Bank Earnings Take a Hit

By Mark DeWeaver.

It’s been lackluster year for the ISX-listed banks. Total pre-tax profit for the 12 non-Islamic lenders that have reported so far fell 12% in the first half on a 3% decline in operating revenue, an 8% increase in operating expense, and a 21% increase in administrative expense.

Earnings dropped at 7 of the 12, with heavyweights Iraqi Middle East Bank (BIME), North Bank (BNOR), Qatar National Bank subsidiary Al Mansour Bank (BMNS), and Burgan Bank subsidiary Bank of Baghdad (BBOB) showing the steepest declines (see chart.)

Falling earnings are unsurprising given the deterioration in the security situation, the central government’s continuing failure to pass a 2014 budget, and, particularly for North Bank, the fiscal crisis in Kurdistan. Months before the fall of Mosul in early June, the banks’ trade finance businesses were already slowing as a result of disruptions to truck traffic from Jordan and Turkey.

At the same time, the budget delay has led to a slowdown in construction—another key sector for the banks—while in the Kurdish region the entire state sector appears to be running out of money.

The direct effect of lost business from branches in what are now ISIS controlled areas is probably quite small, however. For the 14 banks for which earnings breakdowns by province are available, Rabee Securities has calculated that the total contribution attributable to Mosul, Anbar, Kirkuk, Salah Ed Din, and Dyala came to just 2.2% of aggregate pre-tax profit. (Mosul Bank and Economy Bank, where the contributions were 30.9% and 29.6%, respectively, are important exceptions. So far neither has released first half results.)

This suggests that rolling back ISIS territorial gains is not necessarily a prerequisite for a recovery in bank earnings growth. Even with a continuation of the status quo, there could easily be a rebound next year if Parliament passes a budget, payments to the KRG are resumed, and progress can be made in reopening major highways and/or rerouting trade around danger zones.

The hit to bank earnings is likely to be only temporary.

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