Banks’ bonus issues a disappointment so far

It’s always been a bit of a mystery why anyone should care about bonus share issues.  Since a company’s retained earnings are already owned by the shareholders, you would think that converting these earnings into shares shouldn’t have any effect on an investor’s returns.  Following a bonus, the share price should logically fall by an amount just sufficient to leave the market value of your position unchanged.

Surprisingly, however, the ex-bonus price often falls by less than you’d expect, leaving the shareholder with a profit.  In some cases, these gains may even exceed the amount the company would have been able to pay out as a dividend, making the new shares a better deal than a cash payment.

With a number of ISX-listed banks now likely to issue bonus shares to meet the central bank’s new minimum capital requirement, you might therefore expect to make some easy money holding Iraqi bank shares.  So far, however, the first two banks to resume trading following bonus issues have been disappointments.  (See my June 2 and June 29 posts for more on the central bank’s new policy and bank share suspensions.) 

This month, Middle East Investment Bank (BIME) and Bank of Baghdad (BBOB) closed their first ex-bonus trading days down 2.9% (on 7/15) and 4.3% (on 7/21), respectively.  These were significant underperformances whether measured against the ISX index, the Rabee Securities RSISX index (available online at http://rabeesecurities.com), or the returns on the four most liquid bank stocks to trade continuously during the BBOB and BIME suspension periods.  (Please click on the above table for more details.)

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