Fitch Ratings - Dubai/London - Fitch Ratings has revised Jordan Islamic Bank's (JIB) and Bank of Jordan's (BOJ) Outlooks to Negative from Stable, while affirming their Long-term Issuer Default Ratings (IDRs) at 'BB-'. Fitch has also affirmed Arab Bank Plc's (Arab Bank) Long-term IDR at 'BBB-'with Negative Outlook.
The Viability Ratings (VR) have been affirmed at 'bb-' for JIB and BOJ and at 'bbb-' for Arab Bank. A full list of rating actions is available at the end of this commentary.
The revision of the Outlooks to Negative reflects Fitch's view of Jordan's still weak external and public finances despite falling oil prices and heightened political risk.
KEY RATING DRIVERS
IDRS AND VRS
The operating environment in Jordan remains difficult, due to sluggish growth; the significant influx of Syrian refugees, which is putting pressure on the country's resources; and due to disrupted trade routes with Iraq, one of Jordan's main export markets. Tourism has also been affected by regional turmoil. Given instability in the region, the operating environment is unlikely to improve materially in the near term.
Both JIB's and BOJ's IDRs are driven by their intrinsic strength, as indicated by their VRs. As both BOJ and JIB are essentially domestic banks, their ratings and Outlook reflect the difficult operating environment in Jordan.
The ratings reflect asset quality risks, which are mainly driven by the banks' concentrated exposure to the Jordanian operating environment - where lending/financing and funding is mainly domestic, large lending concentrations to the government or government-guaranteed entities exist, and where BOJ has a high proportion of liquid assets invested in government securities.
The ratings also reflect well-established domestic franchises, solid funding bases, adequate capitalisation, and sound liquidity. The ratings further take into account the banks' healthy profitability. Both banks have a long track record of solid profit generation.
Both banks have a solid and diversified deposit base. Accordingly, deposit concentration is low. Highly liquid assets, consisting of cash and interbank placements, covered 25% of JIB's customer deposits and 43% of BOJ's at end-3Q15 (the latter includes government securities maturing within one year; JIB does not hold non-sharia compliant securities, so liquidity is mainly bank placements).
Asset quality indicators remain adequate due to both banks maintaining both conservative risk appetites and longstanding relationships with customers. JIB's impaired financing represented an acceptable 4.5% of gross financing at end-3Q15. Reserve coverage remained an adequate 72%, which excludes investment risk fund reserves (if added to specific reserves; reserve coverage would have improved to 86% at end-3Q15). BOJ's impaired loan ratio has been on a declining trend, standing at 6.8% at end-3Q15, down from 7.2% at end-2014. The improvement was largely due to recoveries and write-offs.
Arab Bank's IDRs are also driven by the bank's standalone strength, as indicated by its VR. The ratings reflect the bank's geographic diversification, with notable operations (branches, subsidiaries and affiliates) in the Gulf Cooperation Council (GCC), north Africa and Europe. The bank's operations in the GCC countries and outside the MENA region, and its holdings of liquid assets mainly in Europe (bank deposits along with some high-quality investment securities) enable the bank to be rated higher than its peers in Jordan.
The bank's geographic diversification, solid capital ratios, conservative overall risk appetite, stable funding profile, the structure of its network and affiliates, and liquidity management help mitigate risks to its credit profile associated with its domicile. Arab Bank's IDRs are linked to but not capped by Fitch's view of Jordanian sovereign risk.
Fitch judges that some of the risks associated with parts of the bank's operations across the MENA region have lessened, in particular in 'Arab Spring' countries and that growth in these countries is expected by the agency to be moderate. Nevertheless, significant risk remains in operating in Jordan and weaker MENA markets (Egypt, Algeria and Tunisia). Asset quality is sound, with an impaired loan ratio of 6.4% and reserve coverage of 107.1% at end-2015 (including interest in suspense), and has been stable despite turbulence in the region. Profitability is strengthening mainly because of lower impairment charges. Arab Bank has maintained its conservative lending practices and high levels of liquidity.
In August 2015, Arab Bank decided to settle a long-standing US litigation case. The terms of the agreement remain confidential; however, the settlement agrees to cap the bank's liability to a specified amount and also prevents any future litigation for the same charge. Arab Bank has been building provisions against the legal case since 2011, which stood at USD1bn at end-2015. We expect the provision to be sufficient and if the settlement amount ends up being slightly higher than the current provisions, it is not expected to materially impact the bank's credit profile. Fitch believes the settlement is positive for the bank, as it allows the bank to put the legal case behind it.
The Negative Outlook continues to reflect some residual risks to Arab Bank's credit profile arising from its domicile, operations in higher-risk MENA markets, and some remaining uncertainty about the final outcome of the litigation.
SUPPORT RATING AND SUPPORT RATING FLOOR
Arab Bank's Support Rating of '5' and Support Rating Floor of 'No Floor' reflect Fitch's opinion that support from the Kingdom of Jordan, if required, is possible, but given Arab Bank's size, cannot be relied upon. The bank has several core shareholders, but it is difficult to assess their willingness and ability to provide support at all times.
JIB's and BOJ's Support Ratings of '4' and Support rating Floor of 'B+' reflect the limited probability of support from the Jordanian sovereign due to constraints on its ability to provide it, although we consider willingness to provide support would be high as both banks are systemically important. In JIB's case, support from the bank's main shareholder, Al Baraka Banking Group, is possible, but is not factored into the ratings.
RATING SENSITIVITIES
IDRS AND VRS
An adverse change in Fitch's assessment of Arab Bank's ability to offset sovereign-related risks (eg banking sector intervention risk or transfer and convertibility risk) or an increase in economic and political risks in Jordan or the broader MENA region could also result in downward pressure on the bank's IDRs. In addition, a change in the bank's allocation of assets leading to an increase in its exposure to weaker, lower-rated, sovereigns relative to equity would also be negative for the ratings.
Should the final outcome of the settlement have a material negative impact on the bank's capital ratios or should the litigation negatively affect the franchise and reputation of the bank, although Fitch believes this to be unlikely, the ratings could be downgraded.
JIB's and BOJ's ratings are sensitive mainly to operating environment risks. Changes in Fitch's perception of risks relating to Jordan, in either direction, could affect the banks' ratings. Material deterioration in asset quality could have a negative impact on the banks' IDRs and VRs. Upside depends mainly on material positive developments in the local economy, and an expansion of growth opportunities.
SUPPORT RATING AND SUPPORT RATING FLOOR
As Fitch does not factor in any support from the Jordanian sovereign to Arab Bank, the Support Rating and Support Rating Floor are at their lowest levels. Fitch does not expect these factors to change.
JIB's and BOJ's Support Ratings and Support Rating Floors are sensitive to changes in Fitch's perception of the Jordanian sovereign's ability or willingness to support the banks.
The rating actions are as follows:
Arab Bank Plc
-Long-term IDR affirmed at 'BBB-'; Outlook Negative
-Short-term IDR affirmed at 'F3'
-Viability Rating affirmed at 'bbb-'
-Support Rating affirmed at '5'
-Support Rating Floor affirmed at 'No Floor'
Jordan Islamic Bank
-Long-term IDR affirmed at 'BB-'; Outlook revised to Negative from Stable
-Short-term IDR affirmed at 'B'
-Viability Rating affirmed at 'bb-'
-Support Rating affirmed at '4'
-Support Rating Floor affirmed at 'B+'
Bank of Jordan
-Long-term IDR affirmed at 'BB-'; Outlook revised to Negative from Stable
-Short-term IDR affirmed at 'B'
-Viability Rating affirmed at 'bb-'
-Support Rating affirmed at '4'
-Support Rating Floor affirmed at 'B+'
Contact:
Primary Analyst
Redmond Ramsdale
Director
+971 4 424 1202
Fitch Ratings Limited
Al Thuraya Tower 1, Office 1805 and 1806
Media City, PO Box 502030, Dubai
Secondary Analyst
Zeinab Abdalla
Analyst
+971 4 424 1210
Committee Chairperson
Gordon Scott
Managing Director
+44 20 3530 1075
Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com.
Additional information is available on www.fitchratings.com
© Press Release 2016
