Moody's reports: Stable outlook for Jordan's banking system

The banks' foreign currency deposit ratings are set at the Ba3/NP country ceilings for deposits, that carry negative outlooks.

The country has a small, albeit resilient economy which offers limited but improving opportunities for the banking sector. A relatively high number of banks (23) are currently operating (13 local commercial banks,
8 foreign and 2 Islamic banks) for a population of 5.5 million, with intensifying competition as each bank seeks to augment its market share.
Moody's rates three banks in Jordan: Arab Bank plc (Ba3/NP/C+), Housing Bank for Trade & Finance (Ba3/NP/D+) and Cairo Amman Bank (Ba3/NP/E+).

However, in spite of the highly competitive environment, the market nevertheless remains concentrated, with the top three banks accounting for a market share of slightly over 40%, leaving plenty of scope for consolidation. Within this context, Moody's believes that going forward smaller banks may find it difficult to retain a sustainable franchise, and that they could form the basis for merger and acquisition activity.

"The possible involvement of any of the rated banks in consolidation activity that could strengthen their local franchise without any significant detriment to their financial metrics could have a positive rating impact," says Nondas Nicolaides, a Moody's AVP/analyst and author of the new report.

GDP growth was mainly driven by booming domestic demand, with consumption and investment fuelled by rapid credit growth, rising property prices and inflows of private capital, mainly from the Gulf region. Credit grew by 25% during 2005, with construction and consumer lending being the main contributors and the banks' aggregate loan portfolio showing good granularity. Moody's expects to see current loan growth rates sustained over the short- to medium term, while foreign banks that recently penetrated the Jordanian market have stimulated competition, especially in the retail lending landscape.

Nonetheless, with regard to the significant increase in consumer lending
-- which helps further diversify the banks' exposure -- Moody's notes that this lending is relatively young and is yet to be tested. In addition, sensitive sectors such as construction and real estate present risks, as does the recent correction in the equity markets. However, the banks are very liquid, even by international standards, while healthy capitalisation levels provide a comfortable cushion for growth and for absorption of possible loan losses.

"The Jordanian banking system seems to have benefited so far (although perhaps temporarily) from the recent instability in neighbouring countries," comments Nicolaides. "Certain capital inflows reach Jordan in search of a safe haven, while part of the Iraqi trade finance activity is carried out through the banking system in Jordan, providing significant fee income to the banks involved," the analyst explains.

The rated banks' declining level of problematic exposures is a positive rating driver with the end-2005 estimated weighted average level of gross NPLs as a percentage of gross loans at around 4%, compared to almost 8% five years ago. The report also notes the banks' improving core operating profits on the back of still wide margins.

While the banks' exposures to Palestine carry significant risks, both credit and operational, Moody's notes that lending at these branches has been heavily reduced, while certain banks have taken proactive provisioning measures.

Over the years, the Central Bank of Jordan (CJB) has taken many steps to improve the quality of supervision, through clear guidelines and instructions on their application which resulted in improved disclosure and transparency on the part of banks. A Prompt Corrective Action Framework was introduced, and guidelines were issued aiming to improve the banks' corporate governance and enhance risk management systems.
According to the CBJ, Jordanian banks are well prepared to implement the Basel II accord by the end of 2007, Moody's concludes.