Sunday 30, July 2017 by Nabilah Annuar

CI affirms Jordan Commercial Bank’s ratings with a negative outlook

Capital Intelligence Ratings (CI), the international credit rating agency, announced today that it has affirmed the Long- and Short-Term Foreign Currency Ratings (FCRs) of Jordan Commercial Bank (JCB) at ‘BB-’ and ‘B’, respectively.

The Financial Strength Rating (FSR) is also affirmed at ‘BB’. The ‘Negative’ Outlook for the ratings was maintained, in common with the other Jordanian banks. JCB’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 high exposure to the Jordanian sovereign, mainly in the form of Jordanian government paper and, to a lesser extent, placements with the Central Bank.

Accordingly, the Bank’s FCRs remain highly correlated with the sovereign’s creditworthiness. The Support Rating is affirmed at ‘3’, reflecting that in case of need, official support from the Central Bank of Jordan (CBJ), as well as from the shareholders is highly likely. The shareholders have repeatedly fully subscribed to a number of rights issues over the years, the last one having taken place in 2013.

The FSR is supported by the improvement in the capital adequacy ratio (CAR) to a comfortable level, as a result of full earnings retention in recent years, as well as the capital infusions in 2012 and 2013. Supporting the rating is also the Bank’s ongoing ample liquidity—despite some tightening in 2016—and the decline in the non-performing loans (NPL) ratio. The FSR is constrained by the still moderate loan loss reserve (LLR) coverage and the decrease in both operating and net profitability to a modest level.

Additionally, the difficult operating environment together with high credit and geopolitical risks in the region weigh on the Bank, whose operations are largely limited to Jordan. The FSR is also constrained by the high concentrations in both the loan book and investment portfolio, which elevate the credit risk of the Bank. JCB’s small size combined with its limited market shares is a constraining factor too.

The ‘Negative’ Outlook for the ratings was assigned to JCB and all other Jordanian banks in May 2017, in line with the ‘Negative’ Outlook assigned to Jordan’s sovereign rating during the same period. Although JCB has adeptly managed its balance sheet in the face of continued elevated credit and geopolitical risks, CI Ratings notes that as is the case with other Jordanian banks, JCB’s FSR and FCRs are increasingly pressured by sovereign risk factors, as well as the challenging operating environment. As such, the FCR and FSR for JCB and all other Jordanian banks could be lowered if Jordan’s ratings are lowered. For the Outlook to revert to ‘Stable’, there would need to be an improvement in the sovereign risk profile, along with a meaningful improvement in asset quality and profitability.

JCB ranks among the small sized banks in terms of assets in the Jordanian domestic banking sector. Over the years, the Bank has built a sizeable branch network in Jordan, which has helped it expand its customer deposit and loan business franchises. The Bank’s presence in Palestine through four branches complements its franchise.

After a significant deterioration in loan asset quality in 2015, the net accretion rate of NLPs decreased substantially to a moderate level in 2106 thanks to settlements and off-balance sheet transfers, leading to a decline in the NPL to gross loans ratio. Notwithstanding the decrease in NPLs, the Bank’s LLR coverage for NPLs stayed at a rather low level at end 2016, due to lower provisioning together with still significant transfers of fully-provisioned NPLs off-balance sheet.

Although unprovided NPLs are more than covered by collateral, CI views security as being a partial loss mitigant rather than a direct source of repayment. JCB aims to address the moderate LLR coverage by setting aside additional provisions in the current year. In Q1 2017 NPLs declined again leading to a further reduction in the NPL ratio, while LLR cover increased to an adequate level (although it was still below the sector average). Management anticipates the NPL ratio to continue its declining trend by the current year end, in part due to the effect of growth in gross loans.

The past capital injections together with the ongoing full retention of net profit have restored capital adequacy to a level that is well above the CBJ’s minimum requirement, although still below the average of what is considered a well-capitalised bank. This has alleviated to a large extent the concern over the Bank’s previously high un-provided NPLs to free capital ratio. However, as LLR cover stayed moderate in 2016 JCB’s free capital remains impaired to some extent by un-provided NPLs. JCB plans to raise its paid up capital to JOD 150 million from the current JOD 113 million by end 2018 through full earnings retention, and if necessary through a rights issue, to fulfil the recently increased regulatory minimum paid up capital requirement in Palestine.

In 2016, despite lower gross provision charges, net profit and ROAA declined mainly due to much lower recoveries of previously written-off NPLs. Also, as a result of an increase in operating expenses combined with a marginal fall in gross income (the latter mainly the result of a decline in non-interest income), JCB’s operating profitability decreased to a modest level and, in turn, provided a reduced buffer for risk charges. The Bank’s operating profitability remains restricted by a rather low net interest margin, which is a function of a much higher than sector average funding cost.

Notwithstanding some tightening in 2016 following a decision to retire some costly deposits, JCB’s balance sheet remains very liquid, in common with other Jordanian banks. Liquidity is underpinned by customer deposit funding, with around two thirds of liquid assets comprising Jordanian government securities. The latter are not traded in an active market but are repoable with the CBJ.

JCB is the successor bank of the former ‘Jordan Gulf Bank’, which was established in Jordan in 1977 as a public shareholding company. In 2004, following its restructuring and a private placement of shares with a group of prominent investors including the Social Security Corporation (Jordan government), the Bank was recapitalised and renamed ‘Jordan Commercial Bank’. JCB is modelled along universal banking lines to provide a comprehensive banking service to corporate and retail clients. The Bank also has a significant trade finance operation generating good levels of fee income. As at end March 2016, JCB reported total assets of JOD 1,331 million ($1.9 billion) and total capital of JOD 147 million ($207 million).

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