Moody's reports stable outlook for Jordan's banks

However, the report also notes that the country's high credit growth is taking place amid a benign operating environment.

Jordan's small, but resilient economy continues to offer limited but improving opportunities for the banking sector. A relatively high number
of banks including local commercial, foreign and Islamic banks are currently operating for a population of 5.5 million, with intensifying
competition as each bank seeks to augment its market share.

The market nevertheless remains concentrated, with the top three banks accounting for a market share of slightly over 40%, which continues to
leave plenty of scope for consolidation. Going forward, smaller banks may thus find it difficult to retain a sustainable franchise, and 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.

Moody's notes that several improvements to the regulatory environment have been noted following preparations in line with the adoption of Basel
II as of January 2008; mainly the enhancement of risk management systems and practices, which had lagged somewhat behind international standards
(or were not actively in place for some institutions) and improved financial reporting in terms of transparency and disclosure.

Furthermore, a compliance function was introduced in many banks and upgraded at others, while IT infrastructure has been greatly enhanced.

GDP growth continued to be 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, says Moody's. Credit continued to grow, with construction and consumer lending being the main contributors and the banks' aggregate loan portfolio showing good granularity. The rating agency expects to see current loan growth rates sustained over the short- to medium term, while
foreign banks that recently penetrated the Jordanian market and which have more experience and more products available in consumer financing are beginning to add a new dimension in the retail lending landscape.

Nonetheless, with regard to the significant increase in consumer lending -- which helps 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. However, the banks continue to be 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 continuing instability in neighbouring
countries. 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, Moody's concludes.

The rated banks' declining level of problematic exposures is a positive rating driver, and we also note 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, we note that lending at these branches has been heavily reduced, while certain banks have taken proactive provisioning measures.