Bank ABC Jordan’s Ratings Affirmed with a Stable Outlook

(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 Jordan (Bank ABC) 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. While CI believes the willingness of the government to provide support remains high, its financial capacity is considered moderate, as indicated by Jordan’s sovereign ratings (‘B+’/‘B’/Stable).

The Bank’s FCRs remain constrained by the ratings assigned to the sovereign, reflecting its base of operations in Jordan. The BSR is based on a CFS rating of ‘bb+’ and an Operating Environment Risk Anchor (OPERA) of ‘b+’, and is also 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 key loan-based ratios. Also supporting the ratings is the recovery in both operating and net profitability in H1 21, assisted by an improved net interest margin (NIM), sound cost containment and lower provisions. 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. Consequently, net profitability declined to very low levels in those years after stepping-up provision charges substantially. The ratings are also constrained by the very high concentration in Jordanian government paper, and the challenging operating environment in Jordan coupled with ongoing high credit and geopolitical risks in the broader region.

Bank ABC ranks among the smaller institutions operating in Jordan’s crowded banking system, resulting in rather high concentrations in both assets and liabilities. However, it is a prudent and well-managed institution and this has enabled it to weather the ongoing economic slowdown in Jordan (including the economic contraction in 2020 due to Covid-19) better than many of its peers. The Bank’s overall sound financial profile evidences conservative risk management practices derived from its supportive parent. Despite a setback in loan asset quality and profitability in 2019 and into 2020, 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 sustained enhancement of already more than full LLR coverage, coupled with a moderate NPL ratio (despite slightly surpassing the sector average). In view of the challenging operating environment in Jordan, further NPL growth is not to be ruled out in the near term, particularly as and when the forbearance measures of the Central Bank of Jordan (CBJ) end in December 2021. The steps taken by the CBJ, including relaxing lending criteria (as well as granting repayment holidays to all borrowers - extended until December 2021 for affected sectors) and easing rules on loan restructuring are likely to have masked asset quality erosion in the banking system. In mitigation, the Bank’s loss absorption capacity is sound, reflecting a solid CAR and more recently improved operating profitability. Asset quality continues to be impacted by the high concentration to individual borrowers, which in turn aggravates credit risk. This has indeed been a source of high NPL accretion in 2019 and 2020, after the classification of three large loans in the construction and industrial sectors. Similarly, concentration in low-rated Jordanian government securities is high and equivalent to almost 2 times the Bank’s equity, although this is a common occurrence observed at almost all local banks.
 
The Covid-19 pandemic has added a threat to Jordan’s economic growth potential. Although the authorities have eased lockdown restrictions, GDP was adversely impacted in 2020 and into the current year. Real 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 has negatively impacted the asset quality of all Jordanian banks.

Supported by a lower funding cost and increased NIM coupled with sound cost control, operating profitability recovered in 2020 and into H1 21, helping improve the Bank’s satisfactory loss absorption capacity. This improvement also helped net profit and ROAA rebound solidly in H1 21, also assisted to a large extent by much lower provision charges. CI expects ROAA to remain under pressure due to high provision charges as further growth in NPLs cannot to be ruled out due to the reasons already mentioned above.

Although the loan to deposit ratio worsened in 2020 and H1 21, as loan expansion surpassed customer deposit growth, the net loans to stable funds ratio remained very sound reflecting Bank ABC’s solid capitalisation. Reliance on wholesale funding is relatively high in view of the Bank’s comparatively small franchise – the latter also produces high depositor concentration. Liquidity ratios however remain very comfortable, reflecting a large stock of liquid assets, a vast majority of which comprises 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 part of liquidity. Bank ABC also benefits from access to funding from the parent Bank in Bahrain and other affiliated entities, and at rather competitive rates, although utilisation of such funding has decreased considerably in recent years.

Bank ABC’s capital position remains solid and continues to strongly support the ratings. The Bank’s CAR, which is one of the sector highest and consists almost entirely of CET 1, provides a good buffer against any unexpected losses, particularly in view of the worsened economic 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. The rate of internally generated capital has been low in recent years, hindered by weakened profitability, and despite some recovery in H1 21 it is expected to remain at best moderate as the Bank will most probably resume the payment of cash dividends in 2022.

Rating Outlook

The Stable Outlook on the Bank’s LT FCR and BSR indicates that the ratings are unlikely to change over the next 12 months. It also reflects our expectation that the Bank will maintain its currently very sound liquidity and capital buffers.

Rating Dynamics: Upside Scenario

For the LT FCR to rise by one notch, Jordan’s sovereign ratings would have to improve. Such an improvement is not likely in the short term.

Rating Dynamics: Downside Scenario

Although not our current expectation, a downgrade of Jordan’s sovereign ratings would have a corresponding effect on the Bank’s LT FCR and BSR. The Bank’s CFS could be lowered if loan asset quality deteriorates, which in turn would put pressure on profitability through elevated provision charges.

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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