On March 11, Rabee Securities came out with the first-ever sector report on ISX-listed companies. The report, which could be thought of as something of a milestone for the Iraqi market, is on the banks—the most heavily weighted sector in terms of both trading volume and market cap.
For me the main takeaway was that the sector is not particularly cheap on a valuation basis. While the analyst does not make this point explicitly, it’s hard to come to any other conclusion on the basis of the data presented. Market-cap-weighted average price/book value for the sector works out to 2.6 times, or 1.8 times if you take out HSBC subsidiary Dar Es Salaam Bank (BDSI). Weighted (historic) P/E comes to 66.0 times, or a still-demanding 17.4 times ex BDSI. And while high PE’s can sometimes be justified on the basis of high earnings growth, it doesn’t look like this is the case here. For the top seven banks (not including Warka), cap-weighted average earnings grew only 16% in 2010.
It’s not clear, however, that historic valuations are particularly relevant in this case. As most of the Iraqi banks are still at a very early stage in their development, current book value and prior-year earnings are a poor guide to what these companies will eventually become. Their real value comes from what their franchises will be worth once they have developed regular commercial banking businesses—something that is still basically unquantifiable.
BDSI is a case in point. Annualized net earnings for the first nine months of last year fell 87%, putting it on a P/E of 333 times. Price/book is 7.2. Does this make the stock a sell? Not necessarily. It all depends on what HSBC, which holds a 70% stake, is planning to do with the company.
Unlike most brokerage research of this type, the Rabee report does not include any buy or sell recommendations. It’s easy to see why. Based on the banks’ historical financial information alone, most of them might be sells. But given the potential for growth in a country where year-end ’09 bank-sector credit to GDP was a mere 4.1%, most might be buys.
What’s an analyst to do?
Dr Mark,
Thank you for your detailed assessment of the Iraqi Banking Sector. Do you know where we can obtain this report?
An in-depth analysis from IraqiXchange on North Bank indicates that the bank is trading at P/E of 13.9, and 2.3 times P/B. Although this may seem high historically, the bank has managed to grow earnings by 24% in 2009. IraqiXchange argues that even Earnings isn't the best long-term growth indicator, rather they focus on deposit (+64%) and loans (+90%) growth. Earnings seem to be impacted by the climbing costs associated with aggressive expansion strategy in the short-term, combined with the sudden drop in CBI interest rates. Finally, they examine (4) financial metrics to arrive to their recommendation:
- Net Interest Margin (NIM)
- Return on Assets
- Return on Equity, and
- Reserves from Loan Losses (%)
In conclusion, they argue that at 13.9x P/E & 2.3x P/B, the bank is still undervalued, given its impressive asset growth, past and projected.
I would say one bit of information from this story is that there is no intention of a rv of the dinar any time in this year so I am fortunate that I held my money back from buying any dinar. I do see Iraq as becomming a wealthy country and a vital world industrial base with cooperation from many nations.
Tom,
I have with many looked at currancy trades. Most of the time you lose!
But when you hit it is like winning the Lotto.
That being said, Have you watched the UNSC approve Iraq as becoming a internationally recognized nation?
Have you read the 22 page report from the IMF reqarding thier letter of intent?
Have you see CBI Pres of CBI state that the IQD will be increased in the coming days? Did you see PM Maliki state on TV in Iraq tell Shabibi Pres of CBI to increase the IQD higher that ths USD?
Have you seen thier new banking infrastructure reports? Leading edge.
a second look for this year. The ME riots got thier attention and have the US, UK,Dept of treas now in Iraq?
There is much more.
I just that it interesting that you state no intention this year.
Might take
Hi Nick:
The report is only available to Rabee clients. I agree on BNOR--I think that is a buy on a valuation basis. So are BUND and perhaps BKUI. But the story is a lot less compelling for the rest of the banks.
Hi Ken,
Thanks for that update..I am mostly in the ISX with a some cache of physical currency...So either way an RV would make my day (or my year..heck even my life..haha) too.I'v heard what you cited about Shabibi and Maliki talking about the IQD being risen in value,of recent.BUT ,i have not seen one credible link to verify these statements (rumors )..So do you have any that you can provide ? Could you post them here for us all to enjoy ?..That would be greatly appreciated by me anyways..
Kindly thanks,Peter
I don't think they exist Peter.