(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of Arab Banking Corporation (Bank ABC Jordan) at ‘B+’ and ‘B’, respectively. At the same time, CI Ratings has affirmed Bank ABC’s Bank Standalone Rating (BSR) of ‘b+’, Core Financial Strength (CFS) rating of ‘bb+’, and Extraordinary Support Level (ESL) of High. The Outlook for the LT FCR and BSR is Stable.
CI’s ESL assessment does not result in any uplift for the Bank’s LT FCR because the BSR is already at the sovereign level. The likelihood of extraordinary support in the event of need is deemed to be high in view of the Bank’s strong ownership and the high probability of support from Bahrain-based parent, Bank ABC, in the event of need. CI believes the willingness of the government to provide support remains high, however there is some uncertainty with regard to its financial capacity, as indicated by Jordan’s sovereign ratings (‘B+’/‘B’/Stable).
Bank ABC Jordan’s FCRs remain constrained by the ratings assigned to the sovereign, reflecting the Bank’s base of operations in Jordan and its relatively high exposure to Jordanian sovereign debt. The Bank’s BSR is based on a CFS rating of ‘bb+’ and an OPERA of ‘b+’, and is constrained by sovereign risk factors. OPERA takes into account both current and projected economic and financial conditions in Jordan, as well as the strengths and weaknesses of the banking sector.
The ratings are supported by the Bank’s solid capitalisation, more than full loan loss reserve (LLR) coverage of NPLs, and comfortable liquidity despite the recent tightening of some loan-based ratios. The ratings are constrained by the Bank’s small size and relatively limited market share, and resultant high concentrations in both the loan book and the customer deposit base. These factors elevate credit and liquidity risks, respectively. In that regard, the NPL ratio rose to above sector average in 2019, following the classification of a very large borrower in the construction sector. Also constraining the ratings is the sharp decline in net profitability, pressured by elevated risk charges coupled with lower than sector average net interest margin (NIM) and non-interest income (non-II). Furthermore, the difficult operating environment aggravated by the effects of Covid-19 and ongoing high geopolitical risks in the broader region weigh on the Bank’s ratings.
Bank ABC Jordan ranks among the smaller institutions operating in Jordan’s crowded banking system, resulting in rather high concentrations in both assets and liabilities. The Bank is however a prudent and well-managed institution and this has enabled it to weather the ongoing economic slowdown in Jordan better than many of its peers. The Bank’s overall sound financial profile evidences conservative risk management practices, derived from its parent ABC. Despite a setback in loan asset quality and profitability in 2019 and into H1 20, the Bank continues to exhibit satisfactory and in some areas very sound key financial indicators.
CI considers Bank ABC’s asset quality to be satisfactory, as indicated by the maintenance of full LLR coverage in recent years, together with a moderate NPL ratio (despite slightly surpassing the sector average in 2019). In view of the rapidly deteriorating economic environment in Jordan, additional NPL growth is not to be ruled out in the near term particularly given the moderately high level of stage 2 loans. In mitigation, despite moderate operating profitability the Bank’s loss absorption capacity is sound, reflecting a solid CAR. Asset quality continues to be impacted by the high concentration to individual borrowers which in turn exacerbates credit risk. This has indeed been a source of high NPL accretion in 2019 and to some extent in H1 20, after the classification of two large loans. Similarly, concentration in low-rated Jordanian government securities is very high and equivalent to almost 2 times the Bank’s equity, although this is a common phenomenon observed in almost all local banks.
Meanwhile, the Covid-19 pandemic has added a threat to Jordan’s already low economic growth potential. Although the authorities have gradually eased lockdown restrictions, GDP will be adversely impacted on both the demand and supply sides this year. Potential GDP growth might also settle at a lower level for some time after the pandemic is brought under control. As a result of the economic contraction, the reduction in incomes and business turnover is expected to negatively impact loan asset quality. In mitigation, the steps taken by the Central Bank of Jordan (CBJ), including reducing the benchmark interest rate and relaxing lending, as well as rules on loan restructuring, are expected to moderate the impact of Covid-19 on the economy and minimise asset quality erosion in the banking system. Bank ABC Jordan is expected to benefit from the aforesaid measures.
Despite a marginal recovery in H1 20, operating profitability weakened over the last four years and currently provides moderate loss absorption capacity. CI expects the currently weak ROAA to remain under pressure due to projected high provision charges, as further NPL growth is likely given the deteriorating operating environment. Although there is no undue reliance on volatile sources of revenue, earnings strength and sustainability are weak due to a lower than sector average NIM derived from a relatively high funding cost, relatively low non-II generation, and quite significant provision needs. CI expects further pressure on earnings in the near term.
Although some key loan based funding metrics are tight, Bank ABC’s solid capitalisation is a mitigating factor. In view of the Bank’s relatively small customer deposit franchise – that in turn produces significant depositor concentration – reliance on wholesale funding is relatively high. Liquidity ratios, however, remain comfortable reflecting a prudent asset allocation policy, with the majority of liquid assets comprising Jordanian government securities. While the latter are not traded in an active market, they are repoable with the CBJ and other local banks and constitute an important source of liquidity. Bank ABC Jordan also benefits from access to funding from its parent in Bahrain and other affiliated entities, and at rather competitive rates.
CI considers Bank ABC’s capital position to be solid and a key supporting factor for the ratings. The Bank’s CAR which consists almost entirely of CET 1 provides a sound buffer against unforeseeable losses, particularly in view of the rapidly deteriorating environment in Jordan and prevailing high credit risk. Capital adequacy also benefits from the lower risk weight assigned to the relatively high proportion of consumer loans, including residential mortgages. Although the Bank has reduced the amount of cash dividends paid to shareholders in recent years, and declared no cash dividends in respect of 2019 net profit, internal capital generation remains low, hampered by weakened profitability.
Rating Outlook
The Stable Outlook on the Bank’s LT FCR and BSR reflects CI’s expectation that the ratings are not likely to change over the next 12 months. Nonetheless, CI notes that the CFS is increasingly pressured by the sharp fall in net profit and ROAA and to a lesser extent operating profitability. In view of the negative effects that Covid-19 will most likely have on the Jordanian economy coupled with increased credit risks, further growth in NPLs and the ensuing effects of higher provisioning on profitability are likely to exert downward pressure on the CFS.
Rating Dynamics: Upside Scenario
For the FCR and BSR to rise by one notch, CI’s assessment of Jordan’s sovereign risk would have to improve, however this is not likely in the short term.
Rating Dynamics: Downside Scenario
A one notch reduction in the Bank’s BSR and FCR would require a downward revision of sovereign and broader operating environment risks.
Contact
Primary Analyst: George Panayides, Senior Credit Analyst; E-mail: george.panayides@ciratings.com
Secondary Analyst & Committee Chairperson: Morris Helal, Senior Credit Analyst
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