Jordanian banks strengthen but take on unseasoned loans, says report

In a report published today titled 'Bank Industry Risk Analysis: Jordanian Banks Strengthen, Grow Fast, But Book Unseasoned Loans,' Standard & Poor's Rating Services said that it considers the banking system in the Hashemite Kingdom of Jordan (foreign currency BB/Stable/B, local currency BBB/Stable/A-3) to be much improved in recent years but still relatively high risk.

We rank the Jordanian banking industry in group 8 of our global Banking Industry Country Risk Assessment framework (BICRA; out of 10, 1 is the strongest).

"This classification reflects banks' fast credit growth, the risks stemming from operation in the Palestinian territories, and limited track record of asset quality stability, plus the lack of economic diversification and the rapid growth of the real estate sector," said Standard & Poor's credit analyst Mohamed Damak. "Offsetting these factors are Jordanian banks' adequate capitalization and improving financial profiles, thanks to the much-improved economic environment that has prevailed during the past three years."

Standard & Poor's assessment of the Jordanian banking sector takes into account the supportive approach of the authorities toward the banking system. Although Jordanian authorities have limited financial flexibility, good risk-based banking supervision makes regulators better equipped to take early corrective action.

The Jordanian banking system is one of the smallest in the Middle East. The system comprises 23 banks, including two Islamic banks and eight branches of foreign banks. The five largest players dominate the system and control more than two-thirds of total assets and three-quarters of total deposits. Given the small size of the remaining players and increasing competition, the Jordanian banking system could well enter a consolidation phase.

Asset quality indicators have dramatically strengthened in the past few years. Jordan's economic improvement and the rapid growth of loan portfolios remain the main drivers behind this achievement.

"The untested nature of new loan production, as well as the dependence of the Jordanian economy on a few cyclical sectors could trigger asset quality deterioration should economic conditions worsen," said Mr. Damak. "Nevertheless, the medium-term outlook for Jordan's economy remains good."

Several additional factors weigh on the risk profile of Jordanian banks. These include the system's exposure to stock and real estate markets and the risks stemming from operations in the Palestinian territories. The banking system has proved relatively resilient to the correction on the Amman Stock Exchange since the last quarter of 2005, but in Standard & Poor's opinion the system has limited ability to withstand other major shocks, which are, however, not foreseen in our base-case scenario.

The rapid increase in competition and the short track record of stability for the overall system pose additional challenges. Improving regulation and supervision are positive factors balancing these risks.