The Outlook for the FSR is revised to ‘Stable’ from ‘Negative’ in view of the significant decline in non-performing loans (NPLs) in Q4 2012, the markedly improved liquidity, high capital adequacy ratio (CAR), and strengthened operating profitability.
The FSR is constrained by the Bank’s still high NPL ratio, concentrations in loans and funding, a relatively small balance sheet, and the challenging economic and operating environment.
The Bank’s Long and Short-Term Foreign Currency Ratings are affirmed at ‘BB’ and ‘B’, respectively. These Ratings are set at the same level as CI’s Sovereign Ratings for Jordan.
In view of the ‘Negative’ Outlook CI recently appended to Jordan’s Sovereign Long-Term Foreign Currency Rating of ‘BB’, the Outlook for the Bank’s Long-Term Foreign Currency Rating is revised to ‘Negative’ from ‘Stable’, as is the case with other Jordanian banks.
This reflects CAP’s base of operations in Jordan and its exposure to Jordanian sovereign debt. Accordingly, CAP’s Ratings remain highly correlated with the sovereign’s creditworthiness.
The downgrade of the sovereign or any improvement in Jordan’s creditworthiness would have a corresponding effect on CAP’s ratings. The Support Level remains at ‘3’ in view of the high likelihood of official support in case of need.
CAP has 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 has 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 management reported that NPLs declined significantly in the final quarter of 2012 through settlements, write-offs and restructuring.
Although CAP continued to set aside large provisions for NPLs, loan-loss reserve coverage is assessed by CI as being inadequate, notwithstanding the improvement in recent periods. The Bank makes ample use of credit risk mitigation by obtaining collateral.
CAP’s solid capital adequacy ratio is a positive ratings driver and provides a buffer against unforeseen events. Although the capital base is currently impaired to some degree by unprovided NPLs, the situation is expected to improve further in the current year due to an increase in reserves from retained profit.
In that regard, CAP’s ongoing sound operating profit provides the flexibility to increase provisions as required. Operating profit grew sharply in Q1-Q3 2012, following a rebound in 2011, on the back of a considerable rise in fee and commission income at the Iraqi subsidiary National Bank of Iraq (NBI) and to a lesser extent at CAP.
This performance produced a much improved return on average assets in 2012 – despite ongoing high impairment provisions. Liquidity has improved to a strong level as surplus funds continued to be deployed into government paper. Sustained high growth in the customer deposit base has underpinned the rise in liquidity.
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 array 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 National Bank of Iraq (NBI). Currently, 13 branches are in operation in Jordan and 8 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 2012, the Bank reported consolidated assets of JD1,456m (%2.05bn) and total capital of JD253mn ($357m).
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