Bank ABC Jordan – 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 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 remains Positive.

CI’s ESL assessment does not result in any uplift for the LT FCR as the BSR is already at the sovereign level, and the Bank does not fulfil our criteria for being rated above Jordan (sovereign ratings: ‘B+’/‘B’/Positive). 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 its Bahrain-based parent, Bank ABC, in the event of need. While CI believes the willingness of the Jordanian government to provide support remains high, its financial capacity is considered moderate as indicated by the sovereign ratings.

The Bank’s FCRs remain constrained by the ratings assigned to the sovereign, reflecting its base of operations in Jordan and its very high exposure to Jordanian sovereign debt. 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.

The ratings are supported by the Bank’s solid capitalisation notwithstanding a decline in CAR in 2022, more than full loan loss reserve (LLR) coverage of NPLs, and comfortable liquidity despite the recent tightening of loan-based ratios. The ratings are constrained by the Bank’s small size and relatively limited market share, and the resultant high concentrations in both the customer deposit base and loan book (including credit granted to government related entities; GREs). These factors elevate credit and liquidity risks, respectively. NPLs rose significantly in 2022 in the aftermath of the pandemic and, as a result, net profitability weakened due to stepped up provision charges. The ratings are also constrained by the very high concentration in Jordanian government securities – although predominantly in local currency – and the challenging operating environment in Jordan, which could be aggravated by the impact of the current conflict between Israel and Hamas.

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, the assessment reflects the economy’s high reliance on capital inflows to cover the country’s chronic current account deficit, low monetary flexibility, and substantial regional instability risks. It also takes into account a faster than initially projected economic recovery and improved short- to medium-term growth forecasts. The Jordanian banking sector exhibits very sound capital and liquidity buffers, and has demonstrated strong resilience amid the challenging operating environment in recent years.

Bank ABC’s overall satisfactory financial profile evidences conservative risk management practices developed in tandem with its supportive parent. That said, Bank ABC ranks among the smaller-sized banks in terms of assets and customer deposits in the Jordanian domestic banking sector. The Bank’s limited market share has the effect of producing high concentrations on both sides of the balance sheet. However, the Bank is a prudent and well-managed institution and this has enabled it to weather the challenging operating environment in Jordan.

CI considers Bank ABC’s asset quality to be satisfactory as indicated by the more than full LLR coverage together with a moderate level of stage 2 loans. Nevertheless, the NPL ratio remained at a level above the sector average of 5.0% in H1 23, having classified a large borrower in the manufacturing sector in 2022. In response, management stepped up impairment charges significantly, thereby maintaining more than full LLR cover. Management has informed CI that if the two largest (fully provisioned) NPLs were to be transferred off the balance sheet, the NPL ratio would decrease by 230bps to a relatively low 5.2%, while LLR cover would slightly strengthen to 118%, based on H1 23 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-2022. In mitigation, the Bank’s loss absorption capacity is good, reflecting sound LLR cover and a solid CAR. Loan asset quality continues to be vulnerable due to high borrower concentrations, which in turn elevates credit risk. This risk factor has indeed contributed to high NPL accretion in recent years. Similarly, concentration in low-rated Jordanian government securities is high − equivalent to almost 1.7 times the Bank’s equity. This is a common feature of all local banks.

Supported by higher net interest income (NII), operating profitability rebounded slightly to an annualised 1.3% average total assets (ATA) in H1 23, providing adequate loss absorption capacity. NII was boosted by a recovery in net interest margin (NIM) amid a rising interest rate environment to a level broadly in line with the sector average, although Bank ABC continued to report one of the highest funding costs in the market. Although the Bank’s ratio of operating expenses to ATA was broadly in line with the sector average, its cost income ratio was above the sector due to relatively moderate operating income generation capacity, including low non-interest income. Net profitability also decreased to a low level in 2022 and H1 23, owing to significant loan loss provision charges. CI expects ROAA to remain under pressure due to ongoing high cost of risk as further growth in NPLs cannot to be ruled out.

Although the loans to deposits ratio tightened in H1 23 due to a contraction in customer deposits, 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 retail franchise. In turn, depositor concentrations remain high. Liquidity ratios, however, remain very comfortable, reflecting a large stock of liquid assets – an overwhelming 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 fairly competitive rates, which provides a good buffer in times of stressed liquidity. Indeed, utilisation of such funding increased considerably in H1 23, making up for the decline in customer deposits. The latter was attributed to cash dividend payments by large corporate depositors in Q2 23.

CI considers Bank ABC’s capital position to be very sound and a main supporting factor for the ratings. Total CAR decreased to some extent in 2022 due to the combination of an increase in total risk weighted assets and the resumption of cash dividends (post-Covid). The Bank’s CAR, which is one of the sector’s highest, consists almost entirely of loss-absorbing CET 1 and stood at 550bps above the 12% minimum requirement in H1 23. At this level, CAR continues to provide a very sound buffer against any unexpected losses, particularly in view of the challenging economic environment and prevailing high credit risk. Capital adequacy also benefits from the low risk-weight assigned to government securities and 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. Nonetheless, internal capital generation was marginal in 2022, due to a combination of low profitability and high dividend playout ratio. CI expects the rate of internal capital generation to remain at best moderate in the short term in light of the modest profitability seen in H1 23.

Rating Outlook

The Positive outlook on the Bank’s LT FCR and BSR is in line with Jordan’s sovereign ratings outlook, and indicates that both ratings are likely to be raised by one notch in the next 12 months, provided the sovereign’s ratings are upgraded as currently expected. This is because the Bank’s LT FCR and BSR are currently constrained by the sovereign’s long-term rating of ‘B+’.

Rating Dynamics: Upside Scenario

Although unlikely, the LT FCR and BSR could be upgraded by more than one notch, or by one notch coupled with a Positive Outlook, if there is a similar action on Jordan’s sovereign ratings and a significant improvement in the operating environment.
 
Rating Dynamics: Downside Scenario

Although not our current expectation, the LT FCR and BSR Outlook could be revised to Stable or lowered were there to be a similar action on the Jordanian sovereign. Alternatively, downward pressure on the ratings could also be exerted if the Bank’s key credit metrics and OPERA deteriorate significantly.
The credit ratings have been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.

The following information sources were used to prepare the credit ratings: public information and information provided by the rated entity. Financial data and metrics have been derived by CI from the rated entity’s financial statements for FY19-2022 and H1 23. CI may also have relied upon non-public financial information provided by the rated entity and may also have used financial information from credible, independent third-party data providers. CI considers the quality of information available on the rated entity to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.

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