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Blessings in Disguise for Iraqi Stock Market

By John Lee.

The continuing war against the Islamic State (IS, ISIS, ISIL), coupled with the decline in oil prices, have reportedly made Iraqi regulators and government more receptive to reforms that would strengthen the economy and the stock market, according to an article in UAE-based The National.

Shwan Taha, head of Rabee Securities, has been pushing for reforms to the stock exchange (ISX) for some years, including the establishment of a custodian bank, and says that the authorities seem to be finally listening:

“The government has to balance the budget, and we are seeing serious efforts towards reforming the country – in both Baghdad and Kurdistan. These reforms would never have been talked about seriously unless there had been a steep decline in the oil price. So this is a blessing in disguise.”

Geoffrey Batt, a US-based fund manager at Euphrates Advisors, agreed, arguing that lower oil prices had forced Iraqi politicians to think seriously about increasing capital formation and stimulating economic growth.

He said that politicians are now open to discussing the privatisation of state-owned banks and utilities, providing tax incentives for private companies that list on the ISX, and establishing a third-party custodian bank:

“The ISX has the potential to attract $10bn-plus of capital into the country if it is properly utilised. At $100 oil, the government could afford to neglect the exchange’s potential. At $50 oil, they have to take it seriously.”

(Source: The National)

Posted in Industry & Trade, Investment, Oil & Gas, SecurityComments (14)

NASDAQ Launches New Tech for ISX

By John Lee.

Nasdaq and the Iraq Stock Exchange (ISX) have announced today the successful on-schedule go-live of the X-stream Trading technology, which replaced the existing Horizon platform. Nasdaq has delivered trading technology to ISX since 2007.

The X-stream Trading upgrade provides ISX with a widely deployed high-end, multi-asset trading platform that complies with international standards. The new technology provides ISX with improved performance and up to ten-fold the amount of the capacity.

Taha A. Abdulsalam, CEO, Iraq Stock Exchange, said:

This is an important milestone for our exchange, the companies of Iraq and investors in the region and around the world …

“We were well-prepared for the transition to our new trading platform, and the system has worked flawlessly since our go-live, which was on schedule and budget. Our ambition to be the focal point of the region’s capital markets is certainly on par with this new technology launch that benefits a vast amount of our key stakeholders.

Lars Ottersgard (pictured), Executive Vice President, Head of Market Technology, Nasdaq, added:

Nasdaq is proud to be supporting our long-term customer ISX in upgrading their market infrastructure …

“This is a very dynamic, important marketplace that has the attention of the entire world. ISX has effectively shown their leadership and focus in driving access to capital in Iraq. We look forward to our continued collaboration with ISX as they grow and expand their business further.”

(Source: Nasdaq)

Posted in Banking & Finance, InvestmentComments Off

Banks Signal Drop in Iraqi GDP

By Mark A DeWeaver.

As of November 6, 18 of the 21 ISX listed banks have reported third quarter earnings. The numbers aren’t pretty. Rabee Securities’ latest corporate profits report shows bank-sector aggregate profits for the first nine months down 17% year-on-year. Taking out BUND, an obvious outlier with earnings growth of 115%, the decline for the remaining 17 banks was 25%.

2014 will certainly be the worst for listed bank earnings growth since the end of the sectarian civil war in 2008. This year’s dismal performance compares to double digit growth for all of the last six years with the exception of 2009, which saw a 3% contraction.

M2 money supply growth is telling a similar story. (M2 includes cash in circulation and commercial bank deposits.) Unlike the earnings statistics, which cover only the listed banks, M2 also covers the state-owned lenders that account for the majority of Iraqi bank assets. As of the end of July, this aggregate was up only 4% year-on-year, down from 16% growth for year-end 2013.

These trends in M2 and bank profits are obvious warning signs for the Iraqi economy as a whole. To get some idea of what they might be telling us, I tried using them to forecast annual GDP growth. This is a somewhat suspect exercise due to the limited number of data points, but the forecasts at least fit well “in sample” (see chart).

Assuming full-year growth in M2 and bank profits of -20% and -4%, respectively, the 2014 forecast is for a GDP decline of 1.7%, not much better than the IMF’s -2.7% projection (see this article). If this is accurate, the banks are signaling the first year of negative economic growth since the US invasion in 2003.

Posted in Mark DeWeaver on Investments and FinanceComments Off

Rising Yields a Plus for Stocks

By Mark DeWeaver.

Falling prices and higher dividends have led to a jump in ISX dividend yields this year. As of September 30, Rabee SecuritiesRSISX index was yielding 4.5%, up from 1.5% in 2013 and 0.0% in 2012. Yields are also improving relative to local interest rates, which have been gradually declining.

The RSISX yield is now above Rafidain’s 4% savings deposit rate and is approaching the average deposit rate for all Iraqi banks. (See chart. Yield calculations are based on period-ending prices and index weightings. Average deposit rates are from Rabee’s most recent Bank Sector report.)

The conclusion of the last three years’ bank capital increases (see this post) is the main reason for this trend. Now that most banks have finally met the central bank’s IQD 250 bn capital requirement, a number have switched from making cash calls to paying cash dividends. So far this year, 7 of the 21 listed banks have made dividend announcements, compared to only 2 in 2013. The 7 include RSISX constituents BIME, BBOB, and BIBI along with BASH, BIIB, BNOI, and BMNS.

While foreign institutional investors—who generally are looking for capital gains rather than dividends—may be unexcited by this development, the local individuals who account for most of the trading are likely to see it in a more positive light. For them, cash payments are a sign that a company has actual earnings—something it’s hard to be sure of when financial reporting is viewed as unreliable. Locals are also more likely to compare dividend yields to deposit rates, bank accounts being the only other domestic financial asset available.

Since any further price declines would push the yield above the deposit rate, this year’s dividends should help to put a floor under the market at its current level. Assuming no deposit rate changes, we might expect this level to hold as long as aggregate dividends remain constant or rise.

I think this is a likely scenario, despite the recent decline in bank earnings (see my last post). While dividends at individual banks may fall, the number of banks paying them can be expected to increase now that almost all of their capital targets have been met.

Yields could even head higher.

Posted in Investment, Mark DeWeaver on Investments and FinanceComments Off

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.

Posted in Investment, Mark DeWeaver on Investments and FinanceComments Off

Iraqi Stocks Bounce Back

By Mark DeWeaver.

This week saw a dramatic turnaround in Iraqi stocks. Last Thursday’s selloff (see this post) accelerated into a mad dash for the exits on Sunday, with the RSISX losing 4.3% on virtually no advancing volume and 60% of the trading in limit-down stocks. On Monday the index fell another 3% to bottom at 1603, just north of long-term support at 1600, a level that hasn’t been tested since January, 2013.

Stocks moved up sharply for the rest of the week, particularly on Wednesday, when not a single stock declined and heavyweights BBOB, BNOR, and BUND closed limit up after closing limit down only three days before. By the Thursday close, the market had recovered about half of the previous two weeks’ losses. (See chart.)

This week’s action mirrored the situation on the battlefield quite closely, with the 1600 support level serving as a market analogue for the army’s line of defense at Samarra. Indeed Iraqi stocks now seem to have become almost entirely a play on the progress of the security forces.

Given that the insurgents are unlikely to push farther south, this suggests that the market is unlikely to see further steep losses. But for the RSISX to bounce all the way back, the front may have to start moving north.

Posted in Investment, Mark DeWeaver on Investments and FinanceComments (6)

The Wrong Time to Panic

By Mark DeWeaver.

Iraqi stocks held up surprisingly well for most of this week despite the dramatic loss of much of Northwestern Iraq to extremists. Even following the fall of Mosul on Tuesday, Rabee Securities’ RSISX index was down only 2.6% for the week by Wednesday’s close. And while the ISX index fell 3.3% on Wednesday, about half of that decline was due to a 10% drop in Asiacell on a mere US$ 659 worth of turnover.

Thursday, however, was a different story. Five of the top banks—BBOB, BCOI, BNOR, BROI, and BUND—were down by the 10% daily limit (or close to it) on heavy foreign selling. Net foreign buying, which had been positive every day since the start of the week, swung sharply negative. Having accumulated US$ 627,000 worth of Iraqi stocks from Sunday to Wednesday, foreigners ended the week by net selling US$ 415,000 in a single day.

While I don’t have any way of knowing for sure, it seems obvious to me that one of the foreign funds has finally panicked.

Should I be panicking too? I don’t think so. Orc-like hordes of invaders descending on the capital is undoubtedly a scary prospect, but ISIS has almost certainly reached the limit of its advance by this point. The Iraqi army is unlikely to melt away from the Shia areas in that way that it did in Mosul. It is already being backed up by Kurdish forces in the territories bordering Kurdistan and may quite possibly be able to call upon US airpower by as early as next week. Meanwhile, the enemy is stretched thin and vastly outnumbered.

The scenario to bet on is not the fall of Baghdad but rather a series of reversals for ISIS. Once that happens, the market should stabilize and, in the event of US airstrikes, will easily erase its losses. If one is going to sell at all, now is not the time to do it.

Posted in Investment, Mark DeWeaver on Investments and FinanceComments (6)

Big Changes Planned for Iraqi Stock Markets

By Melissa Hancock for Al-Monitor. Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.

With the world’s eyes focused on the recent Iraqi elections, little attention is being paid to the major changes taking place in Iraq’s banking and finance industry.

As part of an effort to liberalize the economy, in the first three months of 2014, the Iraqi Central Bank granted approval to 15 Arab and international banks to open branches in Baghdad, with additional branches expected to open soon. There is also a notable drive to grow and promote the stock markets, with senior Iraqi government officials and representatives from the country’s two stock exchanges hosting a two-day forum in Dubai May 14-15 in a bid to court regional investors.

The Iraq Stock Exchange (ISX) is currently in the process of upgrading to the latest Nasdaq trading platform after signing an agreement with Nasdaq OMX in June 2013. The new platform, currently used by more than 25 exchanges globally, is capable of supporting multiple asset classes, although the ISX concentrates mainly on cash equities.

“We will complete the implementation at the end of June, and it will go live at the beginning of July,” said Taha Ahmed al-Rubaye, chief executive of the ISX. “We are working hard to modernize the exchange.”

The ISX is also assisting the Erbil Stock Exchange (ESX), the first exchange in Iraq’s semi-autonomous Kurdistan region, in setting up its Nasdaq trading system. It is due to be fully implemented in July, and the ESX hopes to see around five to 10 listings by the end of 2014, including a major telecom company. The ESX has $8 million in initial capitalization and 56 shareholders, primarily from the private sector.

Posted in InvestmentComments (1)

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