President Ismail Omar Guelleh recently inaugurated the first subsidiary of Iraq-based Warka Bank for Investment and Finance (BWAI) in Djibouti to offer full range of banking services. The ceremony was attended by the Prime Minister Dileita Mohamed Dileita, Mr. Hichem Ben Turkia, who is Warka Bank representative, several members of government, as well as ambassadors and representatives of diplomatic corps accredited to Djibouti and representatives of international organizations.

Established in 1999 in the Iraqi capital, Warka Bank for Investment and Finance now has branches in Jordan and Lebanon and is one of Iraq’s biggest private banks. The entry of BWAI has risen the number of private banks operating in the country to a dozen. It plans to offer facilities such as transferring remittances, credit cards, personal loans, long-term finance, trade finance, structured finance and investment.

The Chief of Djibouti’s central bank, Mr. Jama Mohamoud Haid, who was also present for the occasion said this event highlighted Djibouti’s rapidly growing economy. “This second ribbon cutting ceremony of a banking institution in the space of two weeks demonstrates the vitality of the sector particularly financial and our economy in general,” he said.

He further stressed that the bank will place Djibouti in a more favorable economic position in the region and help strengthen trade relations with the Arab world. He said the central bank was providing the right environment for private banks to thrive.

“I can assure you Mr. President, the local banks tell me that their goal is also to play an important economic contribution to the creation of national wealth. And therefore , to improve the lives of our citizens the central bank of Djibouti is committed to motivate and support them in this will,” he said.

He urged international investors to take advantage of Djibouti’s position as a stable and leading regional financial, trade and transport hub. Appealing to foreign investors, he said, “a strong and stable currency, political stability, Geo-strategic position open to the outside world, a telecommunications system performance, and finally the existence of a port structure in the potential.”

“We hope that the arrival of Warka Bank in the financial Djibouti will contribute to further transform the banking landscape, making it more competitive by introducing a wider range of financial products and services, while respecting international law and regulations of the Central Bank of Djibouti which has continued to support us and advice, “he said finally.

(Source: Somaliland Press)

Last weekend two stories, one in Al Hayat the other in the Abu Dhabi paper The National, confirmed that Standard Chartered is in talks to take over Warka Bank (BWAI). (There’s more on the story here.) While there have been rumors to this effect for over a year, this is the first time anything has been officially disclosed. Hayat cited Warka Bank Executive Director Mohammed al-Samarrai as saying that the merger has reached its “final stages.” A Standard Chartered official interviewed by The National was a bit more circumspect. He characterized the negotiations as “still in the early stages” and cautioned that “It’s not final until it’s absolutely final.”

It’s said that the opera isn’t over until the fat lady sings. While she hasn’t come out yet, it looks like she has already begun warming up backstage.

If the deal goes through, Standard Chartered will presumably be taking up the approximately 145 mn rights issue shares left over from Warka’s failed capital increase in early 2010. At IQD 1 per share, this would add IQD 145 mn to June 30, 2011 net equity of IQD 138 mn, bringing the total to IQD 283 mn. Share capital would increase to 250 mn, with the British bank holding a 58% stake.

In this scenario, book value per share would come to 283/250 = IQD 1.13.

Among the ISX-listed banks, Warka would become only the second to have a major international financial institution as a controlling shareholder. The first was Dar Es Salaam Bank, which is controlled by HSBC.

Dar Es Salaam trades at 7.0 times book value. The same rating for BWAI post-merger would mean the shares would reopen at 7 x 1.13 = IQD 7.92. Anyone who had bought at BWAI’s last traded price of IQD 1.26, got the 33.33% bonus, and taken up the 150% rights issue would be looking at a return of 710%. (Both original and bonus shares were eligible for the rights.)

The final act of this drama may turn out to have been well worth the price of admission.

Photo by: http://www.flickr.com/photos/aliens_ufo_proof_evidence/

London-based Standard Chartered Bank has been in talks for the past 3-4 months to buy a stake in Warka Bank, one of Iraq’s biggest private banks, a central bank official said on Monday.

Hassan al-Haidari, a central bank advisor, told Reuters:

“They (Standard Chartered) wanted more than 50 percent but they (Warka) wanted (to give) less than 49 percent.“

A branch manager at Warka Bank in Baghdad’s Green Zone, Hussam Abdul Kareem Khalaf, confiemed to Bloomberg:

“Yes, there are negotiations for Standard Charter to acquire shares of Warka Bank. We are still not sure about the percentage of shares as negotiations are still ongoing, but this is expected to take place.”

The National reported at the weekend that Abdul-Aziz Hassoun, executive director of the Iraqi Private Banks League, said the talks had not yet reached an advanced stage as Standard Chartered was still doing due diligence on the bank.

“Warka Bank is trying to get rid of its liquidity crisis and its failure to increase its capital to higher levels through negotiations with Standard Chartered as a partner,” Hassoun said.

He said Warka needed less than 100 billion Iraqi dinars ($90 million) to enhance its liquidity.

Reuters reports that Iraq’s central bank has a three-stage plan for banks to increase their capital to $213 million by June 2013 to spur lending in the war-battered state as it emerges from the shadow of sanctions and the 2003 U.S.-led invasion of Iraq.

There are 43 banks in Iraq, with the sector dominated by seven state-owned institutions, while the private sector accounts for just 10 to 15 per cent of deposits. In a country of 39 million people, there are only 700 to 800 bank branches.

Its banking sector is dominated by two state-owned banks, Rafidain and Rashid, which are undergoing restructuring to eliminate debt racked up after years of war and sanctions.

Much of Iraq’s private banking activity is limited to deposit services and a small amount is personal lending.

Warka Bank for Investment and Finance, which was established in 1999, has 130 branches and 350 ATM machines around Iraq.

(Source: The National, Reuters, Bloomberg)

Winston Churchill once likened observing Soviet politics to “watching two dogs fighting under a carpet.” All you can say for sure is that something’s going on.

The latest news on Warka Bank has exactly this ‘subcarpet’ quality. The ISC has ordered Warka’s brokerage subsidiary to stop its operations in the market effective July 26 following the seizure of the bank’s equity in this company by the Ministry of Trade. (See the pdf file at the bottom of this link for the Arabic version of the announcement.)

The Ministry is also seizing shares held by the bank in nine other companies. Appended to the ISC’s announcement is a letter from the Ministry’s Office of Companies Registration to the Diyala Public Company for Electrical Industries dated July 11. This provides the following list:

1.) Al-Asyl for Horse Breeding and Marketing LLC / number of shares (1,020,000).
2.) Al-Iraqiyah for Bank Guarantees LLC / number of shares (400,000,000).
3.) Afaq al-Ghad for Trading Agencies and General Trade LLC / number of shares (200,000).
4.) Al-Mas for Security and General Protective Services LLC / number of shares (200,000).
5.) Al-Mas for Real Estate Investments LLC / number of shares (135,000,000).
6.) Warka Company for Mediation in Trading Securities LLC / number of shares (980,000,000).
7.) Dallat al-Jazeerah for General Transportation LLC / number of shares (680,000).
8.) Al-Ufuq al-’Alamiyah for General Trading LLC / number of shares (1,340,000).
9.) Al-Mass for Recording of the Holy Book Verses LLC / number of shares (60,000,000).
10.) Al-Mas for Real Estate Investments LLC / number of shares (135,000,000)

Note that none of these are ISX listed companies. (6) is the brokerage.

Apparently, there must be a dispute between the bank and the Company for Electrical Industries to whom the Ministry’s letter is addressed. But there’s no way to tell what this dispute might be, why these ten names were selected, how they will be disposed of, or when the brokerage will be allowed to resume its operations.

It would be nice if someone could pull back the carpet and let us see what this fight is about.

In March ISX-listed Qimma Financial Investment (VQUF) announced that Warka Bank’s majority shareholder, Saad Al Bunnia, had appointed it to “begin a formal auction process following a due diligence report carried out by Price Waterhouse Coopers.” The announcement, which was posted on Qimma’s website, went on to say that Mr. Bunnia was “interested in entertaining offers” from banking groups “such as Russia’s Alfa Bank or UK-based Standard Chartered.” (Hat tip to “Kickabuck” for sending me this link.)

It’s hard to know what to make of this. For starters, while the one-paragraph announcement is worded like something copied from a news agency, it does not appear to have appeared anywhere else. Oddly, it also does not even explicitly say what Mr. Bunnia is selling, though presumably this would be a majority stake in the bank. And if an auction were being organized, you’d think that Warka itself would have made some official statement to this effect.

The mention of Alfa Bank as a possible buyer gives the story a ring of truth however. It seems a funny thing for someone to make up—why not just claim that Citibank might bid? And it’s also easy to believe that the Russian lender would be interested in an Iraqi acquisition. With cash and book equity both over USD 3 bn at the end of 2010, it shouldn’t be hard for it to take up the unsubscribed shares from Warka’s failed rights issue. (There’s more on the rights issue here and here.) Its owners should also have little trouble seeing opportunity in a country that, like Russia in the 1990s, has huge unexploited oil reserves and is in the midst of becoming reintegrated into the global economy.

Another point in favor of the story: Alfa Bank is not without Iraqi connections. It has a close relationship with Russian natural gas giant Gazprom, which leads the consortium that won the Badra oil field concession in 2009. In 2002, the two companies entered into a strategic cooperation agreement including, among other things, “the implementation of joint projects,” “provision of short-term financing to Gazprom,” and “the participation of Alfa Bank in project financing schemes for Gazprom.”

For over a year, rumor had it that Standard Chartered would be taking over Warka. After such a long time, however, you have to wonder if perhaps the British bank isn’t really that interested after all. Could a Russian bank turn out to be a better match?

A posting on the ISX website last week has revealed new details about a suit filed against Warka Bank by AsiaCell. Apparently the mobile phone operator has been unable to withdraw IQD 29.3 billion in deposits and is suing for the return of these funds under the bankruptcy provisions of the Commercial Code. (English and Arabic versions of the announcement are available at http://www.iraq-businessnews.com/2011/04/05/asiacell-to-bankrupt-warka-bank/.)

It’s not clear if Warka has any legitimate grounds for refusing AsiaCell’s withdrawal request but it’s easy to see that it might have trouble coming up with the necessary cash. The bank’s last balance sheet, for the end of 3Q 2010, showed total cash assets of only IQD 66.8 bn, down from IQD 141.1 bn at the end of 2009 and IQD 503.2 bn for 3Q 2009. And while the bank also had IQD 554.5 bn in short-term loans on its book, it’s unclear how easy these would be to liquidate.

On the other hand, however, there is no guarantee that AsiaCell’s suit will be successful. Warka has appealed the case on the grounds that failure to return deposits is not grounds for bankruptcy because they don’t count as debt for purposes of the Commercial Code. It’s hard to say what the higher court will make of this argument but it seems reasonable in principle.

In fact, it’s hard to see why the Commercial Code, rather than the Banking Law, is applicable in this case. According to Article 72 of the latter, “petitions for opening bankruptcy proceedings against a bank shall be submitted in writing to the Financial Services Tribunal.” In the event that a bank is declared bankrupt, the Tribunal is supposed to appoint a receiver to carry out a liquidation under the central bank’s supervision.

Perhaps herein lies the rub. It seems unlikely that the CBI has the administrative capacity to oversee such a process. The central bank would doubtless prefer to postpone taking action in the hopes that a foreign financial institution can be found to take up the remaining shares from Warka’s unsuccessful rights issue. This would not only provide the cash needed to pay off depositors like AsiaCell but also restore confidence in the bank, thereby reducing the demand for withdrawals.

While rumors about potential acquirers have been around for more than a year, nothing has been made public about any negotiations so far. In the absence of an effective legal remedy, however, such a takeover may be AsiaCell’s best chance of getting its money back.

Iraq Business News has received information suggesting that AsiaCell is suing Warka Bank for the return of funds amounting to around 29 billion Iraqi dinars [$25 million].

According to one source, this could be enough to do serious damage to Warka.

While the full picture is still not entirely clear, we are attaching an official original announcement in Arabic, together with an un-official translation in English. Please note that this translation is given in good faith, and Iraq Business News takes no responsibility for any errors or omissions.

Please click here to download the Arabic version;

and here to download the English version.

Warka’s moment of truth last Wednesday (Jan 19) turned out to be a nonevent. It seems the general assembly meeting had to be postponed for a week due to lack of a quorum. To put it another way, the chairman, who holds 60% of the stock, didn’t show up. (See my last post for more on this GA meeting that wasn’t.)

Characteristically, both the company and the stock exchange have so far left investors completely in the dark regarding the reason for the postponement. Even the new meeting date has yet to be announced. All one can do is speculate.

One obvious possibility is that the meeting could have been postponed due to some last minute disagreement between the board and a potential buyer. On the other hand, announcing and then postponing a meeting could also be part of an attempt to “produce something from nothing,” as the Chinese say. Even in the absence of any buyers, it might be useful to create an impression that negotiations were ongoing.

Or maybe there’s a perfectly mundane explanation—perhaps the chairman just got stuck in traffic. Until Warka’s moment of truth finally arrives, it’s really anybody’s guess.