Capital Bank of 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 Capital Bank of Jordan (CAP) at ‘B+’ and ‘B’, respectively. The LT FCR Outlook remains Positive. At the same time, CI Ratings has affirmed CAP’s Bank Standalone Rating (BSR) of ‘b+’ with a Stable Outlook, Core Financial Strength (CFS) rating of ‘bb’, and Extraordinary Support Level (ESL) of Moderate.

The Bank’s BSR is derived from a CFS rating of ‘bb’ and an Operating Environment Risk Anchor (OPERA) of ‘b+’ (indicating high risk). Although CAP’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). The ratings are supported by the Bank’s solid funding and liquidity, good profitability, and the sound loan loss reserve (LLR) coverage of NPLs. Also supporting the ratings is the Bank’s satisfactory CAR – including a high Tier 1 component. The ratings are constrained by the difficult operating environments in both Jordan and Iraq, and the ensuing effects on loan asset quality as indicated by a higher NPL ratio in Q3 23, together with significant provisioning requirements in recent years. Furthermore, the Bank’s high exposure to government securities and significant borrower concentrations are credit challenges. Despite the decline in 9M 23, the relatively high related party exposure is also a rating constraint – albeit to a lesser degree.

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 Central Bank of Jordan’s (CBJ) FX reserves stood at a comfortable USD18.1bn at end-2023, equivalent to 7.9 months of imports and 84% of short-term external debt on a remaining maturity basis; this supports the currency peg in case dollarisation rates rise amid a prolonged war in Gaza.

As a result of absorbing Bank Audi’s (BA) operations in Jordan and Iraq (the latter via subsidiary National Bank of Iraq; NBI) in 2021, and following the acquisition of Societe Generale De Banque Jordanie (SGBJ) business in Jordan in 2022, the Bank has markedly expanded its market share of loans and deposits in Jordan, reaching a significant 10%. This, together with further organic growth in 9M 23, has rendered CAP as the third largest bank in terms of assets in the Kingdom, behind Arab Bank Plc and The Housing Bank for Trade & Finance.

CAP has maintained satisfactory loan asset quality, notwithstanding the full integration of the two Lebanese banks’ operations in 2021 and 2022. Despite significant NPL growth in money terms (net of suspended interest) in recent years – mostly due to inherited fully-provided NPLs from BA and SGBJ – CAP’s NPL ratio remained only slightly above the Jordanian banking sector average of 5.5% in Q3 23. Importantly, the Bank maintained more than full LLR cover for NPLs. Management has informed CI that, based on preliminary figures, the NPL ratio decreased again to around 4.9% at end-2023, benefiting from off-balance sheet transfers of fully provided NPLs. At the same time, LLR cover of NPLs was strengthened to a sound 130%. In view of the challenging operating environment in Jordan and Iraq, renewed NPL growth is not to be ruled out in the near term. Despite the downside risks to loan asset quality, we expect the magnitude of any increase to be manageable for CAP. The sectoral diversification in the loan portfolio has also been improving. Meanwhile, the high concentration in low-rated Jordanian government securities remains a feature of CAP’s business model and a common phenomenon seen in the Jordanian banking system; exposure stood at 2.6 times the Bank’s equity in Q3 23, well above the sector average of 1.8 times. This is a credit challenge for CAP.

CAP continues to manage and control its 62%-owned subsidiary NBI. Despite high Iraqi sovereign risk, NBI is well managed and helps to diversify assets and revenue streams away from Jordan. NBI remains an important contributor to group earnings through solid fee income and sound net interest income generation. CAP’s loan book, however, is expected to continue to exhibit relatively high borrower concentrations, reflecting its focus on corporate lending.

CAP’s strengthened operating profitability (and effective loss absorption capacity) in 9M 23 continues to be driven by good growth in operating income, including substantially higher recurring income streams from its Iraqi subsidiary NBI, as well as effective cost control. Earnings strength is therefore considered good. Net profit and ROAA on a consolidated basis remained one of the sector’s highest in 9M 23 and is good in a global context. It has to be noted, however, that NBI provided a sharply increased 76% of the 9M 23 group net profit (despite contributing 27% to total assets), supported by higher fees and commission income (FCI). NBI produced a robust ROAA of 5% in 9M 23, while CAP’s standalone ROAA was a modest 0.6%, hampered by high provisions and pressure on net interest margin (NIM) – the latter due to rising funding cost. Looking ahead, CI expects the Bank’s expanded market shares of loans and deposits − coupled with its strongly growing Iraqi subsidiary − to continue to drive business volumes. This, together with good cost control, is expected to support ongoing good cost efficiency.

CAP’s funding and liquidity profile remained good in 9M 23 as expansion in customer deposits surpassed credit growth. At the same time, wholesale funding decreased further to a moderate level in Q3 23. Due to the inherited granular customer deposit base from BA and SGBJ, concentrations in customer deposits had also decreased markedly in 2022, and remained low into 9M 23. The Bank has strong liquidity (as is the case with peer banks), reflecting large placements with the CBJ and other banks, as well as significant holdings of Jordanian government securities. Although the latter are not listed in an active market, they are repoable with the CBJ and other banks, and as such constitute an important additional source of liquidity – in common with most Jordanian banks.

Despite a marked decline in 2021 and 2022 after the integration of BA and SGBJ, respectively, the Bank’s total CAR – which includes a high Tier 1 component – recovered to some extent to 15.3% at end Q3 23 (and to 15.4% at end-2023 according to unaudited figures). This was moderately above the increased regulatory minimum of 14.25%, which includes a 2% additional buffer for significant overseas exposure (through NBI in Iraq), and 0.25% for D-SIB status. The USD185mn common capital injection from Saudi Arabia’s Public Investment Fund (the Saudi sovereign wealth fund) in June 2022 is viewed positively by CI. Specifically, it supports CAP’s growth strategy and digital transformation plans in Jordan and Iraq, as well as at the KSA and UAE branches. Management has informed CI that the Bank is not currently considering additional capital injections in the short term as total CAR is expected to hover at the 15.5% level at end-2024 through retained earnings. At this level, in CI’s opinion, the buffer is considered just satisfactory, in view of the anticipated increase in the CBJ’s minimum requirement to 14.5% at end-2024 (including a 0.5% for D-SIB status), and the prevailing high credit risks in Jordan and Iraq.

Rating Outlook

The Positive Outlook on the Bank’s LT FCR, which was assigned in December 2022 (following a revision of Jordan’s sovereign rating outlook to Positive), indicates that the rating is 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, but not constrained by, 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. Under our criteria, this would result in a one notch uplift of CAPs LT FCR over its BSR should the sovereign rating be raised to ‘BB-’.

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 rating, as well as a significant improvement in the operating environment and in the Bank’s standalone financial fundamentals.

Rating Dynamics: Downside Scenario

Although not our current expectation, the LT FCR Outlook could be revised to Stable or Negative 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 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 FY2018-22 and Q3 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.

The principal methodology used to determine the ratings is the Bank Rating Methodology, dated 3 April 2019 (see Information on rating scales and definitions, the time horizon of rating outlooks, and the definition of default can be found at Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at

This rating action follows a scheduled periodic (annual) review of the rated entity. Ratings on the entity were first released in November 2004. The ratings were last updated in May 2023. The ratings and rating outlook were disclosed to the rated entity prior to publication and were not amended following that disclosure. The ratings have been assigned or maintained at the request of the rated entity or a related third party.

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