Arab Jordan Investment Bank – Ratings Affirmed with a Positive 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 Jordan investment Bank (AJIB) at ‘B+’ and ‘B’, respectively. At the same time, CI Ratings has affirmed AJIB’s Bank Standalone Rating (BSR) of ‘b+’, Core financial Strength (CFS) rating of ‘bb+’, and Extraordinary Support Level (ESL) of Moderate. The Outlook for both the LT FCR and BSR remains Positive.

The Bank’s BSR is based on a CFS rating of ‘bb+’ and an Operating Environment Risk Anchor (OPERA) of ‘b+’, and incorporates CI’s assessment of AJIB’s capacity to withstand sovereign-induced economic and financial stress. Although the Bank’s ESL is Moderate, there is no uplift for the BSR as the latter is already at Jordan’s sovereign LT FCR level (‘B+’/Positive). However, this is likely to change as and when Jordan’s LT FCR is upgraded. AJIB’s LT FCR remains constrained by the ratings assigned to the sovereign, reflecting the Bank’s base of operations in Jordan and its very high exposure to Jordanian sovereign debt.

The ratings are supported by the Bank’s good asset quality as indicated by the sector lowest NPL ratio, together with more than full loan loss reserve (LLR) coverage. A reasonably diversified asset base by geography also benefits the risk profile to some degree. Additional rating supporting factors are AJIB’s good funding and liquidity and very sound CAR. The well-regarded management and prudent lending policy are also credit positives. The ratings are constrained by the challenging operating environment in Jordan and the MENA region, together with elevated geopolitical risks and the Bank’s moderate asset size and market share. The sizeable holdings of Jordanian government securities, which represent a multiple of the Bank’s capital (a common feature in the Jordanian banking system), also increases credit risk concentration. While disclosure on borrower concentrations is not made – restricting AJIB’s risk profile assessment to some extent – these have historically been very high due to credit extended to government-related entities (GREs). In part mitigation, such credits normally carry explicit government guarantees.

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 (recently aggravated by the war in Gaza). 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. In that regard, the amount of the FX reserves at the Central Bank of Jordan (CBJ) stood at a comfortable level of USD17.5bn at end-October 2023, equivalent to 7.6 months of imports and 83% of short-term external debt on a remaining maturity basis. The FX reserves support the local currency peg in case dollarization rates rise amid a prolonged war in Gaza.

AJIB operates a well-established business franchise in the local market with a focus on corporate and retail banking, while its business operations in Qatar, the UK and Cyprus help to diversify the risk profile to some degree. AJIB has developed into a mid-sized bank within the context of the local banking system after acquiring HSBC’s operations in Jordan in 2014, and more recently the National Bank of Kuwait (NBK) branch in 2022, as well as the operations of Standard Chartered (SC) in Jordan in 2023. Nonetheless, the Bank’s business franchise remains moderate in terms of asset size and significantly smaller than the dominant Jordanian banks. This is in part a result of the low-growth strategy AJIB has pursued in the face of a challenging operating environment in Jordan. In turn, concentrations in government securities (in common with most local banks and predominantly in local currency) and, most probably, by individual borrower remain very high. On a positive note, the recent acquisitions of the NBK branch and SC have moderately improved AJIB’s funding profile by reducing the excessive utilisation of sensitive interbank funds to some degree.

AJIB remains a prudent and well-managed institution, and has weathered the economic slowdown in Jordan better than most of its peers. Although NPLs (stage 3 loans net of suspended interest) resumed growth in 9M 23 (though from a low base), mainly due to inherited classified credits from SC together with organic growth. AJIB’s NPL to gross loans ratio increased only slightly and remained the sector lowest at 1.9% – well below the system average of around 5.5%. Meanwhile, LLR coverage was maintained at a solid level in Q3 23 despite a moderate decrease. Stage 2 loans increased significantly to 18% of the portfolio in 9M 23 – well above the sector norm of 11%. This was due to considerable transfers from stage 1 loans, partly reflecting prudent classification by management, while the SC acquisition also added a considerable amount. Although CI expects the Bank’s NPL ratio to remain below the sector average in the short term, further NPL growth is not to be ruled out given the increased level of stage 2 loans, and high prevailing credit risk in Jordan and the region. Exposure to related parties was high in relation to total equity, but an overwhelming majority comprised placements with banking subsidiaries and associated companies with sound financial profiles.

Operating profitability has been relatively moderate in recent years, due to pressures on the net interest margin (NIM), and currently provides just adequate loss absorption capacity. At the net level, however, net profit and ROAA remained satisfactory in 2022 and into 9M 23, benefiting from very low provision charges. Even though additional NPL growth cannot be ruled out in the short-term, CI expects the loan-loss provision expense to continue to erode a low-to-moderate proportion of operating profit given AJIB’s solid LLR cover and adequate loss absorption capacity. Earnings strength and sustainability remain satisfactory, benefiting from a lean cost base and a significant level of recurring revenue streams, particularly net interest income and fees and commissions.

Growth in customer deposits accelerated in 2022 due to the takeover of the NBK branch deposits, and in 9M 23 after the SC acquisition. This had the effect of improving AJIB’s already comfortable funding and liquidity metrics to a very sound level, in part aided by contractions in the loan book during these periods. Customer deposits currently fund a larger share (61%) of the Bank’s balance sheet, while utilisation of interbank funding has reduced significantly, albeit it remained rather high. In mitigation, this was more than offset by the significant holdings of liquid assets – notably Jordanian government securities and cash and CBJ balances. Though the former are unquoted and not traded in an active market, they are repoable with the CBJ and other local banks and thus constitute an important source of liquidity.

AJIB’s capitalisation remains one of its key strengths and an important rating driver. Total CAR at end Q3 23 remained 350bps above the CBJ’s minimum requirement of 14.0% (including a 2% buffer for significant overseas exposure). It was also slightly higher than the average seen in Jordan’s well capitalised banking system. Regulatory capital has a very high loss-absorbing CET1 component, providing a sound buffer against unforeseeable losses, particularly in view of the prevailing high credit risk environment in Jordan. The Bank’s balance sheet leverage, measured by the ratio of equity to total assets, is also very sound despite a gradual decline, providing ample scope for business growth. However, in common with other Jordanian banks AJIB’s substantial holdings of Jordanian government securities inflate CAR to some degree in our view as the exposure is 0% risk weighted for the purpose of calculating total risk weighted assets (RWAs). In that regard, AJIB’s percentage of RWAs to total assets declined to 48% in 2022, remaining below the sector average of 61%. Internal capital generation is expected to remain low, hampered by a rather high dividend payout ratio.

Rating Outlook

The Positive outlook on the Bank’s LT FCR and BSR that was assigned in December 2022 (following a revision of Jordan’s sovereign rating outlook to Positive) indicates that the ratings are likely to be raised by one notch in the next 12-18 months, provided the sovereign’s ratings are upgraded as currently expected. This is because the Bank’s LT FCR and BSR are currently at the sovereign’s long-term rating of ‘B+’, and our assessment of the likelihood of official extraordinary support being made available to the Bank in the event of need is moderate.

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 the ratings 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.

Contact

Primary Analyst: George Panayides, Senior Credit Analyst; E-mail: ...
Secondary Analyst & Committee Chairperson: Morris Helal, Senior Credit Analyst

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