Sunday 08, January 2017 by Georgina Enzer

Jordan Ahli Bank’s ratings affirmed with a Stable outlook

Capital Intelligence Ratings (CI Ratings or CI), has affirmed Jordan Ahli Bank’s (JAB) Long- and Short-Term Foreign Currency Ratings (FCRs) at ‘BB-’ and ‘B’, respectively.

JAB’s Long-Term FCR is constrained by the ratings assigned to the sovereign (‘BB-’/‘B’/‘Stable’), reflecting the Bank’s base of operations in Jordan and its relatively high exposure to the Jordanian sovereign – mainly in the form of Jordanian government paper and balances with the Central Bank of Jordan (CBJ). Accordingly, the Bank’s FCRs remain highly correlated with the sovereign’s creditworthiness. Any downgrade of the sovereign or any improvement in Jordan’s creditworthiness would have a corresponding effect on the Bank’s FCRs. The Outlook for JAB’s FCRs remains at ‘Stable’, in line with the Outlook for Jordan’s Sovereign FCRs. The Support Rating is set at ‘3’, in view of the high likelihood of official support from the CBJ in the unlikely scenario of financial distress.

The Financial Strength Rating (FSR) is affirmed at ‘BB’, with a ‘Stable’ Outlook. The rating is supported by the Bank’s abundant liquidity, long established franchise in Jordan − especially in the SME sector − and sound capital adequacy ratio (CAR), the latter subject to some impairment by unprovided non-performing loans (NPLs). The FSR is constrained by a still high NPL to gross loans ratio together with a just adequate loan-loss reserve (LLR) coverage, and the moderate and below sector average profitability metrics, which weakened in H1 2016. Also constraining the FSR is the comparatively high concentration in Jordan sovereign debt, the low rate of internal capital generation reflecting a generous dividend policy, and the challenging domestic and regional operating environment.

Although JAB had slipped to the sixth largest bank in terms of total assets in the Jordanian banking sector after the sale of its Lebanese subsidiary ‘Al-Ahli International Bank Lebanon’ (AIBL) in 2014, it retains a well-established business franchise in the local market. Indeed, the Bank managed to grow its market shares in loans and customer deposits following the rapid expansion seen in H1 2016. As a result, JAB now ranks fifth in total assets, and fourth in customer deposits and net loans in the Jordanian banking system. Having successfully reduced NPLs in each of the preceding three years through write-offs and transfers to off-balance sheet, problem loans resumed moderate growth in H1 2016 due to the ongoing economic slowdown and heightened credit risk in the market. Even prior to the recent increase in impaired loans, however, JAB’s NPL to gross loans ratio was relatively high and well above the average level in the local market, partly due to legacy classified loans. Given the ongoing challenging economic conditions in Jordan and the associated elevated credit risk, the likelihood that NPLs may rise further in the near term is rather high. Although LLR coverage for NPLs declined to a just adequate level at end June 2016, JAB’s operating profitability continues to provide the flexibility to set aside the necessary provisions. That said, JAB’s risk absorption capacity weakened in H1 2016 as indicated by the fall in operating profitability, and on this basis, it will now require a longer 16 months to build LLR cover to a sound level.

Gross income continued to expand in 2015 and into H1 2016 supported by good growth in non-interest income, mainly the result of much higher gains from sale of foreclosed properties, and growth in fees and commissions. At the same time, despite the pressure seen on net interest margin in H1 2016, net interest income continued to grow steadily, reflecting the ongoing expansion in the loan book. However, the combination of a comparatively large cost base and sustained provisioning (although the latter declined in 2015) continued to depress profitability ratios to some degree in 2015 and into H1 2016. Net profit fell by as much as one-third in 2015 − albeit from a high base due to exceptional gain from AIBL disposal in 2014 − producing a moderate and below sector average return on average assets (ROAA) ratio. However, excluding the exceptional disposal gain, net profit expanded firmly in 2015 in comparison with the previous year. During H1 2016, while operating profit fell moderately as operating expenses grew at a faster pace than gross income, the ROAA (annualised) fell significantly to a low level mainly due to much higher provision charges.

The Bank’s liquidity position remains strong, reflecting the relatively low share of loans in total assets combined with a strong and growing customer deposit base in Jordan. Although key loan based ratios tightened a little in H1 2016, as rapid credit expansion surpassed growth in customer deposits, they remain broadly in line with what is considered a very liquid domestic banking system. JAB continues to have high liquid and quasi-liquid asset ratios – mainly a reflection of large holdings of Jordanian government securities. Although the latter are not listed, they can be repo’d with the CBJ in exchange for liquidity. At the same time, reliance on interbank funding remained at a very low level, underscoring the strength of the Bank’s customer deposit franchise.

As a result of the transfer of AIBL’s disposal gain to regulatory capital in 2014, the Bank’s CAR strengthened markedly to a more than satisfactory level in that year (from a just adequate position), and further increased to a sound level at end 2015 from retained earnings. CAR was comfortably above the CBJ’s minimum regulatory capital requirement of 12 per cent. In H1 2016, however, the combination of lower net profit together with a much higher dividend payout ratio reduced CAR to the level seen in 2014. Internal capital generation was almost flat in the last three years, as JAB resumed relatively high cash dividend payments to the shareholders. At the same time, JAB’s free capital remains impaired to some extent by unprovided NPLs.

Jordan Ahli Bank (the name adopted in 2006 for the former ‘Jordan National Bank’) was established in Amman in 1955. The Bank provides a universal banking service in Jordan through its sizeable network of 56 branches as well as through brokerage, leasing and microfinance subsidiaries. Abroad, JAB has five branches in Palestine and one in Cyprus. There is very little lending activity in Palestine in view of the ongoing difficult operating environment, while in Cyprus the focus is on treasury and to a lesser extent lending. JAB’s major shareholders include the Mouasher family (25 per cent), Byblos Bank (Lebanon, 10.4 per cent), Jordan’s Social Security Corporation (10 per cent), Jordan Worsted Mills (6.5 per cent) and Jordan Investor Centre (part of the Mouasher group of companies, 5.4 per cent). The Bank reported consolidated assets of JOD2.73 billion ($3.86 billion) and total capital of JOD304mn ($428 million) as at end-June 2016.

Features & Analyses