4th July 2024 in Ahmed Tabaqchali, Investment
By Ahmed Tabaqchali, Chief Strategist of AFC Iraq Fund.
Any opinions expressed are those of the author, and do not necessarily reflect the views of Iraq Business News.
An Unfolding Structural Economic Transformation
The equity market, as measured by the Rabee Securities U. S. Dollar Equity Index (RSISX USD Index), was down 1.7% in June and up 12.5% for the year.
The market's decline for the month is a continuation of the profit-taking seen after hitting a multi-year high in late April 2024; while there is the potential for continued profit-taking bouts especially with the onset of the slow summer months, these should take place within the market's current multi-month uptrend in the same way that they did over these months (chart below).
Rabee Securities U.S. Dollar Equity Index
(Source: Iraq Stock Exchange, Rabee Securities, AFC Research, daily data as of June 30th June)
The latest annual data from the Central Bank of Iraq (CBI) on the adoption of banking support the assertion -made here most recently in "What Next After a Gangbuster Year ???"- that significant fundamental developments are underway that promise to accelerate the adoption of banking and bring about a transformation of the sector and its role in the economy.
The first evidence of these fundamental developments were seen in the acceleration in the growth in net profit and equity values for the country's top banks -four of which are among the RSISX USD Index's major constituents- which translated into a stellar 2023 for these banks as reviewed in "Banks end the Year with a Bang".
The CBI's data* show that this acceleration in banking adoption was accompanied by significant increases in 2023 over 2022 in the number of bank account openings; issuance of bank cards (pre-paid, debit and credit) and e-wallets; and installations of point-of-sale terminals (POSs) and automated teller machines (ATMs).
Specifically, in 2023 the total number of bank accounts, bank cards, and e-wallets increased year-over-year by 51.1%, 21.9%, and 67.7% respectively (chart below). These increases build upon the year-over-year growth that started in 2018, as the banking sector's recovery got under-way following the twin crisis of the ISIS conflict and the fall in oil prices in 2014-2017 that devasted the sector as discussed in "Private Sector Deposit & Loan Growth Continues".
Number of Bank Accounts, Bank Cards, and E-wallets 2017-2023
(Source: CBI, AFC Research, data as of end of 2023)
The significance of the increases in the numbers of bank accounts, bank cards, and e-wallets lies in their performing banking transactions, through the use of ATMs and crucially POSs, in increasing the usage of the banking system as a means of payments instead of cash. ATMs and POSs had explosive growth in 2023 over 2022 (chart below) -albeit from a very small base in the prior years in which banks played a distant second fiddle to cash in settling transactions.
In 2023 the total number of ATMs increased by 80.9% as banks expanded their networks, and the total number of POSs increased by 115.2% spurred by the government's and the CBI's initiatives and measures for the use of the banking system as means of payments in settling transactions instead of cash.
ATMs and POSs (2017-2023)
(Source: CBI, AFC Research, data as of end of 2023)
The increase in the number of bank accounts, bank cards, e-wallets, ATMs, and POSs in 2023 spurred significant growth, year-over-year and month-over-month, in the monthly values of Iraqi Dinar (IQD) transactions through cards and e-wallets (chart below). These build upon the trends that started in 2018, then boosted by the changes in consumer behaviours for the preference of cashless transactions following the onset of COVID-19 as happened elsewhere in the world.
Card and E-wallet Monthly IQD Transactions
(Source: CBI, AFC Research, data as of end of April 2024)
All of these positive developments are at the early stages of the transition to the use of the banking system in the payments for transactions instead of cash, and while they are from a small base, the trends are clear and mirror, with a time-lag, those that took place elsewhere in emerging and frontier economies. As such, they reflect an unfolding long-term structural economic transformation that is taking place which has lasting positive implications for the country's banking sector -which should disproportionally benefit the top banks.
Over time, this structural economic transformation, will enhance the new normal for the top banks' growth profile that was discussed in "Banks end the Year with a Bang", which will be marked by an increased adoption of banking and of formality, coupled with a move away from the dominance of cash and informality.
Such developments that the investment thesis for the banking sector contends would come with growth in bank lending, resulting in an expansion of the money circulating in the economy and consequently an increase in non-oil GDP. Over time, the banks' net profits should grow substantially, and ultimately feed into higher stock market valuations driven by both net profit momentum and increases in market multiples placed upon these net profits.
The equity market, as measured by the Rabee Securities U. S. Dollar Equity Index (RSISX USD Index), which by the close of the month is 17.0% below its 2014 peak, has the potential to regain that peak and to rally further, reflecting the developments discussed above. However, significant risks remain given Iraq's recent history of conflict, extreme leverage to volatile oil prices, as well as the risks that the widening of the current Middle East conflict will not be contained and evolve to destabilise the region.
Notes
(*) The CBI's data on the number of bank account openings represent the total number of bank accounts that is made up of company accounts, current accounts, deposit accounts, and savings accounts, however, they don't provide granularity as to the growth of unique accounts. Of total cards outstanding by end of 2023, 66.5% were pre-paid cards which were up 18.5% year-over-year, 32.8% were debit cards which were up 16.3% year-over-year; and 0.6% were credit cards which were up 106.3% year-over-year.
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For those that have questioned, as to what to do now or after Iraq has a REER applied, Rabee Securities is a place one may want to start looking. Here is a strong layout of what may be expected to be a reality for Iraq's banking sector. Seeking professional advice is always a good start. Militia Man & Crew welcome everone to our Forum and our vibrant DISCORD chat room. See you there. ~ MM |
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