Fitch revises Bank of Jordan's outlook to Stable; affirms at 'BB-'

Dubai :  Fitch Ratings has revised the Outlook on Bank of Jordan Plc's (BOJ) Long-Term Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at 'BB-'. A full list of rating actions is below.

Challenges to the Jordanian economy from the coronavirus pandemic continue to put moderate pressure on domestic banks. However, challenges have subsided sufficiently to remove the negative outlook on the 'bb-' operating environment score. The latter is sufficiently low to absorb any mild deterioration, already incorporating low GDP/capita, below-potential GDP growth, high unemployment and a difficult regional environment. The Central Bank of Jordan (CBJ) support measures have helped shield domestic banks and the economy from further deterioration.

The Stable Outlook on BOJ also reflects the Stable Outlook on Jordan's sovereign rating, which caps the bank's ratings at its current level (see 'Fitch Revises Jordan's Outlook to Stable; Affirms at 'BB-', published 07 December 2021). BOJ's main operations are in Jordan and the bank is moderately exposed to the Jordanian sovereign. Fitch estimates that the bank's total exposure to the Jordanian sovereign through lending to public-sector entities, holding of government debt and balances with the CBJ represented 18.5% of total assets at end-1H21 (19.8% at end-2020), equivalent to 1.1x the bank's common equity Tier 1 (CET1) capital (1.2x at end-2020).

Rating Withdrawals

Fitch has withdrawn BOJ's Support Rating and Support Rating Floor as they are no longer relevant to the agency's coverage following the publication of its updated Bank Rating Criteria on 12 November 2021. In line with the updated criteria, Fitch has assigned BOJ a Government Support Rating (GSR) of 'b'.

KEY RATING DRIVERS

IDRS AND VIABILITY RATING

BOJ's IDRs are driven by its standalone strength, as indicated by its 'bb-' Viability Rating (VR).

The bank's VR considers its exposure to the weak domestic operating environment and to the sovereign, which puts pressure on its asset quality, profitability and capital. However, it also considers the bank's good domestic franchise, adequate capitalisation and solid funding and liquidity profile.

The bank's Stage 3 loans ratio increased to 8.5% at end-2020 from 7.5% at end-2019 and was stable at end-3Q21. The Stage 2 loans ratio also increased to 8.2% at end-3Q21 from 5.2% at end-2020 but remains relatively moderate. This has led to higher generation of potential problem loans (change in Stage 3 and Stage 2 loans plus write-offs; 3.3% of average gross loans in 9M21, -1.7% in 2020). The bank rarely writes off loans. Total reserve coverage of Stage 3 loans and gross loans is high (119% and 10.2% at end-3Q21, respectively). Fitch expects mild pressure on loan quality in 2022, particularly if the CBJ does not extend the loan moratorium period throughout 2022.

Like peers, the current crisis has led to a deterioration in BOJ's profitability. The operating profit/risk-weighted assets (RWAs) ratio declined to 2.4% in 2020 from 2.8% in 2019 primarily due to higher loan impairment charges (LICs), lower net interest margin and lower business opportunities. BOJ's net income improved by 204% in 9M21 but Fitch expects the bank's profitability in 2022 to remain below pre-pandemic levels, constrained by LICs and low interest rates. Nevertheless, annualised pre-impairment operating profit represented 4% of average gross loans in 9M21, providing an adequate buffer to absorb unexpected losses through the income statement.

BOJ's capitalisation is satisfactory. Full reserve coverage of Stage 3 (adequate for Stage 2 loans), adequate pre-impairment operating profitability and good buffers of capital ratios above the minimum regulatory provide BOJ with a good cushion against deteriorating credit conditions. The bank's capital base is 98% composed of CET1, supporting loss absorption capacity. CBJ's caps on dividend distribution on 2019 and 2020 net profits and BOJ's low loan growth in 2020 and 3Q21 have supported the bank's capitalisation (CET1 ratio and capital adequacy ratio of 18.8% and 19.2% at end-3Q21, respectively). Tangible leverage is high (16.4% at end-3Q21). Although lower than at regional peers, high single obligor concentration exposes the bank to event risk.

BOJ's funding and liquidity are solid. BOJ is predominantly funded by stable and granular customer deposits (93% of non-equity funding at end-3Q21). Retail deposits represented a high 81% of customer deposits at end-1H21, leading to low deposit concentration, with the 20 largest depositors accounting for only 8% of total deposits at end-1H21. The bank benefits from a high level of current and saving accounts (72%), supporting its low cost of funding (non-interest- bearing deposits were about 40% of customer deposits at end-1H21). BOJ's gross loans/customer deposits ratio is low (82% at end-3Q21) and the bank is a net placer on the interbank market. Net liquid assets covered about 28% of customer deposits at end-1H21.

Key Rating Driver 1

GSR

Fitch has assigned BOJ a GSR of 'b', at the same level as the country's domestic systemically important banks' (D-SIB) GSR. The latter is below Fitch's typical D-SIB GSR for 'BB-' rated sovereigns with a high propensity to provide support (0-1 notch below the sovereign rating).

BOJ's GSR reflects a limited probability of support from the Jordanian sovereign due to constraints on the latter's ability to provide support given its weak financial flexibility. However, Fitch believes the willingness of the Jordanian authorities to provide support would be high, given the banking sector's importance to the economy and the country's development plans.

RATING SENSITIVITIES

Factors that could, individually or collectively, lead to negative rating action/downgrade:

BOJ's ratings are primarily sensitive to further deterioration in the domestic operating environment, as well as a material weakening in its asset quality, profitability and capital.

A deterioration in asset quality, particularly in the bank's Stage 3 loans ratio exceeding 10% could lead to a VR downgrade.

A further weakening in BOJ's profitability, with operating profit/RWAs ratio remaining below 1.25%, could also put pressure on the VR, especially if pre-impairment operating profit is insufficient to shield capital buffers from asset-quality deterioration.

A deterioration in BOJ's CET1 ratio to below 12% could also lead to a downgrade of the VR.

As BOJ does not meet Fitch's criteria to be rated above the sovereign, due to its significant exposure to the domestic economy and moderate exposure to the sovereign, its ratings are also sensitive to a downgrade of the Jordanian sovereign.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of BOJ's ratings would require an upgrade of the Jordanian sovereign.

A material reduction of BOJ's exposures to the sovereign and to the domestic operating environment and/or the bank's expansion outside Jordan into higher rated markets could lead to an upgrade of the bank's ratings. However, this is unlikely in the next 12-18 months.

VR ADJUSTMENTS

The Operating Environment score of 'bb-' has been assigned above the 'b' category implied score for Jordan due the following adjustment reason: Macroeconomic Stability (positive).

BEST/WORST CASE RATING SCENARIO

International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579

REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING

The principal sources of information used in the analysis are described in the Applicable Criteria.

PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS

The GSR is driven by Jordan's sovereign rating.

ESG CONSIDERATIONS

Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg 

-Ends-

Media Relations: Louisa Williams, London, Tel: +44 20 3530 2452, Email: louisa.williams@thefitchgroup.com 
Additional information is available on www.fitchratings.com 

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© Press Release 2021