Soaring economic growth is rejuvenating the banking in Iraq
16 Jul 2013
Recently a report illustrated that the banking sector in Iraq is all set for a significant leap in earning and asset growth in the coming years, driven by a strong macro environment, with increased credit penetration and improvised security conditions.
National Monetary Fund or IMF has recently declared that the country is forging towards a 9 percent economic growth in coming year and 85 percent growth at the next year after this year.
It has been anticipated in IMF’s report that Iraq will continue to do well in coming years with its economic growth, as the government has successfully reformed its economic structure and thus foreign investors are finding it easier to invest in this country – foreseeing further and higher level of profit.
In a report, Sansar Capital, a renowned company in the finance sector has opined that rising credit penetration is also expected to further fuel banking sector growth. The report cites a World Bank study which shows that Iraqi domestic credit to GDP stood at a mere 9 per cent of GDP at the end of 2011 as compared to a 55 per cent of GDP average for the Mena region.
Between the time lengths from 2009 to 2011, domestic credit to GDP has taken a leap of 89 percent.
Moreover, according to Central Bank of Iraq data, cash credit, such as loans and overdraft facilities, have grown at an impressive CAGR of 50 per cent from 2006-2011.
The detailed report analyses the Iraqi private banking sector through the perspective of five of the country’s largest private banks by deposit.
The report reveals that buoyed by strong economic growth and rising credit penetration, these five banks saw their aggregate net income grow by 207 per cent between 2010 and 2012.
Dilution driven by increases in equity capital resulted in earnings-per-share growth will go down but that still will have impressive impact with aggregate EPS growth of 111 per cent from 2010-2012.
The report explores an odd idiosyncrasy in the Iraqi markets where banks with highest Return-on-Equity and growth profiles trade at the lowest valuation multiples.
The company, Sansar Capital believes that this example of market inefficiency needs to be paid due attention.
The statements that have been received from the Iraqi banks have been also verified and the report also demonstrates that adjusted underlying profitability and Return-on-Equity (ROE) for the banks significantly exceeds reported numbers with some banks approaching 60% underlying ROEs.
According to the report, the growth in Iraq’s banking sector earnings and GDP – which IEA forecasts will grow 151 per cent between 2011 and 2020 driven by the country’s increasing oil revenues, go hand-in-hand with the improving security situation in the country.
As violence declined by over 80 per cent between 2006 and 2012, Iraqis in many parts of the country enjoyed relative calm and stability.
Despite of the impressive growth, there are some rays of concerns still remain for the Iraqi private banks.
There are a lot of challenges that have to be overcome precisely if the private sector banking has to sustain in Iraq with greater chances of profit making.
Accessibility is among the biggest challenges facing the country’s banking industry. Access to bank branches or ATM machines remains highly limited to the general Iraqi population.
There are approximately 900 bank branches covering a population of 33 million Iraqis equating to just one branch serving 36,000 individuals.
The other reason is the trust factor. People of Iraq find it more trustworthy to invest in the state-owned banks rather than putting their money in the hassles of private banking.
However, this problem seems to be temporary as foreign banks are expected to do well in Iraq, clinching the trusts of the common Iraqi people by providing their seamless services.
In the report, transparency is another factor that has been questioned. In the example of North Bank, the report highlights how audit and financial concerns raised by the accountants in the Arabic reports were missing from the English translated reports provided by the bank.
“Iraq’s banking sector, though certainly on the growth path, is not without its share of challenges,” said Sanjay Motwani, president of Sansar Capital.
He added, “However, what is important to note is that all the challenges and hurdles can be overcome, especially with the combined efforts of the government and private sector.
In particular, we believe that the private sector can help improve accessibility to branch networks and services while the government can help level the playing field between the state-owned and private sector banks. Of course, gaining the trust of the population would require efforts from both sides.”
From trade and financial related activities, Iraqi banks generate a good portion of their overall revenues.
For the year 2011, commissions driven by trade-financing related activities (wire transfers, letters of credit, FX spreads) accounted for a range of 28 per cent to 83 per cent of net revenues for the four largest ‘traditional’ banks.
The second largest contributor to the banking revenue is the traditional method of lending money and gaining capital through the interests over the lending amounts. From 13 percent to 49 percent revenues are generated in this method.
The Sansar Capital report concludes that while the mix of an improving macro environment and security situation offer attractive investment ingredients in Iraq, many challenges remain for those interested in participating through public markets.