FINANCIAL INSTITUTIONS

SECTOR IN-DEPTH Banks – Iraq

21 December 2023
Macro profile – Very Weak -
Banks in Iraq (Caa1 stable) operate in an environment of moderate economic strength,
combined with very weak institutional strength and susceptibility to adverse events. Several
years of armed conflict have weighed on the economy and prevented it from reaching its
potential. Endemic corruption, a lack of transparency and poor public services delivery have
contributed to deep public dissatisfaction with the authorities. The political situation is
Contacts
complex, and domestic and geopolitical risks are relatively closely intertwined, reflecting
Ashraf Madani +971.4.237.9542
VP-Sr Credit Officer
ethnic and sectarian tensions and Iraq's location in an unstable region. The banking sector
[email protected] remains largely basic and heavily concentrated in public or government-owned banks, which
Azhar Bouzidi +971.4.503.9835
control 81% of total assets. Credit to the private sector remained low at 9% of GDP as of
Ratings Associate December 2022, with ample room to grow should the operating environment and legal
[email protected] conditions improve. We make a -1 adjustment to our industry structure score to capture the
Constantinos +357.2569.3009 large number of privately owned banks in the country, which results in a highly fragmented
Kypreos banking sector. Funding conditions remain largely favourable. Banks are deposit-funded, with
Senior Vice President
no reliance on market or external funding.
[email protected]
Henry MacNevin +44.20.7772.1635 These drivers result in a Very Weak - macro profile for Iraq.
Associate Managing Director
[email protected] Exhibit 1
Arriving at Iraq's macro profile
CLIENT SERVICES
Americas 1-212-553-1653
Asia Pacific 852-3551-3077
Japan 81-3-5408-4100
EMEA 44-20-7772-5454

The macro profile is a rating input used to determine each bank’s Baseline Credit Assessment. It is designed to capture the
systemwide factors that are predictive of the propensity of banks to fail. For more information, please consult Moody’s Banks
Methodology.
Source: Moody's Investors Service
 MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Economic strength: ba2

Our assessment balances Iraq's size and ample natural resources endowment against its volatile economic growth, inadequate
infrastructure and the economy's lack of diversification. The downward adjustment from the initial score of “baa3” reflects the damage
caused to Iraq's productive capacity and infrastructure by several years of armed conflict. This conflict has limited the economy's
competitiveness and flexibility, and constrained its capacity to grow more rapidly and diversify away from its high concentration in the
oil and gas sector. The country's hydrocarbon wealth remains underexploited because of many years of armed conflict, international
sanctions and an inadequate level of investment in the oil and gas sector. Infrastructure and technology constraints prevent Iraq from
taking full advantage of its natural resources wealth, limiting its oil production capacity to below 5 million barrels per day. Moreover,
the Iraqi economy's heavy reliance on this sector exposes it to significant carbon transition risk as the global economy moves to reduce
its carbon emissions.

Exhibit 2
Economic strength

Source: Moody's Investors Service

Institutions and governance strength: caa3

Our assessment reflects Iraq's significant institutional challenges and very weak policy effectiveness. The quality of Iraq's institutions
is very poor, highlighted by Iraq's very weak performance in the Worldwide Governance Indicators (WGI). Endemic corruption, a lack
of transparency at every level of the government and poor public services delivery have contributed to deep public dissatisfaction
with the authorities. Many years of armed conflict have led to public underinvestment in basic physical and social infrastructure and
housing supply. This is partly because the government prioritised security spending and partly because of concerns over the potential
misappropriation of public funds. Corruption has also weakened the efficiency of the public services distribution system.

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the issuer/deal page on https://ratings.moodys.com for the
most updated credit rating action information and rating history.

2 21 December 2023 Banks – Iraq: Macro profile – Very Weak -

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Exhibit 3
Institutional strength

Source: Moody's Investors Service

Susceptibility to event risk: caa

Iraq’s very high level of political risk drives the caa assessment for susceptibility to event risk. The political situation is complex,
and domestic and geopolitical risks are relatively closely intertwined, reflecting ethnic and sectarian tensions and Iraq's exposure to
regional tensions. Delays in government formation, and widespread and violent protests against the lack of employment opportunities,
widespread corruption and poor delivery of public services have led to the crystallisation of the country's very high domestic political
risks. Iraq is also significantly exposed to multiple geopolitical risks, including rising geopolitical tensions in the Gulf. The country’s
susceptibility to rising geopolitical tensions is heightened by its extensive economic, military and political links with Iran even as the
government strives to maintain a good relationship with Saudi Arabia (A1 positive) and hosts US (Aaa negative) military bases on its
territory.

Credit conditions: No adjustment

Iraq's banking sector is small compared with the overall economy. As of December 2022, total banking sector assets amounted to
$138 billion, with loans constituting only 30% of total assets. Loan portfolios are largely concentrated in government and government-
related entities, which benefit from two thirds of total loans. The remaining 33% is extended to the private sector and largely
concentrated in the building, construction and society services sectors. Years of military conflict, very high political risks and a weak
legal environment have strained the Iraqi banking sector and prevented it from reaching its potential. Credit to the private sector
remains very low at only 9% of total GDP, with substantial room to grow should operating conditions improve significantly. Banks are
still hesitant to extend loans to the private sector, and private companies' access to financing remains very difficult because of the high
value of collateral requested by banks, high financing costs, or both. Nonperforming loans (NPLs) in the system have recently increased
on the back of weak operating conditions. The NPL ratio was around 19% as of 2022, up from 13% in 2016. However, the actual ratio
could be much higher because of the deviation in reporting from international standards for local financials in NPL classification and
provisioning. This is visible in the difference in the NPL ratios of public banks as opposed to private banks; the ratio is 25% for private-
sector banks and only 18% for public-sector banks. The difference reflects that past dues for loans to public entities are not recognised
as NPLs on public-sector banks’ books because of the inherent government guarantee for these loans. We make no adjustment for
credit conditions despite the challenges stemming from the small size of the banking sector's loan portfolio because Iraq's current Very
Weak - macro profile already captures these risks.

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Exhibit 4
Credit conditions

Source: Moody's Investors Service

Funding conditions: No adjustment

Banks in Iraq are self-funded, with deposits constituting around 73% of total liabilities as of December 2022. The funding is largely
domestic with no reliance on market or foreign funding. Public deposits account for a significant 57% of total deposits, which increase
event risk during times of lower oil prices (90% of government revenue is oil related). However, this risk is mitigated by the low credit
concentration in the system, reflected by a low loan-to-deposit ratio of 47% as of December 2022. On average, the liquid banking
asset-to-total asset ratio is about 49%, with most of these liquid assets being money placed with the central bank.

Industry structure: (-1)

There are 70 banks operating in Iraq, with seven being government-owned banks. The sector is largely dominated by these banks,
which account for around 81% of total assets. Public banks are largely undercapitalised and suffer from poor corporate governance,
inadequate risk management practices and lack of independence. Despite these legacy issues, they still have the leading market
share because of the government guarantee extended to the depositors of these banks. In addition, public banks still get preferential
treatment with regard to banking from government-related entities or projects initiated by the government.

A strengthening of the current weak legal governance and the credit bureau is a key driver for the growth of Iraq's banking sector. Such
actions will have banks relax their high collateral requirements and reduce finance cost for the borrower, which will increase credit
demand, especially from the small and medium-sized enterprise sector. The central bank is working on these initiatives, but work is still
in the early stages.

Although the number of private banks in Iraq is high and they are competing for the smaller share of the market, the system remains
largely underbanked. There are only four branches in Iraq per 100,000 adults, which is well below the MENA average of 13 (per the
World Bank). There are also only eight automated teller machines (ATMs) per 100,000 adults, much lower than the MENA average
(32 machines per 100,000 adults) and especially the Gulf Cooperation Council (50 machines per 100,000 adults). Nonetheless,
consolidation in the private banking space would certainly help strengthen the efficiency of these small banks and improve their
financial profiles and presence in the market.

In July 2023, some private banks in Iraq were banned from dealing in US dollars or accessing the US dollar sale window of the Central
Bank of Iraq. The ban relates to allegations about suspicious transactions conducted in 2022, which were in breach of US anti-money
laundering (AML) and combating the financing of terrorism (CFT) regulations. The banks are challenging these allegations and have

4 21 December 2023 Banks – Iraq: Macro profile – Very Weak -

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expressed readiness to undergo an audit. Consequently, the CBI adjusted the minimum capital requirements for banks from IQD250
billion to IQD400 billion by December 2024 in an effort to drive consolidation among smaller banks and bring more efficiency to the
system.

We make a -1 adjustment for industry structure to capture the large number of private banks in the country, which results in a highly
fragmented banking sector. The adjustment also takes into consideration the risk associated with the legal framework in Iraq, which is
still operating under legacy laws that require updating to protect banks, particularly with regard to execution and enforcement.

5 21 December 2023 Banks – Iraq: Macro profile – Very Weak -

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Appendix: Moody’s macro profiles

6 21 December 2023 Banks – Iraq: Macro profile – Very Weak -

 MOODY'S INVESTORS SERVICE FINANCIAL INSTITUTIONS

Source: Moody's Investors Service

7 21 December 2023 Banks – Iraq: Macro profile – Very Weak -

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Moody’s related publications

Credit Opinion:

» Government of Iraq – Caa1 stable, 29 November 2023

Methodology:

» Moody's Banks Methodology, 9 July 2021

To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this
report and that more recent reports may be available. All research may not be available to all clients.

8 21 December 2023 Banks – Iraq: Macro profile – Very Weak -

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REPORT NUMBER 1390548

9 21 December 2023 Banks – Iraq: Macro profile – Very Weak -

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Contacts CLIENT SERVICES

Ashraf Madani +971.4.237.9542 Constantinos Kypreos +357.2569.3009 Americas 1-212-553-1653

VP-Sr Credit Officer Senior Vice President
Asia Pacific 852-3551-3077
[email protected] [email protected]
Azhar Bouzidi +971.4.503.9835 Japan 81-3-5408-4100
Ratings Associate EMEA 44-20-7772-5454
[email protected]

10 21 December 2023 Banks – Iraq: Macro profile – Very Weak -