Jordan Ahli 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 Jordan Ahli Bank (JAB) at ‘B+’ and ‘B’, respectively. At the same time, CI Ratings has affirmed JAB’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 remains Stable.

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. Our 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 moderate. 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 ratings are constrained by the challenging operating environment in Jordan and Palestine – with economic conditions aggravated by Covid-19 – together with ongoing high credit and geopolitical risks in the broader region. Non-performing loans (NPLs) grew significantly in 2020 after the onset of the pandemic to a level that was just slightly above the sector average. In response, management stepped-up provisions which had the effect of reducing net profit and ROAA to a low level. Also constraining the ratings are the very high concentration in Jordanian government paper – in common with most local banks – that is equivalent to a multiple of JAB’s equity, as well as the relatively high related party lending. Despite a mild recovery in H1 21, profitability remains modest, reflecting elevated risk charges and to a lesser extent a high cost base. This factor continues to weigh on the ratings. The Bank’s ratings are nevertheless supported by ample liquidity, the sound CAR, and its long-established franchise in Jordan.

JAB ranks seventh in terms of total assets, customer deposits and net loans in Jordan’s crowded and highly competitive banking system, and sixth among conventional banks, commanding significant market shares in loans and customer deposits. The Bank operates a well-established business franchise in the local market with a focus on commercial banking, while its presence in Palestine and Cyprus diversifies the risk profile to a modest degree. Although the planned expansion in Palestine would leverage the unutilised capital and in turn increase operating profit through economies of scale, this strategy entails risks given the very difficult operating environment in Palestine. Despite the focus on corporate banking, the Bank has been careful to avoid high borrower concentrations, while on the liability side the very large proportion of retail customer deposits bestows JAB’s funding profile with high granularity.

After a decline in 2019, growth in NPLs (net of interest in suspense) accelerated in 2020 amid the global pandemic mainly due to the classification of a large obligor in the industrial sector, increasing the NPL ratio to a level slightly above the sector average. Similarly, stage 2 loans also rose considerably in H1 21 – in common with almost all Jordanian banks – reflecting the deteriorating operating conditions in Jordan and Palestine and ongoing high credit risks amid the pandemic. In response, JAB transferred a much larger part of operating profit to provisions in 2020 and H1 21, enhancing loan loss reserve (LLR) coverage to a satisfactory level. On a positive note, renegotiated credits remained rather low, while the NPL ratio edged lower in H1 21, assisted by loan rescheduling and, to a lesser extent, settlements and collections. Although related party lending was fairly high in relation to total equity, all exposures are currently performing.

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. Given the economic contraction, the reduction in incomes and business turnover has negatively impacted the asset quality of all Jordanian banks. Meanwhile, the measures taken by the Central Bank of Jordan (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, are likely to have masked asset quality erosion in the banking system.

Reflecting management’s ongoing efforts to reduce the relatively high cost base − and at the same time safeguarding net interest margin at a level above the sector average through optimising funding cost − operating profitability improved to an adequate level H1 21 and provided a better cushion for absorbing unexpected losses. Although there is no undue reliance on volatile sources of revenue, earnings strength and sustainability are weak due to a still high cost base and rather significant provision charges. The latter will most likely remain significant in relation to operating profit, or may even have to be stepped up further in the near term given that further NPL growth cannot be ruled out once the CBJ’s loan payment deferral programme ends in December 2021.

JAB continues to boast very sound funding metrics, despite a minor tightening in some key ratios as loan growth outpaced customer deposits growth in H1 21. While borrowings rose significantly in 2019 and 2020 – mainly through increased CBJ repo funding in common with many Jordanian banks – reliance on wholesale funding remained modest, indicating moderate refinancing risk. At the same time, liquidity ratios remain very comfortable, underpinned by a large stock of Jordanian government securities and, to a lesser extent placements, with banks and the CBJ. Though the latter are not traded in an active market, they are repoable with the CBJ and other local banks and therefore constitute an important source of liquidity.

CI considers JAB’s capital position to be sound and not impaired by unprovided NPLs. The Bank’s CAR, which consists almost entirely of loss-absorbing CET-1, provides a satisfactory buffer against any unforeseeable losses, particularly in view of the prevailing high credit risk in Jordan and Palestine. Due to its material overseas exposure in Palestine, JAB has to maintain an extra buffer of 2% over the 12% regulatory minimum. However, internal capital generation is low, hampered by low profitability and the resumption of cash dividend payment.

Rating Outlook

The Stable Outlook reflects CI’s expectation that the ratings are unlikely 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 are mitigating factors.

Rating Dynamics: Upside Scenario

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

Rating Dynamics: Downside Scenario

Apart from the possibility of a downward assessment in Jordan’s sovereign ratings, the Bank’s BSR and LT FCR could also be lowered in the event of a significant deterioration in asset quality and consequent pressure on profitability and capital adequacy through elevated provision charges.

Contact

Primary Analyst: George Panayides, Senior Credit Analyst; E-mail: george.panayides@ciratings.com
Secondary Analyst and Committee Chairperson: Morris Helal, Senior Credit Analyst

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