Capital Intelligence (CI), the international credit rating agency, announced that it has affirmed Capital Bank of Jordan’s (CAP) Long and Short-Term Foreign Currency Ratings (FCR) at ‘BB-’ and ‘B’, respectively.
CI had recently lowered CAP’s and all other Jordanian banks’ Long-Term FCR to ‘BB-’ from ‘BB’ in December 2013, following the agency’s lowering of Jordan’s Sovereign Long-Term FCR to ‘BB-’ from ‘BB’. Jordanian banks’ FCRs remain highly correlated with the sovereign’s creditworthiness. The Outlook for CAP’s FCRs remains ‘Stable’, in line with the Outlook for Jordan’s Sovereign FCRs. This reflects CAP’s incorporation and base of operations in Jordan, as well as its exposure to Jordanian sovereign debt. A possible downgrade of the sovereign or any improvement in Jordan’s creditworthiness would have a corresponding effect on CAP’s FCRs.
The Financial Strength Rating (FSR) is affirmed at ‘BBB-’ on the basis of the Bank’s strong liquidity, sound capital base and the recent strong rebound in profitability. The FSR is also supported by the improved loan-loss reserve (LLR) cover, as well as the rising effective coverage of non-performing loans (NPLs). The FSR is constrained by the still high level of NPLs, which together with the difficult operating environment and increased geopolitical risks in the region are likely to continue weighing on the asset quality of the Bank – whose base of operations is mainly in Jordan and to a lesser extent in neighboring Iraq. The FSR is also constrained by the relatively small balance sheet and the high concentrations in the loan book which elevate the credit risk of the Bank.
CAP had faced challenging credit related issues in recent years in the aftermath of the shock from the global financial crisis, and one-off lending irregularities connected to the former chairman. Being predominantly a corporate bank, with large loan exposures in the trade sector, the economic slowdown in Jordan had a bigger impact on CAP’s loan portfolio than that of its peers. In response to the events, management had tightened the Bank’s credit policy, including reducing single borrower limits, while continuing to aggressively pursue collections and recoveries – and to a lesser extent restructuring.
Having seen NPLs reach a record level in both money and ratio terms in 2011, encouragingly these measures declined significantly in 2012 and into the first nine months of 2013 through settlements and restructuring. Nonetheless, the Bank’s NPLs, though improved, remain comparatively high and credit risk is still elevated in the local economy. LLR coverage of NPLs materially improved in the first nine months of 2013 to a level broadly in line with the sector average, following substantial provision charges in recent years and into 2013. In that regard, CAP’s ongoing good operating profitability provides the flexibility to increase provisions as required.
CAP’s sound capital adequacy ratio (CAR) is a positive ratings driver and provides a buffer against unforeseen events. In addition, its capital base in no longer significantly impaired by unprovided NPLs as a result of the recent increases in capital and LLR levels, together with the decline in NPLs. Profitability recovered strongly in 2012 and into Q1-Q3 2013, on the back of a considerable rise in fee and commission income at the Iraqi subsidiary National Bank of Iraq (NBI). This performance produced a much improved return on average assets (ROAA). Liquidity has improved to a strong level in 2012 and into the first nine months of 2013, as surplus funds continued to be deployed into government paper and Central Bank placements. Sustained high growth in the customer deposit base has underpinned the rise in liquidity.
CAP has majority ownership and management control in NBI in Baghdad, which over the years has become an important group contributor in terms of assets and deposits, and more essentially in terms of profits. The partnership with NBI has added to the strengthening of relationships with regional and global banks, as well as institutions seeking to develop their business in both the Jordanian and Iraqi markets. In Q4 2013, CAP completed a share capital increase in NBI, bringing its paid-up capital up to the new local minimum regulatory requirement.
CAP is the name adopted on 3 September 2006 for the former ‘Export & Finance Bank’ established in 1995. It is a full service commercial bank providing a wide range of banking, investment products and services to mainly corporate and individual customers alike. CAP is consolidating its market presence in Jordan and expanding selectively in Iraq through its subsidiary NBI. Currently, twelve branches are in operation in Jordan and eight branches in Iraq (through NBI). The Bank is majority owned by a group of prominent Jordanian businessmen. The state Social Security Corporation retains less than 10%. As at end-September 2013, the Bank reported consolidated assets of JOD1,763mn (USD2.48 billion) and total capital of JOD226mn (USD378mn).
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