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.

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.

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)

By Omar al-Shaher, for Al-Monitor. Any 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.

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)

By John Lee.

If we gave a prize for the best quote of the week, this week’s top contender would be Sami Haddad, the general manager of Lebanon’s Byblos Bank, which is expanding its presence in Iraq.

“You would have to be stupid not to make money [in Iraq]“, he said.

And of course banking is not the only way to get exposure to Iraq’s increasingly buoyant economy; one sector that is getting more attention in recent times is healthcare.

A couple of weeks ago, in response to demand, we added a new Healthcare tab to our list, which includes information on hospitals, clinics, and related services.

We’ve now added a new and extensive report from international business intelligence firm Geopolicity on the outlook for Iraq’s healthcare sector, and it is available to buy in our Reports service.

If you have any involvement in the provision of health services, we’re sure you’ll find it essential reading.

By John Lee.

Lebanon’s biggest bank, Bank Audi, plans to enter the Iraqi market late next year.

Chief Executive Samir Hanna (pictured) told Reuters that its new Iraqi operation will be a subsidiary of its Turkish business, which it launched in October and which is trading “more than 50 percent ahead” of the bank’s target.

Turkey is Iraq’s biggest trading partner, which Hanna said would provide Bank Audi with a captive customer base, serving Turkish clients who do business with Iraq.

The new venture will begin by focusing on areas such as trade credit and will not be a retail bank, he said.

The bank, which held $29 billion of assets at the end of Septmber, also has a “Plan B” to quit Syria if the situation deteriorates further.

Byblos, Lebanon’s third-largest bank with with nearly $17 billion in assets, became the first Lebanese bank to venture into Iraq in 2007. Its general manager, Sami Haddad, views the country as “grossly under-banked” and said that Byblos intends to add two branches to the three it already has in the country.

“You would have to be stupid not to make money,” he said.

(Source: Reuters)

By John Lee.

Qatar National Bank (QNB) has announced that it has taken control of Iraq’s Al-Mansour Investment Bank.

It acquired an additional 27.7 percent shareholding for a cash payment of QR425.4 million, bringing its interest in the bank to 50.8 percent.

The company said that goodwill of QR117.6 million has been determined on acquisition of this additional stake on a provisional basis.