Arab Jordan Investment Bank’s ratings affirmed

February 15, 2014 9:36 am

Capital Intelligence (CI), the international credit rating agency, announced that it has affirmed Arab Jordan Investment Bank (AJIB)’s Long and Short-Term Foreign Currency Ratings (FCRs) at ‘BB-‘ and ‘B’, respectively. CI had recently lowered AJIB’s and all other Jordanian banks’ Long-Term FCR to ‘BB-‘ from ‘BB’, following the agency’s recent 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 AJIB’s FCRs remains ‘Stable’, in line with the Outlook for Jordan’s Sovereign FCRs. This reflects AJIB’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 AJIB’s ratings.

The Financial Strength Rating (FSR) is affirmed at ‘BBB’ on the basis of the Bank’s strong capital base and continuing strong liquidity, coupled with a consistently sound and better than sector average net profitability. The FSR is also supported by the recent improvement in the non-performing loans (NPL) ratio, which is currently one of the best in the Jordanian banking system. The FSR is constrained by high concentrations in both sides of the balance sheet – particularly relating to government sovereign debt and government related entities – and the challenging economic conditions in Jordan, which may adversely affect the Bank’s asset quality. The ‘Stable’ Outlook for the FSR is maintained. In view of the high probability of support from the Central Bank of Jordan in case of need, the Support Level of ‘3’ is maintained.

In January 2014, AJIB announced that it had entered into an agreement to buy HSBC’s banking business in Jordan. The deal, which has been approved by Central Bank of Jordan (CBJ), is expected to be completed during the first half of 2014. In the announcement, it was reported that HSBC’s banking business in Jordan comprised four branches with total assets of about US$1.2 billion at end September 2013. This transaction is expected to increase AJIB’s assets by some 75% and render the Bank a medium-sized player in the local market. Due to the Non-Disclosure Agreement (NDA) with HSBC, the Bank cannot disclose any further details about the deal at present. AJIB has advised CI that it plans to increase its capital by JOD50m by way of a rights issue to compensate for the increase in risk-weighted assets. After the capital increase and the completion of the acquisition, CI understands that AJIB’s CAR will decline from the very high current level, but remain comfortably above the CBJ’s minimum regulatory capital requirement.

From a liquidity perspective, the Bank’s management does not anticipate the transaction to affect the Bank’s funding and liquidity profile to a great extent, as HSBC’s funding composition and liquidity is structured in comparatively the same manner as that of AJIB. AJIB currently has very high liquid and quasi-liquid asset ratios. With respect to asset quality, details concerning HSBC’s loan portfolio have not been made public because of the NDA. However CI understands that HSBC has been cleaning its balance sheet over the last three years in preparation for their departure from non-core markets (Jordan being one of them) as part of a global strategy to exit markets in which they don’t have a substantial share. Although CI does not expect any change in the Bank’s ratings post acquisition, it will continue to closely monitor the impact the acquisition may have on AJIB’s risk profile. Once further information is publicly disclosed, any rating action will be announced on a timely manner.

AJIB is a well managed institution and follows a clear business strategy. Notwithstanding the steady growth in the balance sheet over the years, the business franchise remains modest in terms of size and market share in the Jordanian banking sector. AJIB’s solid capital adequacy has been consistently better than the sector average and provides a good buffer against potential setbacks. Liquidity is strong, in common with other Jordanian banks. The significant holdings of liquid and quasi-liquid assets, coupled with the comparatively low share of loans in total assets underscores AJIB’s conservative lending policy.
AJIB’s overall loan asset quality remains satisfactory in the post 2008 era that caused a marked economic slowdown in Jordan. While loan-loss reserve coverage (LLR) deteriorated due to provision reversals relating to NPLs write-offs, NPLs recorded a significant decline in 2013. However, the operating environment in Jordan remains challenging and credit risks are still relatively high. AJIB’s solid capital base, in combination with its high liquidity, is a major risk mitigant in this regard.

Net profit reached a record level in 2013, on the back of significantly higher non interest income and lower provision charges. Contrary to most Jordanian banks, AJIB has produced consistently solid returns with no significant earnings volatility in recent years, aided by diversified sources of revenue streams, good cost control and relatively low provision charges. Although operating profit slightly decreased in 2013, it continues to provide effective risk absorption capacity.

Established in 1978, AJIB is focused on commercial banking and serves a base of corporate and high net worth customers, as well as Jordanian government entities. The business strategy seeks to develop private and retail banking in order to further diversify risk assets, sources of funding, and income. During 2013, AJIB raised its stake in London-based Jordan International Bank Plc to 25% from 21.24% after purchasing (together with Housing Bank for Trade and Finance) the shares of the other Jordanian banks.

Jordan International Bank Plc was incorporated in the United Kingdom in 1984 to provide a range of financial services and products to banking institutions, corporations, and private clients, both UK and overseas residents. AJIB’s largest shareholder is the Al-Qadi family, the founding owners, who own 40% of shares. Other shareholders include Sheikh Hamad Bin Jassin Bin Jaber Al-Thani (the previous Prime Minister and Foreign Minister of Qatar, 9.09%), Arab Investment Company (Saudi Arabia, 10.25%), and Libyan Foreign Bank (12.79%). The Bank reported consolidated total assets of JOD1,198mn ($1.69 billion) and total capital of JOD160mn ($225mn) at end 2013.

Primary Analyst
George Panayides
Credit Analyst
Tel: +357 2534 2300