
Under the privatization of large state-owned companies' scheme, 2 offers were made, both near
the end of the year. One offer concerned the shares of Mobarakeh Steel Mill; but within three
days, it was faced with a cool reception by the market. Few days earlier, another company
avoided an even less welcome reaction, by pulling out, when the experts considered it was too
unrealistically priced.
Another important event in the capital market, which took place outside the TSE, was the bulk
purchase of one of the private bank's share (Bank Sarmaye) by the Tehran Municipality, still
pending official ratification.
Tehran Stock Exchange
ϭϬ,ϮϬϬ
ϭϬ,ϬϬϬ
ϵ,ϴϬϬ
ϵ,ϲϬϬ
ϵ,ϰϬϬ
ϵ,ϮϬϬ
ϵ,ϬϬϬ
ϴ,ϴϬϬ
ϴ,ϲϬϬ
Ϯϱ/Ϭϯ/ϮϬϬϲ
Ϯϳ/Ϭϲ/ϮϬϬϲ
ϮϬ/ϭϮ/ϮϬϬϲ
ϭϯ/ϭϮ/ϮϬϬϲ
Ϭϲ/Ϭϳ/ϮϬϬϳ
Ϯϳ/Ϭϱ/ϮϬϬϳ
ϮϬ/Ϭϯ/ϮϬϬϳ
ϴ,ϰϬϬ
During the year under review, the amount of shares transacted in the Tehran Stock Exchange
amounted to $6b, which was 2.4% less than the year before, while the number of shares
transacted (14.7tr shares) increased by 1.1%. This indicates that the average value of shares
transacted was smaller than the year before. But during the year before, the fall in the average
value of shares transacted was on a much larger scale due to fall in share prices. The number of
buyers (some 727 thousand individuals) was 21.2% less than last year. As was pointed out
above, 2005-06 itself was a year of considerable decline in stock market activity and prices.
External Position
During the year under review, the balance of payments showed an unprecedented positive
balance of $26.2b, which was almost twice the year before. This was due to sizeable increase in
foreign exchange earnings brought about mainly by strong oil prices, and reported relative
stability of imports. Our analysis is approximative and based on assuming an oil revenue of
37
$60b (Fars News Agency, 25/1/85 (April 14th 2007)) imports of $41.4b and an unchanged
capital account deficit of about $-3b (according to the Central Bank statistics for the first half of
1385–September 2006)1.
The balance of trade surplus of $34.9b was most impressive. It was about 2.5 times the figure
for 2005-06, itself three and a half times the figure for 2004-05. Thus, all previous records were
surpassed. At $60b, the oil revenues was the main factor behind this surplus. Oil prices
remained strong almost throughout the year. The average for Iranian crude was about $55 per
barrel for 2006-07 (compared to $51.3 for 2005-06). Non-oil exports also continued to grow at
a respectable rate and reached $16.3b.
Simultaneously, at $41.4b (according to the Central Bank Governor’s press conference of May
22, 2007), the rate of growth of imports slowed down to 1.0%, compared to 34.1% in 2003–04,
29.2% in 2004-05, and 7.2% in 2005-06. At half-year point, however, imports were up by 34%
compared to the similar period the year before. It follows that during the second half of the year
imports must have fallen by about 28 % below the second half of the previous year ($15.8b
against $21.9b).
As a result, despite a slowly rising negative net position in services, the same superlatives could
be applied to the balance of payments current account surplus.
The capital account presented a negative balance of $3b at the end of the first half of the year.
Up to 2 years ago, the surplus capital account substantially contributed to improvement in the
balance of payment. In comparative terms, therefore, there seems to have been a shift in the
flow of funds.
On the other hand, according to statistics released by the Iranian Center for Foreign Investment,
during the year under review, some 70 projects worth $10.2b of new foreign investment have
been approved by the Center, which was nearly as much as the amount of total new foreign
investment approved during the past 3 years (some $11.1b). This seems to indicate willingness
on the part of the Iranian authorities to let foreign investors operate in Iran, while the latter has
been hesitant, seemingly, due to the international situation.
Consequently, during the period under review, as a result of the balance of payment yet another
sizeable surplus, the reserves were boosted and must have reached about $65b. According to
the Central Bank statistics, during the first 6 months the addition to the reserves amounted to
$9.3b. The IMF reported $14.9b addition for the end of 2006.
At the end of the year, the balance of the country's foreign external obligations, according to the
Central Bank Governor press conference, amounted to $45.3b, up by $3.7b over the previous
year. Consequently, it is estimated that our debt/reserve ratio has been falling from 81% and
107% in 2005-06 and 2004–05, to roughly about 75% in 2006-07.
1
- As the balance of payments statistics of the Central Bank cover only the first 6 months of year, we have relied
on the Central Bank Governor's statements and press reports to complete the data, references being given in each
case.
38
(billion dollars)
Balance of Payments
Services (net)
Transfers (net)
Current Account
Capital Account(net)
Balance of Payments
Change in Reserves
Cumulative reserves
External Obligations
* 6 month figures
2004-05
-4.5
0.9
0.8
4.5
5.3
3.7
28.6
8.3
34.7
-5.0
0.8
1.4
7.4
8.8
8.7
37.3
9.4
40.0
34.0
27.4
6.6
29.6
4.4
Exports
Oil & Gas
Other goods
Import of goods
Balance of Trade
Year
2003-04
43.8
36.3
7.5
38.2
5.6
2005-06
% Change
2006-07
2003-04
2004-05
-5.9
-6.5
0.9
0.8
14.0
29.2
-0.4 -3.0
13.6
26.2
13.6 14.9
50.9
3.4
9.5
41.1
29.5
3.8
-77.2
76.7
-13.5
-20.5
14.9
2.7
35.9
10.3
-13.1
71.6
65.3
66.3
135.3
30.6
13.0
35.5
60.0
48.8
11.2
41.0
19.0
76.3
60.0
16.3
41.4
34.9
20.4
19.1
25.9
34.1
-28.6
28.9
32.7
13.0
29.2
26.4
2005-06
37.0
34.4
49.3
7.2
239.8
17.8
12.5
902.9
-105.4
55.0
55.4
36.4
-63.8
78.1
2006-07
27.2
23.0
45.5
1.0
83.4
10.0
-11.1
108.2
650.0
92.3
9.8
179.2
** According to IMF for end of 2007
Balance of Trade and Components
ϵϬ
ϴϬ
ϳϬ
ϲϬ
ϱϬ
(trillion dollars)
Oil & Gas
Exports
Import of goods
Balance of Trade
ϰϬ
ϯϬ
ϮϬ
ϭϬ
Ϭ
ϮϬϬϯ-Ϭϰ
ϮϬϬϰ-Ϭϱ
ϮϬϬϱ-Ϭϲ
ϮϬϬϲ-Ϭϳ
During the year under review, according to the Governor of the Central Bank and the Minister
of the Economy and Finance, some $20.9b was credited to the Oil Stabilization Fund (OSF).
Total available funds during the year, therefore, amounted to $31.6b. Total withdrawals
amounted to $22.1b, which would leave a balance of about $9.5b at the end of the year.
During the year under review, $4b was withdrawn by the private sector. Public sector
withdrawal reached $18.1b, which makes up for 82% of total withdrawals. These figures
revealed no substantial change compared to previous years.
39
(billion dollars)
2000-01
2002-03
2003-04
2004-05
2005-06
2006-07
Aggregate
Starting Balance
New Contribution
Total available
0.0
5.9
5.9
2001-02
Withdrawals:
Private sector
Public sector
Total withdrawals
Ending Balance
0.0
0.0
0.0
5.9
0.1
0.7
0.8
7.3
0.5
4.5
5.0
8.2
1.1
4.4
5.5
8.5
1.8
7.5
9.3
9.7
2.5
9.7
12.2
10.7
4.0
18.1
22.1
9.5
10.0
44.9
54.9
9.5
5.9
2.2
8.1
7.3
5.9
13.2
8.2
5.8
14.0
8.5
10.5
19.0
9.7
13.2
22.9
10.7
20.9
31.6
64.4
64.4
*Donyyayeh Eghtesad, 19/1/86 [8 April], quoting Mr. Mofatah, a member of the
Currency & Credit Council
**Mr. Danesh-Jaafary, Minister of Economy & Finance, Asre Eghtesad, 16/04/07
[27/1/85]
Calendar Conversion Table
Iranian month
Farvardin
Ordibehesht
Khordad
Tir
Mordad
Shahrivar
Mehr
Aban
Azar
Day
Bahman
Esfand
Gregorian
Start day
End day
ʹͳst
ʹͲth
ʹͳst
ʹͳst
ʹʹst
ʹͳst
ʹʹnd
ʹʹnd
ʹ͵rd
ʹʹnd
ʹ͵rd
ʹʹnd
ʹ͵rd
ʹʹnd
ʹ͵rd
ʹͳst
ʹʹnd
ʹͳst
ʹʹnd
ʹͲth
ʹͳst
ͳͻth
ʹͲth
ʹͲth
NOTES:
*-You will find the electronic version of this survey on our Website: http://www.karafarinbank.com
*- Our text is essentially based on data released by the Economic Research Department, the Central
Bank of the Islamic Republic of Iran (CBI), unless otherwise indicated. Failing that, for the year
under review, we have more frequently availed ourselves of reported interviews & press conferences.
**-One USD is approximately equal to 9220 rials (3rd quarter figure published by the Central Bank).
40
Risk Management
Report
41
Risk Management Report
Introduction
Risk management in banks is one of the paramount pillars for creating shareholders value. Karafarin
Bank as one of the leading private banks in Iran intends to exploit the latest techniques of modern
banking in its daily processes, in order to frequently measure and control various risks of its operations.
This measurement and control of risk should be in full compatibility with the New Basel Accord.
To accomplish this goal, in early 2005 the Bank decided to establish a new department for measuring
and managing relevant risks. This department directly reports to the Managing Director and frequently
presents to the Board of Directors. Its mission is as follows:
Implementation of the major principles of risk management and capital adequacy
measurement, which are specified by Bank for International Settlement (BIS) and
the Basel Committee.
Adaptation of major financial operations
according to the above mentioned principles.
and
procedures
of
Karafarin
Bank
Designing of models for measuring different financial and operational risks in
Karafarin Bank.
Identification of major factors of risks, measurement, monitoring and controlling
of those risks.
To report the latest status of various risks in Karafarin Bank to the Board of
Directors, the capital market and the Bank’s shareholders.
Measurement of capital adequacy and economic capital for the Bank according to
the new Basel II standard.
Currently the Bank calculates the capital adequacy according to the Central Bank guidelines which are
mandatory for all banks in Iran. But Karafarin Bank intends to measure its capital adequacy according
to the New Basel Accord regulations as well by the end of the current Iranian year.
Credit Risk
To measure the credit risk of Karafarin Bank, we have used the advance approach of the New Basel
Accord. In this approach we had to measure five parameters: Probability of Default for each customer,
Loss Given Default, Exposure at Default, Correlation between exposures and Effective Maturity.
In order to rate our customers internally, we have used different statistical models to estimate (PD)
according to the customer’s financial statements, customer’s past performance in the banking system
and other types of qualitative and quantitative parameters. This estimation has been accomplished for
our "corporate" clients and the results were statistically acceptable.
42
For our "individual" clients, lack of sufficient data have prevented us to score them yet, but we hope to
collect enough reliable data by the end of next year in order to design a model which could be reliable
and accurate enough to rate our individual clients.
Until the end of the last financial year, March 20th, 2007, the total outstanding balance of loans was
11,313 billion Rials of which 69% were "corporate" clients and the rest were real persons. The
breakdown of loan portfolio in different sectors is as follows:
ϰϬ%
ϰϬ%
Ϯϵ%
ϯϬ%
Ϯϰ%
ϮϬ%
ϳ%
ϭϬ%
Ϭ%
Manufacturing Trade & Services
Construction
Others
Figure 1. The breakdown of loan portfolio in different economic sectors
The following figure shows the breakdown of our "corporate" client loans in different industries:
ϯϬ%
Ϯϴ.ϭ%
Ϯϱ%
ϭϰ.ϴ% ϭϰ.Ϭ%
Cement &
Mining
Textile &
Carpets
Electronics
ϯ.ϯ% ϯ.ϭ% Ϯ.ϯ% Ϯ.Ϯ%
Pharmaceutic
als
Financial
Services
Auto
Construction
Ϭ%
Food &
Beverage
ϱ%
ϱ.ϴ% ϱ.ϰ%
Manufacturin
g Equipments
ϴ.Ϯ%
ϭϬ%
ϭϮ.ϳ%
Chemicals
ϭϱ%
Others
ϮϬ%
Figure 2. The breakdown of corporate loans in different industries
As of now the bank has rated its corporate clients in 5 different grades according to their estimated
probability of defaults by statistical methods. It must be pointed out that these grades are not calibrated
with the grades of international rating agencies and are for internal use only. The rating system updates
43
every 6 months and each client is rated annually. The following table shows the real frequency of
defaults in each grade during past five years.
Real default frequency
in each grade
ϱй
ϴй
ϭϯй
ϯϬй
ϰϬй
Grade
A+
A
B
C
D
The number of customers in each grade is as follows:
ϭϳϱ
ϮϬϬ
ϭϱϬ
ϭϵϲ
ϭϱϮ
ϭϭϮ
ϭϬϬ
ϯϳ
ϱϬ
Ϭ
A+
A
B
C
D
Figure 3. Number of current corporate clients in each grade
The following figure shows the breakdown of our "corporate" client loans in each grade:
ϯϬ%
Ϯϱ%
Ϯϱ%
ϯϬ%
Ϯϰ%
ϮϬ%
ϭϱ%
ϭϱ%
ϲ%
ϭϬ%
ϱ%
Ϭ%
A+
A
B
C
D
Figure 4. The percentage of current corporate loans in different grades
44
The total expected loss according to the ratings of customers and combinations of collaterals pledged to
the Bank is: 302 billion Rials. This is higher than the total loan loss provisions. The reason is that the
Bank can not make tax-exempt provisions more than what is required according to the Central Bank
regulations.
Also the distribution of loan loss is figured out and according to it the total unexpected loss or credit at
risk for next year is 563 billion Rials with confidence level of 99%. Note that this figure does include
neither the potential loss of off-balance sheet items nor that of market risk and operational risk.
8
x 10
-12
7
6
5
4
Frequency3
2
Economic Capital
1
0
1.5
2
2.5
Expected Loss
3
3.5
4
4.5
Loss Distribution
5
5.5
6
6.5
11
x 10 Rials
Unexpected Loss
Figure 5. The loss distribution of loan portfolio of Karafarin Bank
The LGD for each loan is estimated based on the types of collaterals pledged to the Bank and their
market value volatility and their marketability. The following table shows the coverage percentage for
mitigating customer's exposure and estimating LGD.
45
Type of collateral
Residential Property
Marketable Stocks
Government Bonds
Cash or Saving Deposits
Receivables
Promissory Notes
Inventory and Equipments
Coverage percentage
ϵϬй
ϱϬй
ϭϬϬй
ϭϬϬй
ϳϬй
ĞƚǁĞĞŶϮϬйƚŽϱϬй
depends on customer grade
ϱϬй
It has also to be noted that the above calculations are based on two assumptions: first it is assumed that
occasions of default for clients are independent from each other, which is not the case in reality. We are
working on relaxing this assumption and estimating the correlation between different clients in the same
sector or industry. The second assumption is that the economic situation of the country will remain in
normal conditions; the results above will be totally different in stressed situations.
Market Risk
Karafarin Bank has invested a minor percentage of its assets in the Tehran Stock Exchange (TSE). The
total value of the Bank's portfolio until the end of last year was 95 billion Rials. The Value at Risk of
the Bank's portfolio for the next 10-days has been estimated monthly with confidence level of 99%. The
amount of VaR has fluctuated between 1.7 to 3.2 billion Rials during last year.
VaR (Million Rials)
ϯϮϭϯ
Ϯϵϳϵ
ϯϬϯϭ
ϮϲϬϲ
ϭϳϬϱ
ϮϰϲϮ
ϮϮϮϱ
Ϯϭϴϭ
ϭϴϲϮ
ϮϱϰϮ
Ϯϭϱϰ
ϭϳϬϭ
ƉƌͲϬϲ
DĂǇͲϬϲ
:ƵŶͲϬϲ
:ƵůͲϬϲ
ƵŐͲϬϲ
^ĞƉͲϬϲ
KĐƚͲϬϲ
EŽǀͲϬϲ
ĞĐͲϬϲ
:ĂŶͲϬϳ
&ĞďͺϬϳ DĂƌͲϬϳ
Figure 6. The VaR of Karafarin Bank's portfolio in TSE during last year
46
Operational Risk
Karafarin Bank has started to measure and monitor its operational risk in the middle of last year. For
effective operational risk management it is crucially important that all employees, managers and
directors in different levels of the organization have the similar understanding of operational risk and its
factors. The followings are events that are considered as factors of operational risk in the Bank right
now:
Internal fraud
External fraud
Employees health and security
Damage to physical assets
Failures and interruption in IT, communication systems and technology
Business processes with clients
Failures and interruption in internal business processes
The operational risk management group has started its activity by investigating all of the procedures in
the Bank and identifying potential risk factors which may cause loss to the Bank. In the next phase the
frequency and impact of each event will be estimated. In the last phase the group intends to design a
system for monitoring and controlling risk factors, and reports the results frequently to the Board of
Directors.
By accomplishing the above tasks the Bank will be able to estimate the potential loss due to operational
risk and estimate the required economic capital according to the New Basel Accord.
47
Financial Reports
For 1385
48
Report of the Auditors to the Annual General Meeting of Shareholders of
Karafarin Bank (Public Joint Stock Company)
49
Financial Statements and Notes
50
Karafarin Bank (Public Joint Stock Company)
Notes To The Accounts
Note 1) Background and Formation of the Company
Karafarin Bank started its operation as Karafarinan Credit Institution (public joint-stock co.). The Company was
registered under no.157915 with the Company Registrar's Office of Tehran on 19/9/1378 (December 9th.
1999). It was granted its banking license under the provisions of the "Law for Establishment of Non-StateOwned Banks" of 2/1/1379 (April 10th, 2000) and the relevant operating regulations, ratified by the Central
Bank of Iran on 14/9/1379 (December 5th, 2000). It was registered under the same registration no.157915 with
the Company Registrar's Office of Tehran as Karafarin Bank on 1/10/1380 (December 22nd, 2001) and started
its operation a few days later. As of 7/11/1383 the Bank's shares are quoted in Tehran Stock Exchange.
Note 1-1) Objectives of the Bank
The Bank is authorized to engage in all banking operations under the provisions of the
Monetary and Banking Law of Iran of Tir 1351 (July 1972), the Usury-free Banking Law, the
Commercial Code and its Articles of Association. Its objectives are to accept deposits and
otherwise raise funds through financial instruments and apply these funds for extension of
credit and investment in various sectors of the economy.
Note 1-2) Scope of the Bank's Activities
- Accept all kinds of bank–deposits;
- Issue bearer or registered certificates of deposit;
-Grant credit facilities;
-Open letters of credit and engage in all foreign exchange transactions;
-Issue and process domestic and international payment orders and transfers;
-Issue, purchase and sell participation bonds and other instruments, for itself and on behalf of
others under the operative regulations of the Central Bank of Iran;
-Receive credit facilities from real or legal persons in accordance with the standing regulations;
-Issue bank guarantees, endorse, accept and underwrite securities including participation bonds;
-Operate safe-deposit boxes;
-Grant facilities for the export of goods and technical services;
-Participate and invest directly or through acquisition of shares in the stock market in
manufacturing, commercial or service projects;
-And engage in all other authorized banking activities.
Note 2) The Basis of Financial Statement
The Bank’s financial statements are based on historical cost to price; current prices are only applied, where it
may be deemed necessary, according international accounting standards and local rules and legislations.
51
Note 3) Significant Accounting Policies
Note 3-1) Fixed Assets
3-1-1) Fixed assets are recorded at purchase price. Any expenditure incurred for betterment or
repair of an asset, resulting in the extension of its useful life or its improved performance, is
capitalized and depreciated over the remaining useful life of the asset. Minor expenses, when
incurred, are treated as current expenditure and taken to the profit and loss account.
3-1-2) As of 1385, in accordance with the operative instructions MB 2946 of the Central Bank
of Iran, depreciation of fixed assets is calculated on the tables attached to section 151 of Direct
Taxes Act as shown in the following table:
Assets
Land Buildings, Utilities , etc
Motor Vehicles
Furniture & fixture
Rate
7%
25%
10 years
Procedure
Regressive
Regressive
Straight line
3-1-3) Fixed assets acquired during a month and immediately put to use are depreciated starting
the first day of the following month.
3-1-4) Expenses incurred for renovation and major repairs of rented buildings are recorded
under fixed assets and depreciated in 3 years.
Note 3-2) Goodwill
As of 1385, in accordance with the operative instructions MB 2946 of 16/12/1385 of the
Central Bank of Iran, goodwill is recorded at cost/amount-paid and may not be amortized.
Note 3-3) Investments
Investments are recorded at purchase price after taking provision for any reductions in
value/share price on the date of the Balance Sheet.
Note 3-4) Assets and liabilities in other currencies
All assets and liabilities are converted into rials at the rates specified by the Central Bank on
March 20th of every year.
Note 3-5) Income Recognition Procedure
3-5-1) Income recognition from loans and facilities granted: Per the Currency and Credit
Council resolution of 19/12/1380 (March 10, 2001) and the resolution of the General
Assembly of all state-owned banks dated 8/3/1381 (May 29, 2002), banks were required to
prepare their financial statements on accrual basis (as opposed to cash basis for previous years).
Accordingly, Karafarin Bank changed its system to accrual basis in 1381 (year ended March 20,
2003).
52
3-5-2) Investment Income: Income form investments are taken into income when such income
is realized, and, as the Bank’s investments do not generally exceed 20% of the share-capital of
the companies, dividends are taken into account upon the approval of the general assemblies.
3-5-3) Commissions: Commissions on letters of guarantee, letters of credit, foreign-exchange
transactions, managed funds, etc. are taken into income upon receipt.
3-6) Expense Recognition Procedures
3-6-1) Profit (or interest) on investment (or term) deposits: Per terms of agreements signed
with investment-depositors, profit is paid in proportion to the amount and maturity of
deposits. Furthermore, at year-end, after calculation of statutory deposits, and considering
bank's own fund, any additional profit is calculated and paid to investment-depositors.
3-6-2) Provision for Doubtful Debt: According to the instructions of the Central Bank, banks
are required to set aside 2% of their loan and investment portfolios as "general reserve for
doubtful loans." An additional "specific provision" is set aside for those facilities that in the
opinion of the Bank's Internal and/or External Auditors may so require.
3-6-3) Provision for employees severance pay: Provision for employees severance pay is
provided based on one-month of the latest salary of all employees at the end of every year.
53

Annual Report and Financial Statements of Karafarin Bank, March

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