The UK’s HSBC is reviewing its operations in Iraq and could look at selling its 70 per cent stake in the local Dar Es Salaam Investment Bank. The potential sale is part of a wider review of its regional business that will result in the bank focusing on higher growth markets.

HSBC bought into Dar Es Salaam in 2005, acquiring a 70 per cent stake from the local investment holding firm, Asad Khudairy Group, which still owns the rest of the bank. The UK lender is understood to now be in talks with the company about selling the stake back to them.

Potential buyer

“We only want to stay in markets where we can earn at least $100m a year, and Iraq just isn’t a market where we can do that,” says one source at the UK lender.

Another source in Iraq confirms that a sale is on the cards, and the Khudairy Group has been identified as a potential buyer. The source adds that the sale has been under consideration since late 2012.

When it acquired the stake in Dar Es Salaam Investment Bank in 2005, HSBC was one of the first international banks to establish a presence in the country, which was still struggling in the aftermath of a US-led invasion that overthrew former ruler Saddam Hussein.

Iraq’s vast oil wealth and plans to invest billions of dollars in new infrastructure to rebuild the country and boost oil production fuelled hopes that it would become a lucrative market for international banks. However, continued security problems and the government’s failure to meet its investment promises have caused increasing frustrations within Iraq’s business community.

Speaking at a presentation in Dubai on 21 April, Simon Cooper, the UK bank’s chief executive officer for the Middle East and North Africa, said of Iraq: “It is a market we continue to review.” He declined to comment further.

“HSBC is reviewing it – that means whether to keep it or not,” added Georges Elhedery, head of global markets at the bank at the same presentation.

Since 2011, HSBC has embarked on a strategic review of many of its businesses, resulting in the sale or closure of 47 of its operations. In assessing these, the bank applies six filters, including scale in the market, profitability, a financial crime risk assessment, and whether it provides funding to the wider HSBC group.

Local competition

Although Iraq offers great potential, sources close to HSBC say the bank has become increasingly frustrated with the difficulties of doing business in the country. One source close to the situation says although a sale looks increasingly likely, the Iraqi authorities are keen for the bank to remain in the country.

Two state-owned banks, Rafidain Bank and Rasheed Bank, dominate Iraq’s financial sector and make it difficult for private-sector banks to compete. Although the Central Bank of Iraq says 15 foreign banks are licensed to operate in the country, none of them match the scale of the publicly owned ones.

The UK’s Standard Chartered says it plans to open three branches in Baghdad, Erbil and Basra over the next 18 months, and it will be the only international bank operating in Iraq under its own name.

In contrast to it Iraq review, HSBC remains committed to markets such as Egypt, despite continued political instability and a weak economy. Cooper said Egypt was enduring “bumps in the road” on its transition to democracy, but that HSBC was continuing to invest. Its other main priorities in the region are the UAE, Qatar, Oman and Saudi Arabia.

HSBC hopes to capitalise on rising infrastructure spending and the increasing shift towards funding projects through the capital markets. “Continued growth in infrastructure spending will be a key theme in the region and it will further develop into an enabler of the capital markets,” said Cooper.