Cairo Amman Bank’s Ratings Affirmed

(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 Cairo Amman Bank (CAB) at ‘B+’ and ‘B’, respectively. At the same time, CI Ratings has affirmed CAB’s Bank Standalone Rating (BSR) of ‘b+’, Core financial Strength (CFS) rating of ‘bb’, and Extraordinary Support Level (ESL) of Moderate. The Outlook for the LT FCR and BSR is Stable.

The ESL assessment of Moderate does not result in any uplift for the Bank’s LT FCR because the BSR is already at the sovereign level (‘B+’/‘B’/Stable). While CI believes the willingness of the government to provide support remains high, its financial capacity is deemed moderate, as indicated by Jordan’s sovereign ratings. CAB’s FCRs remain constrained by the ratings assigned to the sovereign, reflecting its base of operations in Jordan and high exposure to Jordanian sovereign debt.

The Bank’s BSR is based on a CFS rating of ‘bb’ and an Operating Environment Risk Anchor (OPERA) of ‘b+’. 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 ample liquidity, sound CAR and satisfactory loan asset quality. Also supporting the ratings is the recovery in net profit and ROAA in H1 21. The ratings are constrained by the challenging operating environment in Jordan and Palestine together with ongoing high credit and geopolitical risks in the broader region, and by the very high concentration in Jordanian government paper that is equivalent to a multiple of CAB’s equity. Concentration by borrowers also remained relatively high, and this factor aggravated growth in NPLs in 2020 due to the classification of a large obligor in the industrial sector.

CAB has an established retail business franchise, aided by its extensive nationwide branch network in Jordan. The Bank also operates a relatively large branch network in Palestine, including an Islamic subsidiary Safa Bank (SB) established in 2016. While CAB foresees further rapid growth for Islamic banking in Palestine – as indicated by SB’s rapid expansion since creation – Palestinian branches act primarily as deposit takers, as the credit policy in Palestine remains very cautious in view of the prevailing difficult environment. As such, despite flat growth in customer deposits in H1 21, CAB’s balance sheet remains very liquid, 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 Central Bank of Jordan (CBJ) and other local banks, and constitute an important source of liquidity. Relatively cheap and granular retail customer funds continued to contribute a major share to total customer deposits, leading to a comparatively low funding cost. However, operating costs are relatively high due to the effect of running a large branch network. While CAB’s utilisation of wholesale funding (including interbank deposits) remained relatively high after increased utilisation of CBJ funding – in common with almost all Jordanian banks after the onset of the pandemic – this was more than offset by the significant holdings of liquid assets.

Growth in NPLs - stage 3 loans accelerated in 2020 mainly due to the classification of a large obligor in the industrial sector, increasing the NPL ratio to a level slightly below the sector average. Similarly, stage 2 loans also rose considerably (in common with almost all Jordanian banks), reflecting the deteriorating operating conditions and elevated credit risk in Jordan and Palestine due to the pandemic. In response, CAB transferred a much larger portion of operating profit to provisions, improving loan loss reserve (LLR) cover to a sound level in H1 21. On a positive note, renegotiated credits remained rather low, while the NPL ratio edged lower in H1 21, assisted by settlements and loan rescheduling. Management expects the NPL ratio to rise only marginally at year end 2021, benefiting from ongoing capital repayment holidays that were introduced by the CBJ at the onset of Covid-19.

However, in CI’s opinion the steps taken by the CBJ, including relaxing lending criteria (as well as granting repayment holidays for all borrowers - extended until December 2021 for affected sectors) and easing rules on loan restructuring, have (more than likely) masked asset quality erosion in the banking system. Therefore, further NPL growth in the short term cannot be ruled out as and when these forbearance measures end. CAB’s loan asset quality is also impacted by moderately high borrower concentrations, which in turn exacerbates credit risk.

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 almost all Jordanian banks.

Supported by a lower funding cost, increased net interest margin and higher non-interest income coupled with sound operating expenses control, operating profitability recovered firmly in H1 21, strengthening the Bank’s loss absorption capacity. This improvement also helped net profit and ROAA rebound in H1 21, although risk charges continued to erode a significant part of operating profit. CI expects ROAA to remain under pressure due to high provision charges, as renewed growth in NPLs cannot be ruled out given the challenging operating environment in Jordan and Palestine.

CI considers CAB’s capital position to be very sound, and not impaired by unprovided NPLs. The Bank’s CAR, which consists almost entirely of loss-absorbing CET1, provides a sound buffer against any unforeseeable losses, particularly in view of the prevailing high credit risk in Jordan and Palestine. Internal capital generation turned negative in H1 21, following the resumption of a large cash dividend payment. Although profitability improved in H1 21, the rate of internally generated capital for the full year will depend on the size of declared cash dividends.

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. While provisioning will probably erode a considerable part of operating profit putting pressure on earnings, the Bank’s sound CAR and ample liquidity together with improved operating profitability are mitigating factors.

Rating Dynamics: Upside Scenario

For the LT FCR and BSR to rise by one notch, CI’s assessment of sovereign risk factors would have to improve. Such a reassessment is not likely in the short term.

Rating Dynamics: Downside Scenario

A one notch reduction in the Bank’s LT FCR and BSR would require a downward reassessment of sovereign and broader operating environment risks. Furthermore, any further significant increase in exposure to Palestine may exert downward pressure on the BSR. Downward pressure on the CFS would most likely be exerted if NPLs increased significantly, which would, in turn, erode profitability (and possibly capital adequacy) 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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