Arab Jordan Investment Bank's ratings affirmed
Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, has affirmed Arab Jordan Investment Bank’s (AJIB) Long- and Short-Term Foreign Currency Ratings (FCRs) at ‘BB-’ and ‘B’, respectively, with a ‘Negative’ Outlook.
AJIB’s FCRs are constrained by the ratings assigned to the sovereign (‘BB-’/‘B’/‘Negative’), reflecting the Bank’s base of operations in Jordan and its comparatively high exposure to the Jordanian sovereign, mainly in the form of Jordanian government securities. The Support Rating remains at ‘3’, in view of the high likelihood of official support from the Central Bank of Jordan (CBJ) in case of need, as well as from the shareholders, who are expected to be willing to support the Bank in the unlikely scenario of financial distress. The shareholders have repeatedly fully subscribed to several rights issues over the years, the last one having occurred before the merger with HSBC Jordan (HSBCJ) in 2014.
The Bank’s Financial Strength Rating (FSR) is affirmed at ‘BBB’, also on a ‘Negative’ Outlook, supported by the Bank’s good asset quality as indicated by the very low and sector best non-performing loans (NPLs) to gross loans ratio, together with good effective NPL coverage. Also supporting the FSR is AJIB’s ample liquidity and still sound capital adequacy ratio (CAR), despite a decline in both pillars in Q1-Q3 2017. Management is good and well regarded in the market. The FSR is constrained by high client concentrations in both the loan book and deposit base, which elevate both credit and liquidity risks. The sizeable and increased holdings of Jordanian government securities (which represent a multiple of the Bank’s capital), though a common feature in the Jordanian banking system, also increase credit risk concentration. Furthermore, the FSR is constrained by the Bank’s moderate size and market shares, the relatively high and increased utilisation of interbank funding, and the challenging domestic operating environment reflecting increased credit and geopolitical risk factors. An additional constraint is the sharp fall in operating profitability to an adequate level due to pressure on NIM, which in turn has weakened the Bank’s loss absorption capacity.
The ‘Negative’ Outlook on the ratings for AJIB (and all other Jordanian banks) was assigned in June 2017, following a similar change in the outlook on the sovereign’s rating. Although AJIB has adeptly managed its balance sheet in the face of continued elevated credit and geopolitical risks, CI Ratings notes that AJIB’s ratings are increasingly pressured by heightened sovereign risk factors, as well as the challenging operating environment. As such, the ratings for all Jordanian banks could be lowered if Jordan’s FCRs are lowered. At the same time, if the Bank’s operating profitability contracts further this would also put downward pressure on the ratings.
AJIB’s successful acquisition of HSBCJ in 2014 marked a key milestone in its history. The contested bid for HSBCJ, which had a modest share of banking system assets, has considerably enhanced the Bank’s business franchise, as well as its market share of total assets and deposits in Jordan. That said, AJIB’s balance sheet remains moderate in terms of size and significantly smaller than the dominant Jordanian banks.
The Bank is a prudent and well-managed institution and has weathered the economic slowdown in Jordan better than most of its peers. In common with most other Jordanian banks, AJIB’s credit portfolio had come under pressure in the past, (after the 2008 global financial crisis) amid sharply slower economic growth in the country. On a positive note however, the Bank’s NPLs continued falling in 2016 – albeit at a slower pace – thanks to rescheduling, as well as collections and settlements. Although NPLs resumed growth in the first nine months of 2017 due to classified corporate credits in the trading and manufacturing sectors, the NPL to gross loans ratio remained low and remained the best in the Jordanian banking system. At the same time, while loan-loss reserve (LLR) coverage strengthened noticeably in 2016 − thanks to a significant rise in LLRs coupled with decline in NPLs − LLR cover slipped to a still satisfactory level at end Q3 2017 given renewed growth in NPLs. Importantly, the Bank’s effective coverage ratio remained sound and markedly better than the sector average. It is worth mentioning that it will only require a mere 2 months of operating profit for AJIB to reach full LLR cover.
Notwithstanding the marked decline in capital adequacy following the merger with HSBCJ in 2014, the Bank’s CAR hovered at a sound level in subsequent periods. Regulatory capital is made up primarily of Tier 1 capital. Although CAR slipped at end Q3 2017 due to interim net profit not being included in regulatory capital, capital adequacy remained comfortably above the CBJ’s minimum requirement. However, the ongoing generous dividend policy continues to produce a rather low rate of internal capital generation.
Liquidity remains ample, in common with other Jordanian banks, although key funding and liquidity ratios tightening in Q1-Q3 2017 caused by a contraction in customer deposits at a time when the credit portfolio expanded moderately. Competition for customer deposits intensified in the market, resulting in a system-wide tightening of liquidity. Although AJIB’s relatively high utilisation of interbank sources of funding increased further due to a repo agreement with the CBJ, this was more than offset by the significant holdings of liquid and quasi-liquid assets. The former consists largely of government securities, which although not listed in an active market, can be repo’d with the CBJ in case of need.
Aside from good cost control, AJIB’s operating profitability declined significantly to an adequate level in Q1-Q3 2017 due to a fall in net interest income and to a lesser extent non-interest income. The former declined due to pressures on net interest margin (NIM). Although the Bank managed to preserve yield on average assets, its NIM declined below the peer group average due to a rise in funding costs – an occurrence seen at almost all local banks following the three interest rate hikes by the CBJ in 2017 together with intensifying competition for customer deposits. At the net level, although risk charges continued to erode a low proportion of operating profit, profitability measured by the Bank’s return on average assets also declined noticeably to below the sector average in the first nine months of 2017 (annualised), dragged down by lower operating profit. It has to be noted, however, that AJIB's profitability is compromised to some extent by the large holdings of low-yielding liquid assets, which in turn squeeze NIM.