Capital Intelligence (CI), the international credit rating agency, announced that it has affirmed Jordan Commercial Bank’s (JCB or the Bank) Long and Short-Term Foreign Currency Ratings (FCR) at ‘BB-’ and ‘B’, respectively.
JCB’s Long-Term FCRs are constrained by the ratings assigned to the sovereign (‘BB-’/’B’/’Stable’). CI had lowered JCB’s and all other Jordanian banks’ Long-Term FCR to ‘BB-’ from ‘BB’, following the agency’s lowering of Jordan’s Sovereign Long-Term FCR to ‘BB-‘ from ‘BB’ in December 2013. Jordanian banks’ FCRs remain highly correlated with the sovereign’s creditworthiness.
The Outlook for JCB’s FCRs remains at ‘Stable’, in line with the Outlook for Jordan’s Sovereign FCRs. This reflects JCB’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 JCB’s FCRs.
The Financial Strength Rating (FSR) is affirmed at ‘BB’, supported by ongoing high levels of liquidity, growing customer deposit base, and the adequate capitalization – which is currently just above the Central Bank of Jordan (CBJ) minimum regulatory requirement. While capital adequacy is not currently strong enough to feature as a significant supporting factor, it is at a level which CI considers to be satisfactory. The FSR is also underpinned by the improvement in the ratio of loan-loss reserves (LLR) to non-performing loans (NPLs) and by the level of unprovided NPLs to free capital. That said, the Bank’s still high non-performing loan (NPL) ratio and relatively lower than average loan-loss reserve coverage (LLR) for NPLs – as well as the relatively high borrower concentrations – continue to constrain the FSR. Elevated credit risk in the face of challenging economic conditions in Jordan combined with high geopolitical risk factors continue to weigh down on the Bank’s asset quality. JCB’s overall weak profitability is also a constraining factor. Although net profit grew noticeably in 2013, though from a very low base, the return on average assets (ROAA) remained weak, while the ratio of operating profit to average assets declined further and remained below the sector average level. The ‘Stable’ Outlook for the FSR is maintained. In view of the high probability of support from the CBJ in case of need, the Support Level of ‘3’ is maintained.
JCB ranks among the small sized banks 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 franchises. However, asset quality had been negatively impacted by Jordan’s sharp economic slowdown. After an extended period of rather aggressive loan expansion (especially to 2008 ), the Bank suffered a noticeable increase in impaired loans in subsequent years, which pushed up its NPL to gross loans to among the highest in the local market. The growth in NPLs had been a pattern observed across most, but not all, Jordanian banks. On a positive note, in 2012 NPLs started trending downward due to write-offs and loan rescheduling. The Bank’s NPLs declined further in money terms in 2013 although the ratio remained comparatively high. With regard to LLR coverage, notwithstanding the noteworthy improvement in 2012 and 2013 as a result of an increase in provisioning levels, this remained below the sector average. Management aim to continue addressing the LLR coverage level through ongoing provisioning.
The recent capital infusions, together with the fall in NPL’s level, has to some degree eased concern over the Bank’s high unprovided NPLs to free capital ratio and at the same time restored capital adequacy to an acceptable level. Nevertheless, its capital adequacy ratio (CAR) remained well below the sector average at end 2013. Having incurred a moderate net loss in 2011, followed by a marginal net profit in 2012, JCB’s net profit and return on average assets (ROAA) remained under pressure during 2013, in large part due to still high provision charges. On a positive note, JCB’s operating profitability, although below the sector average, provides the financial flexibility to continue increasing provisions as necessary. Gross income generation is supported by adequately diversified sources of income and good core income levels.
In common with other Jordanian banks, JCB’s balance sheet remains very liquid and this strength constitutes an important ratings driver. Liquidity is supported by a high proportion of liquid assets, and a growing base of customer deposits that forms the Bank’s principal source of funding.
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 to a group of prominent investors including the Social Security Corporation (Jordan government), the Bank was recapitalised and the current name adopted. A new management team was subsequently installed. 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 2013, the Bank reported total assets of JOD1,055mn (USD1.486 billion) and total capital of JOD114mn (USD161mn).
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