Jordan Commercial Bank's ratings affirmed

In line with the 'Negative' Outlook CI recently assigned 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 JCB's incorporation in Jordan and its exposure to Jordanian sovereign debt. Accordingly, the Bank's Ratings remain highly correlated with the sovereign's creditworthiness. A possible downgrade of the sovereign or any improvement in Jordan's creditworthiness would have a commensurate effect on JCB's ratings.

The Bank's Financial Strength Rating (FSR) is affirmed at 'BB', and is constrained by the Bank's continued high non-performing loan (NPL) ratio, low loan-loss reserve coverage for NPLs, and very weak net profit. The FSR Rating is supported by the recent capital increase, ongoing high levels of liquidity, and satisfactory operating profitability. The Outlook for the FSR remains 'Stable'. JCB's Support level is maintained at '3', in view of the high likelihood of support from the Central Bank of Jordan in case of need.

JCB ranks among the small sized banks in the Jordanian domestic banking sector. The Bank has made good progress expanding its customer deposit and loan franchises over the years, aided by a sizeable branch network. However, asset quality has been negatively impacted by Jordan's sharp economic slowdown. As conditions in the trade and industry sectors worsened after an extended period of rather aggressive loan expansion, the Bank saw a marked increase in NPLs in recent years and into Q1-Q3 2012. The growth in problem loans was a pattern observed across most, but not all, Jordanian banks. The Bank's NPL ratio is currently among the highest in the local market. Although management has started to address the weak loan-loss reserve coverage through stepped up provisioning levels, cover for NPLs remains weak. JCB advised that a considerable amount of unprovided NPLs is covered by collateral. However, CI views security as being just a partial loss mitigant, rather than a source of repayment.

The recent capital increase has to some degree allayed concern over the Bank's high unprovided NPLs to free capital ratio and restored capital adequacy to a satisfactory level. Nevertheless, its capital adequacy ratio (CAR) remains well below the sector average and provides limited scope for business expansion. Having incurred a moderate net loss in 2011, JCB's net profit and return on average assets (ROAA) remained under marked pressure in the first nine months of 2012 and a net loss is likely for the full-year. On a positive note, JCB's satisfactory operating profitability provides the financial flexibility to continue increasing provisions as necessary. Gross income generation is supported by adequately diversified sources of income and good core income levels.

In common with other Jordanian banks, JCB's balance sheet remains very liquid and this strength constitutes an important ratings driver. Liquidity is supported by a growing base of customer deposits, the latter being the Bank's principal source of funding.

JCB is the successor bank of the erstwhile Jordan Gulf Bank, which was established in Jordan in 1977 as a public shareholding company. In 2004, following its restructuring and a private placement of shares to a group of prominent investors including the Social Security Corporation (Jordan government), the Bank was recapitalised and the current name adopted. A new management team was subsequently installed.

JCB is modelled along universal banking lines to provide a comprehensive banking service to corporate and retail clients. The Bank also has a significant trade finance operation generating good levels of fee income. As at end-September 2012, the Bank reported total assets of JOD804m ($1.13bn) and total capital of JOD92m ($129m).