HSBC Holdings is struggling to exit its Iraqi operations, having had two proposals to sell its stake in Dar Es Salaam Investment Bank (DES) rejected by the country’s regulator, according to the Iraq Securities Commission (ISC).
The saga underlines the risks for international firms of doing business in Iraq, where a complex regulatory and political environment, as well as security worries, can offset the attractions of rapid economic growth fuelled by oil production.
HSBC said last month that it was exploring options to dispose of its 70.1% holding in the Iraqi bank, following a strategic review by the international lender.
DES, which focuses on corporate and consumer banking and has eight branches in Iraq, has been linked to HSBC since October 2005. Its shares last traded at 1.36 dinars, down 63% from this year’s high, which was hit in January, and far below levels around 6dinars in 2011. The current market price values HSBC’s stake at about 100bn dinars ($86mn).
In a statement, DES chairman Asad al-Kudhairi said there had been problems which delayed the sale of HSBC’s stake, adding that the ISC objected to HSBC selling at a value significantly below the market price.
HSBC’s previous proposals to sell its stake in DES were not approved by the ISC because they contradicted Iraqi financial regulations, the regulator said.
“HSBC first proposed abandoning its stake in DES to Iraqi investors. We asked them the reason for abandoning its stake and the mechanism for transferring the stake, but they never returned with answers,” ISC chairman Abdul Razzak al-Saadi told Reuters.
One of HSBC’s proposals was for it to sell its DES shares at a nominal price of one Iraqi fils (a thousandth of a dinar) each, but HSBC officials did not explain why the bank wanted to do this, the regulator added.
He did not elaborate on the ISC’s objections to HSBC’s proposals.
An HSBC spokesman told Reuters that any decision on the disposal would be made in line with legal and regulatory requirements. He declined to comment further on the situation in Iraq, saying the bank did not comment on transactions or regulatory matters.
DES posted a net profit of 12.06bn dinars on revenue of 33.64bn dinars in 2011, the latest period for which data is available, according to Zawya, a Thomson Reuters company.
A DES spokesman blamed this year’s slide in its share price mainly on “tough hurdles placed by the regulator in the way of HSBC selling its stake in the bank”.
The delays to the sale appear to have held up a capital-raising by DES. The central bank has been pressing Iraqi banks to boost their capital, and asked DES to increase its capital to 250bn dinars from 105bn dinars by the end of June this year, the spokesman said.
“Considering HSBC’s plan to sell its stake, the central bank of Iraq agreed to extend the deadline for Dar Es Salaam until it sorts out this issue with HSBC,” he said.
As part of a three-year global restructuring, HSBC has cut its retail banking business in some Middle Eastern nations and merged its operations in Oman with a local bank. It has also scaled back its Islamic banking operations.