(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 LT FCR because the BSR is already at the sovereign level, and the Bank does not fulfil our criteria for being rated above Jordan’s ratings. Nevertheless, 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+’ (indicating high risk), and is also constrained by the Bank’s limited capacity to withstand sovereign-related stress. 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. In particular, our OPERA assessment reflects sluggish economic growth dynamics in Jordan, the economy’s high reliance on capital inflows to cover the chronic current account deficit, low monetary flexibility and substantial regional instability risks. On a positive note, it also takes into account the fact that the Jordanian banking sector exhibits very sound capital and liquidity buffers and has shown strong resilience amid the challenging operating environment in recent years.
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. 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. Loan asset quality suffered a setback in H1 22 and, as a result, net profitability weakened due to stepped up provision charges. Operating profitability also declined significantly due to lower operating income generation. The ratings are also constrained by the very high concentration in Jordanian government paper and the challenging operating environment in Jordan, aggravated by the effects of the Ukrainian war on the local economy.
Bank ABC ranks among the smaller-sized banks in terms of assets and customer deposits in the Jordanian domestic banking sector, resulting in high concentrations on both sides of the balance sheet. However, it is 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 satisfactory financial profile evidences conservative risk management practices developed in tandem with its supportive parent. Despite a setback in loan asset quality and profitability in recent years, 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 more than full LLR coverage together with moderate level of stage 2 loans. Nevertheless, the NPL ratio increased again to 7.8% in H1 22 – a level above the sector average of 5.5% – after the classification of a large borrower in the manufacturing sector. In response, management stepped up impairment charges significantly, maintaining more than full LLR cover. Management has informed CI that if the three largest (almost fully provisioned) NPLs were to be transferred off the balance sheet, the NPL ratio would decrease to a relatively low 4.8%, while LLR cover would strengthen to 112%, based on H1 22 figures. In view of the challenging operating environment, further NPL growth is not to be ruled out in the near term, particularly given that the Central Bank of Jordan’s (CBJ) forbearance measures expired at end-2021. The steps taken by the CBJ, including relaxing lending and restructuring criteria (as well as granting repayment holidays to all borrowers for affected sectors) are likely to have masked asset quality erosion in the banking system. In mitigation, the Bank’s loss absorption capacity is sound, reflecting strong LLR cover and a solid CAR. 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 recent years. Similarly, concentration in low-rated Jordanian government securities is high and equivalent to almost double the Bank’s equity, although this is a common occurrence observed at almost all local banks.
Operating profitability weakened significantly in H1 22, hampered by lower net interest income (NII), and a decline in non-interest income (non-II; mainly fees and commissions). The former decreased moderately as a result of higher suspended interest on new classified loans, together with pressure on net interest margin (NIM). Consequently, at an annualised 1.0% of average total assets (ATA) the Bank’s loss absorption capacity is now considered merely adequate. At the net level, profitability also decreased to a low level, dragged down by the 32% decrease in operating profit and elevated loan loss impairments. CI expects ROAA to remain under pressure due to high provision charges as further growth in NPLs cannot to be ruled out.
Although the loan to deposit ratio tightened in 2021 and H1 22 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 continues to benefit from access to funding from its parent bank in Bahrain and other affiliated entities, and at rather competitive rates. While utilisation of such funding has decreased considerably in recent years, the availability of such lines provides a good buffer in times of stressed liquidity.
Bank ABC’s capital position remains solid with this factor firmly supporting the ratings. The Bank’s CAR, which is one of the sector highest and consists almost entirely of loss-absorbing CET 1, provides a good buffer against any unexpected losses, particularly in view of the challenging economic environment and prevalent high credit risk. Capital adequacy also benefits from the low risk weight assigned to the relatively high proportion of consumer loans, including residential mortgages. Capital flexibility is good, underpinned by the willingness and capacity of the parent to support Bank ABC in case of distress. While the rate of internally generated capital recovered in 2021, CI expects it to remain at best moderate in the short term in light of the weakened profitability in H1 22.
The Stable Outlook 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 further, which in turn would put pressure on profitability through elevated provision charges. A further decline in both operating and net profit would also result in a downgrade of the CFS.
Primary Analyst: George Panayides, Senior Credit Analyst; E-mail: firstname.lastname@example.org
Secondary Analyst & Committee Chairperson: Morris Helal, Senior Credit Analyst
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