(MENAFN Editorial) 21st March 2017
Capital Bank of Jordan’s Ratings Affirmed – Outlook for the FSR changed to ‘Negative’
Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, today announced that it has affirmed Capital Bank of Jordan’s (CAP) Long- and Short-Term Foreign Currency Ratings (FCRs) of ‘BB-’ and ‘B’, respectively. CAP’s FCRs are constrained by the ratings assigned to the sovereign (‘BB-’/‘B’/‘Stable’), reflecting the Bank’s base of operations in Jordan and its exposure to the Jordanian sovereign, mainly in the form of government paper and balances with the Central Bank of Jordan (CBJ). Accordingly, the Bank’s FCRs are highly correlated with Jordan’s creditworthiness. Any downgrade of the sovereign or improvement in Jordan’s creditworthiness would have a corresponding effect on the Bank’s FCRs. The Outlook for CAP’s FCRs remains ‘Stable’. The Support Rating is set at ‘3’, in view of the high likelihood of official support from the CBJ in case of need, as well as from the shareholders given their past demonstrated support.
The Financial Strength Rating (FSR) is affirmed at ‘BBB-’, supported by the Bank’s ample liquidity, as well as still sound capital adequacy ratio (CAR) that currently stands comfortably above the CBJ’s minimum regulatory requirement, in spite of a marked decline in Q1-Q3 2016. Supporting the FSR is also the satisfactory level of loan-loss reserve (LLR) coverage for non-performing loans (NPLs). The FSR is constrained by the comparatively high NPL to gross loans ratio and ongoing borrower concentrations. The sharp fall in operating and net profitability in 2015 is also a constraining factor despite a moderate recovery in Q1-Q3 2016. Provision charges at the Iraqi subsidiary National Bank of Iraq (NBI) will probably remain significant looking ahead and, therefore, expected to continue to restrict CAP’s net profitability. The challenging operating environment in Jordan, as well as in Iraq, coupled with increased geopolitical risks in the region, are likely to still weigh on CAP’s asset quality – whose operations are limited to Jordan and to a lesser degree in neighbouring Iraq. In light of worsening loan asset quality and given that downside risks in Jordan and Iraq remain rather high, the Outlook on the FSR is revised to ‘Negative’ from ‘Stable’. The FSR could be lowered if asset quality deteriorates further – both in terms of high NPL accretion and lower LLR coverage. A further fall in the CAR would also exert negative pressure to the Bank’s FSR.
CAP ranks among the small-sized institutions in terms of assets and customer deposits in Jordan. The Bank’s loan book continues to exhibit relatively high concentrations by individual borrower (including government related entities) and to a lesser extent to corporate customers. Following an improvement in asset quality metrics in the past, the rate of NPL net accretion accelerated in 2015 and into Q1-Q3 2016, mainly reflecting new classified loans in the corporate sector in Jordan and Iraq – the latter exacerbated by a rapidly weakening operating environment in Iraq. As a result, the Bank’s NPL ratio weakened significantly at end Q3 2016, although this was aggravated by a contraction in gross loans at NBI, reflecting CAP’s decision to curtail lending in Iraq due to the extremely difficult circumstances prevailing in the country. Concurrently, the LLR coverage of NPLs retreated to some extent due to lower loan-loss provisions, although it stayed at a very satisfactory level. On a positive note, renegotiated loans decreased to a much lower share of gross loans at end Q3 2016. CI Ratings understands that the NPL ratio retreated moderately at end Q4 2016. The Bank’s comparatively high NPL ratio, combined with the ongoing difficult economic conditions in Iraq and Jordan, continue to exert negative pressure on the Bank’s FSR.
Although capital adequacy remained sound, the CAR retreated markedly at end Q3 2016 in response to a request by the CBJ to deduct a major portion of NBI’s frozen central bank balances from regulatory capital. CI understands from management that CAR increased moderately at end 2016. CAP’s internal capital generation rate was negative in 2015 owing to a sharp decline in profitability, coupled with foreign currency translation losses arising from the Iraqi subsidiary.
Key loan-based liquidity metrics tightened in 2015 owing to faster expansion in lending compared with customer deposits. Although in Q1-Q3 2016 a minor contraction in customer deposits led to a further tightening in these ratios, they remained slightly better than the sector average and strong in a global context. In common with other Jordanian banks, CAP’s balance sheet remains very liquid with a large proportion of assets being invested mainly in government securities and placements with the CBJ and the Central Bank in Iraq (CBI). With regard to the latter, notwithstanding the Kurdistan Regional Government (KRG)’s decision to freeze the cash placed at the CBI branches in Erbil and Sulaymaniah, the ‘adjusted’ liquid asset and net liquid asset ratios (after the deduction of the frozen amounts) stood at a still sound level at end-September 2016. NBI’s management has received assurances from KRG that this is a temporary measure intended to address KRG’s liquidity issues arising from budget disputes with the central government in Baghdad.
Profitability suffered a setback at the operating level in 2015 – although it remained at a satisfactory level – mainly due to significantly lower fee and commission income and realised security losses. At the same time, net profit fell sharply, due to much higher provisions at the Iraqi subsidiary, as well as goodwill write-off related to NBI acquisition – the latter being an exceptional item of non-recurring nature. The absence of recoveries of previously written-off NPLs − which had more than offset the significant provision charges in the preceding two years − was also a contributing factor. Encouragingly, during Q1-Q3 2016, operating profitability - measured as a percentage to average total assets - recovered noticeably to a good level, bolstered by a strong rebound in non-interest income (in particular at NBI), while the return on average assets also improved, despite ongoing significant provision charges at NBI. The Bank anticipates net profit to increase further in full year 2016.
CAP is the name adopted in 2006 for the former ‘Export & Finance Bank’ established in 1995. It is a full service commercial bank providing a wide range of banking, investment products and services to mainly corporate and individual customers alike. The Bank operates twelve branches in Jordan and eleven branches in Iraq (through NBI). The Bank is majority owned and controlled by prominent Jordanian businessmen. The Jordan Social Security Corporation retains less than 10% of shares and the International Finance Corporation holds 6.92%. As at end-September 2016 the Bank reported consolidated assets of JOD1,964mn (USD2.77 billion) and total capital of JOD329mn (USD463mn).
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