Tag Archive | "banking"

In State Banks We Trust

By Mark DeWeaver.

2013 was another strong year for deposit growth at the ISX-listed banks. Deposits at the 19 names that have so far reported year-end financials were up 17% year-on-year as of December 31. (Only BDFD and BELF, which together accounted for 8% of 2012 listed-bank deposits, have yet to report.)

While their deposit growth slowed from 32% in 2012, these 19 banks nonetheless continued to outpace the rest of the sector, where deposits rose by only 10%. As a result, their share in the deposits component of Iraq’s M2 money supply rose for a second year to reach 13%. (Click here for full-sized chart.)

This is the highest share in at least six years. Nevertheless, it represents only a modest improvement from the 10% low in 2011.

Clearly the playing field remains steeply tilted in favor of the state-owned banks. These lenders not only enjoy a virtual monopoly on government deposits but also accounted for 60% of private sector deposits as of year-end 2012. They held about 85% of total deposits, despite having only a fifth of total bank-sector capital and somewhat fewer branches—479 versus the private banks’ 515. (See pages 27 and 112 of the central bank’s 2012 bulletin.)

From the depositor’s point of view, the state-owned banks’ obvious advantage is their lack of bankruptcy risk. While private banks have been allowed to go under, it is highly unlikely that state-owned institutions would be permitted to suffer a similar fate. The central bank can always be counted on to rescue them in a crisis.

This means that the private banks’ deposit share is likely to remain low for the foreseeable future. In the absence of deposit insurance or any effective mechanism for dealing with bank failures, depositors can hardly be blamed for continuing to view the state banks as their safest bet.

Posted in Investment, Mark DeWeaver on Investments and FinanceComments (4)

Iraq’s Missing Market

By Mark DeWeaver.

In my last post I argued that Iraqi banks’ high cash/deposit ratios are due to the absence of an interbank market. If that is the case, you might think it would be easy to get the banks to put more of their deposits to work in the “real economy.” Couldn’t somebody (e.g. the central bank) simply set up a system through which they could make short-term loans to one another?

A few years ago I met someone at a conference on Iraqi banking who said he had helped to set up just such a system. According to him, the IT platform he worked on was already in place. The banks just weren’t using it.

If the issue isn’t primarily technical, what is it? I think the root of the problem is the dominant role of the state banks, which together account for about 80% of system-wide deposits.

Without their participation, an interbank market would not work. There would be no guarantee that at the end of a given day the private banks collectively wouldn’t end up with a cash deficit while the state banks had a surplus. In a market with only the private banks, those with extra funds might not have enough cash to meet the demand of those with a shortfall.

So why not get the state banks involved? Unfortunately, that wouldn’t be ideal either. Like state-owned enterprises in general, these banks can always count on a bail-out if they get into trouble. This means that as interbank lenders they could afford to act recklessly, making funds available to anyone willing to pay a high enough interest rate, regardless of counter-party risk. The result would be an increase in the state banks’ non-performing loan ratios and a corresponding hit to the government budget.

The absence of an interbank market thus turns out to be symptomatic of much deeper problems in the structure of the Iraqi financial system. Until these are resolved, the banks are unlikely to begin either lending to one another or lending out a bigger share of their deposits to the non-financial sector.

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Are Iraqi Banks Too Liquid?

By Mark DeWeaver.

Fund managers visiting Iraq for the first time are often surprised by the large amounts of cash Iraqi banks typically hold. While the Central Bank of Iraq (CBI) requires lenders to hold 15% of their deposits in the form of vault cash and central bank reserves, most hold well over 50%. (See Chart.) “Cash in hand and at bank,” rather than loans, is usually a bank’s single biggest asset.

Bank managers will tell you that they need cash to meet unexpected large withdrawals by depositors. But this is true of banks everywhere. Why should Iraqi lenders be so much more liquid than their counterparts in other countries? Aren’t they being overly cautious?

Their behavior doesn’t seem so strange when you consider the fact that Iraq lacks an interbank market. Ordinarily, banks with a cash shortfall at the end of the day can borrow overnight from those with a surplus. As long as the public’s demand for banknotes is unchanged, withdrawals from bank A end up as deposits at bank B, ensuring that A’s demand for short-term money can usually be easily met.

In Iraq, a bank that ends up with a cash shortfall will be forced to borrow from the CBI, which offers seven-day facilities for this purpose. This is a much less attractive alternative than borrowing from another commercial bank.

Foreign institutions that are perceived to be in trouble may still be able to access funds in the interbank market provided that they are willing to pay a large enough premium over LIBOR. The central bank, however, is both lender and regulator. It is certainly not going to provide liquidity to the highest bidder regardless of the circumstances. (In fact, CBI facilities are available at a fixed rate—two percentage points above the CBI’s policy rate.)

It is thus not surprising that Iraqi banks choose to rely on their own funds. Their high levels of liquidity are not a sign of risk-aversion or incompetence, as is sometimes suggested. In the absence of an interbank market, liquidity risk is the biggest risk they face. They need to be ready not only for ordinary levels of withdrawals but for worst-case scenarios as well.

Posted in Investment, Mark DeWeaver on Investments and FinanceComments (8)

Being Bullish on Iraqi Banking

With so much gloomy news around, it is good to find some analysis that shows the other side of the story: A report just issued by Sansar Capital suggests that shares in Iraq’s banking sector may be ripe for a re-rating.

Key to the report’s findings is the argument that Iraq’s banks are exceptionally well capitalised, having been forced to raise significant funding to comply with the “arbitrary” rules set by the Central Bank of Iraq (CBI).

To put it another way, they are sitting on a huge pile of cash that is not working for them, or more accurately, not yet working for them. This should enable to the banks to grow rapidly in an underbanked economy, while adjusting the return on equity (RoE) to allow for this gives some rather attractive numbers.

The report also finds that some of the most efficient banks are trading on the most attractive valuations, which may be caused by unsophisticated investors focusing on the nominal share price, while ignoring the capital and future earnings per share.

Taken together, this could represent a buying opportunity for investors, but they should, of course, form their own opinions on these metrics. The full report can be read here, as part of Iraq Business News reports service.

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Major New Report on the Iraqi Banking Sector

Singapore-based Sansar Capital Management has issued a comprehensive new report on the Iraqi banking sector.

The report finds that while the mix of an improving macro environment and security situation offer attractive investment ingredients, many challenges remain for those interested in participating through public markets.

Nevertheless, Iraq remains one of the most under-banked countries in the Middle East North Africa (MENA) region, while most Iraqi banks are overcapitalised, sitting on large sums of underutilised cash; this gives significant scope for expansion, and opportunities for investors.

In addition to providing a detailed analysis of the industry, the report examines the Iraqi private bank sector through the lens of the five largest private banks, ranked by deposit size:

  • North Bank (BNOR);
  • Bank of Baghdad (BBOB);
  • Iraqi Middle East Investment Bank (BIME);
  • Kurdistan International Bank (BKUI); and,
  • Dar Es Salaam Investment Bank (BDSI).

Please click here to download the full 64-page report free of charge.

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Standard Chartered Expanding in Iraq

By John Lee.

British bank Standard Chartered is to apply to Iraqi regulators for permission to open three business branches in Baghdad, Basra and Erbil.

Chief executive of wholesale banking, Mike Rees (pictured), told The Telegraph:

Associated with the name British is trust … It is a very important brand which I think is underestimated. But we need to use it.

“Since the Iraq war we have worked with JP Morgan to establish the Iraq Trade Bank [Trade Bank of Iraq, TBI], which was to help growth there [after] the war and the reconstruction. Off the back of that, we opened a representative office in Erbil.

“As with every country we go into, the question is once you have a rep office, how do you go to the next stage, which is to support growth?

“If we listen to our clients, our Korean clients, our oil and gas clients, they would probably want us in Basra and Erbil as branches but I suspect that we would have to be in Baghdad as well, being that it is the commercial centre.

“Our Korean clients are building infrastructure and power [in the country]. Our oil and gas clients such as BP are doing a fantastic job reaching their production targets. They want us to be there to help finance those businesses. Clearly we have to talk to the regulators, talk about the next stage, our aspiration for the country, but that is what I would be hoping.

(Source: The Telegraph)

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Questions About Practices of Private Iraqi Banks

By Omar al-Shaher, for Al-MonitorAny opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

Privately held Iraqi banks have almost entirely relinquished their traditional functions — such as giving out loans, lending credit and issuing letters of credit — due to default risks. Instead, they are resorting to profit making through participation in the currency auction regularly held by the Iraqi Central Bank.

Iraqi banks demand exaggerated guarantees for the granting of any loans to local investors, for fear of defaults on payments. According to banking experts, the value of some loans does not cover more than 40% of the guarantees the privately held banks are demanding, leading to a decrease in the number of loan operations conducted by these banks to a bare minimum.

A lack of local confidence in privately held banks has contributed to their reluctance to enter the market. According to banking expert Dr. Ahmad Brayhi, “Members of the public are depositing their money in government owned banks because they feel that they will honor their commitments towards them.” He also added, “The public does not have much confidence in local banks, which is why it does not trust them with its money.”

Bank brokers affirm that most privately held banks have either closed — or chosen not to open — branches in Iraqi provinces and restrict their activities to their main branches in Baghdad, due to a reluctance to engage in real banking transactions.

Out of a total of 23 privately held banks operating in Iraq, only two are located in the city of Erbil and one in Mosul, whereas 20 are located in Baghdad.

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Private Bank SME Lending Tops $224m

More than $224 million has been injected into Iraq’s private sector economy in the form of Small & Medium Enterprise bank loans thanks to a cooperative effort between the USAID-Tijara Provincial Economic Growth Program and 12 private commercial banks. Of this amount, around $113 million presently is in circulation helping business owners expand their companies and create new jobs.

Prior to 2008, there was little SME bank lending in Iraq. As recently as December 2008, USAID-Tijara partner banks reported only $5 million worth of disbursements with $3 million of that sum outstanding.

Today, USAID-Tijara private partner banks have $113 million worth of SME loans circulating throughout Iraq. Nationwide, that total climbs to $650 million when total bank SME loans unreported to USAID-Tijara are added. This increase in SME lending shows that Iraqi banks regard small and medium-sized businesses as good customers and vital community assets.

SME loans are a recognized driver of job growth. According to bank records, borrowers receiving SME loans hired 21,000 new employees when they expanded their businesses.

Four years ago, many SME loans were guaranteed or subsidized by non-banking financial institutions such as the Iraqi Company for Bank Guarantees and the Iraqi Company for Financing SMEs. Today, over 56% of the SME loans made by USAID-Tijara’s partner bank were made with the banks’ own money.

One indication that SME loans are becoming a permanent part of Iraq’s commercial financing is the fact that 63% of the disbursed SME loans reported to USAID-Tijara have been made over the past 20 months. Indeed, of the 12,535 SME bank loans reported over the past four and a half years, two out of three, or 67%, are currently outstanding.

The accelerating rate of SME lending by Iraq’s private commercial banking sector is a major contributor to the economic revitalization in Iraq, says Adnan Chalabi, Director General of the Bank of Baghdad and chairman of the Iraqi Private Banks League. “Growth outside of the oil sector depends squarely on growing business at all levels,” he notes. “Small and medium enterprise financing is a dynamic force that directly improves Iraq’s economic well being.”

For additional information on banks that have SME lending programs please visit www.ipbl-iraq.org.

(Source: USAID-Tijara)

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