Investbank ratings affirmed
Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, has affirmed Investbank’s (IB) Long- and Short-Term Foreign Currency Ratings (FCRs) at ‘BB-’ and ‘B’, respectively, with a ‘Negative’ outlook.
IB’s FCRs are constrained by the ratings assigned to the sovereign (‘BB-’/‘B’/‘Negative’), reflecting IB’s base of operations in Jordan and its exposure to the Jordanian sovereign in the form of government debt and balances at the Central Bank of Jordan (CBJ). Accordingly, the Bank’s FCRs remain constrained and highly correlated with the sovereign’s creditworthiness. The Support Rating remains at ‘3’ in view of the high likelihood of support from the CBJ, as well as from the shareholders who have demonstrated their financial support over the years. The shareholders have repeatedly fully subscribed to a number of rights issues.
CI Ratings also affirmed IB’s Financial Strength Rating (FSR) at ‘BB+’. The rating is supported by IB’s good capital adequacy, despite a decline, and still satisfactory loan asset quality, notwithstanding the resumption in non-performing loans (NPL) growth in recent periods and the higher than sector average level of renegotiated credits. Also supporting the FSR is IB’s sound operating profitability and still adequate liquidity despite the significant tightening seen in the first nine months of 2017. The Bank’s FSR is constrained by high–although reduced–concentrations in both the loan book and the customer deposit base which, in turn, elevate both credit risk and liquidity risk.
Furthermore, Jordan’s challenging operating environment coupled with continued high credit and geopolitical risks remain constraining factors. The ongoing difficult credit conditions may result in further growth in NPLs and, in turn, stepped up provisioning requirements. The FSR is also constrained by the Bank’s small size and limited market share, with its operations being limited to Jordan.
The ‘Negative’ Outlook on the ratings for IB (and all other Jordanian banks) was assigned in June 2017, following a similar change in the Outlook on the Sovereign rating. Although IB has adeptly managed its balance sheet in the face of continued elevated credit and geopolitical risks, CI notes that in common with other Jordanian banks, IB’s ratings are increasingly pressured by heightened sovereign risk factors, as well as the challenging operating environment. As such, the ratings for IB and all other Jordanian banks could be lowered if Jordan’s FCRs are lowered.
IB ranks among the small-sized institutions in terms of total assets and customer deposits in the Jordanian banking sector. Although the acquisition of Jordan Trade Facilities Company (JOTF, a small company specialising in retail and SME lending) in 2016 did not materially increase total assets, it helped IB to diversify its credit portfolio to some extent by reducing borrower concentrations. Having significantly declined in the past following substantial write-offs and collections, NPLs resumed growth in 2016 and Q1-Q3 2017, mainly due to new classified loans chiefly from the corporate sector as well as inherited NPLs from JOTF.
Nonetheless, the ratio of NPLs to gross loans decreased to a level broadly in line with the improved sector average, flattered by rapid credit expansion. In response to the renewed growth in NPLs, IB stepped up provisioning and restored loan loss reserve (LLR) coverage to a satisfactory level. The Bank also reduced concentration in Jordanian government debt in response to declining yields. Exposure to Jordan government securities as a multiple of equity is currently much lower than the level seen at many other local banks.
Notwithstanding a decrease due to brisk credit expansion, the capital adequacy ratio (CAR) remained at a good level and well above the CBJ’s minimum requirement, thanks to satisfactory net profitability along with adequate internal capital generation – although the latter continued to be restrained by a moderately high dividend payout ratio. More positively, IB’s unprovided NPLs to free capital remained negligible as LLR cover recovered moderately in Q3 2017. The Bank’s good CAR (with a very high Tier 1 component) together with satisfactory operating profitability provide an effective risk buffer in Jordan’s current high credit risk environment.