Iraqi Banks' Profitability Will Soar in the Long Term, HSBC's Hogan Says

Bank profitability in Iraq may increase by 100 times within 10 to 20 years, said James Hogan, country manager of HSBC Holdings Plc.

“HSBC as an institution is remarkably bullish on Iraq,” Hogan said at an event hosted by the British-Iraqi Friendship Society in London late yesterday. It is “a country with a tremendous future.”

Revenue from rising oil production is driving growth in Iraq, seven years after the U.S.-led invasion that ousted Saddam Hussein. Iraq holds the world’s third-largest oil reserves, with 115 billion barrels, behind Saudi Arabia and Iran.

“Over the next 10 to 20 years, we see that bank profitability will increase 100-fold,” Hogan said. “We need to take a long-term view.”

There are currently 36 banks operating in Iraq, including 22 private banks, seven state-owned and another seven foreign banks, Hogan said. The sector’s total assets amount to $55 billion and about 90 percent of deposits are state-owned. The deposit ratio in Iraq is about 30 percent, up 10 percent from this time last year, he said.

“There is more lending activity as the economy gets stronger,” Hogan said.

Among the challenges to the sector are the high number of banks operating in Iraq, managed to different standards, Hogan said. There is also no interbank collaboration and little reliance on electronic transactions in a society that favors the use of cash, much of it in dollars, Hogan said.

Stronger Dinar

The new Iraqi dinar has been linked to the dollar for the past 18 months at an exchange rate of 1,170. The trend is for a stronger dinar, and the Central Bank of Iraq is “doing a fantastic job managing the currency,” Hogan said.

Speaking about violence, Hogan said security has become “a fixed cost that can be managed.” Attacks picked up slightly after elections on March 7 that produced no clear winner, though incidents have fallen from their peak levels of 2006 and 2007.

Once a new government is formed, “stability will inspire confidence,” Hogan said. President Jalal Talabani said today that Iraq’s parliament will convene next week, for the first time since the vote.

HSBC entered the Iraq’s postwar banking sector with its 2005 purchase of a 70 percent stake in the Dar Es Salaam Investment Bank. HSBC may soon put its own brand on the business, Hogan said. The bank has wholesale, equity-broking, insurance and retail operations in Iraq, he said.

To contact the reporter on this story: Caroline Alexander in London at calexander1@bloomberg.net.

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