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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.

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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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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.

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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.

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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.

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Stocks Brace for Iraqi Election


By Mark DeWeaver.

This hasn’t been a particularly good year for Iraqi stocks. So far the Rabee Securities Index (RSISX) is down 3% year-to-date and off 8% from its recent high on January 28. The ISX index has been dropping all year. It’s now down 5% year-to-date.

Uncertainty in the run up to Iraq’s April 30 parliamentary elections seems to be the most obvious explanation for this downturn. Market participants may well be expecting a repeat of the last elections, on March 7, 2010, after which the government formation process lasted until November 11. That year the RSISX was already down 12% from its November, 2009 pre-election peak by election day. It fell a further 8% before finally rebounding in October. (See chart.) Investors could hardly be blamed for getting cold feet this time around.

But this year is unlikely to be a rerun of 2010 for three reasons. First, Iraqi oil production is set to jump sharply. This should lead to strong growth in the money supply—always a positive for asset prices. Second, bank capital increases will be less of an overhang than they were four years ago as many banks have already met the central bank’s final capitalization target of IQD 250 bn. Finally, there isn’t really that much uncertainty about the outcome of the election. Presumably some compromise will once again be reached after a protracted period of government formation. The situation will continue to be bad but there is no reason to expect it to get worse.

This time, look for Iraq’s strong economic fundamentals, rather than its fractious politics, to be the main driver for stocks.

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Why Two Exchange Rates?


By Mark DeWeaver.

Since the Central Bank of Iraq (CBI) began changing the rules for its USD auctions in 2012, Iraq has been operating a de facto dual exchange rate system. (There’s a summary of some of the CBI’s recent rule changes on pages 12-14 of this report from Sansar Capital.) For those with access to the CBI auction—mainly banks and (as of March, 2013) importers using letters of credit—the rate has been fixed at IQD 1,166: USD 1.00. For the rest of us, the dinar has ranged from 1,194 to 1,292, with two major episodes of depreciation in mid-2012 and mid-2013 (see chart).

The ostensible purpose for this arrangement is to limit illicit outflows of foreign exchange to Iran and Syria. In practice, it serves mainly as a subsidy to banks, large importers, and anyone in a position to generate phony trade documents. The losers include everyone from foreign investors in Iraqi stocks to the government itself, which gets the CBI rate on its oil-export revenues.

Iraq is unusual in this regard. Dual (or even multiple) exchange rates are usually only found in countries suffering from chronic trade deficits and foreign exchange shortages. Typically the objective is to make foreign exchange available for “essential” imports or to control inflation by lowering import prices. Examples include Hitler’s Germany, China in the 1980’s and early ‘90’s, Burma prior to 2012, and Venezuela today. (See this note from the Asian Development Bank for an excellent introduction to this topic.)

It’s hard to see why Iraq belongs on this list. The country has a trade surplus, inflation is low, and the central bank has ample foreign exchange reserves. Even USD outflows to Iran are presumably no longer a major issue.

One exchange rate should be enough.

Posted in Investment, Mark DeWeaver on Investments and FinanceComments (11)

Another Look at Corporate Actions


By Mark DeWeaver.

In this old post from 2010, I considered the possibility that ISX share prices might fail to adjust completely for corporate actions. There didn’t seem to be much evidence for this but it was a bit hard to be sure. In those days, stocks would generally be suspended for a number of months following rights and bonus issues. Discrepancies between theoretical and actual ex rights prices might as easily be due to developments during the long intervals between cum rights and ex rights trading dates as to a failure to reflect changes in the number of shares in issue.

In September, 2011, the ISX changed the rules on stock suspensions to allow trading to resume within four weeks of shareholders’ meetings (see this post). Following this dramatic reduction in suspension periods it should be now easier to identify departures from theoretical ex-rights prices. Given the importance of corporate actions to ISX investors, I thought it would therefore be worth revisiting this question with some more recent data.

Since the end of 2012, the “Corporate Actions” table in the Rabee Securities monthly gives 78 examples of rights, bonus, and dividend issues. Taking out cases where the cum rights price was below IQD 1.00 (in which case minority shareholders would be unlikely to subscribe) and a few others where I thought the stocks were too thinly traded for the prices to be meaningful, I ended up with a sample of 49 observations.

The chart shows the premium/(discount) of actual to theoretical ex-rights prices, where the theoretical price is the last traded cum-rights price adjusted for rights, bonuses, and dividends. For example, if the cum-rights price were IQD 2.00, following a 50% rights issue, a 30% bonus issue, and a IQD 0.25 dividend, the theoretical ex-rights price would be: (2.0+0.5-0.25)/(1.0+0.5+0.3)=1.25. (Note that the dates following the ticker symbols on the x axis are for the start of ex-rights trading.)

In half of the cases actual prices deviated by no more than 5% from the theoretical prices; two thirds of the time the difference was no more than 10%. Extreme examples of over- or under-adjustment were relatively rare.

Once again there doesn’t seem to be much reason to expect outsized gains or losses following corporate actions.

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