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Arab Banking Corporation’s (Jordan) ratings affirmed

Capital Intelligence (CI), the international credit rating agency, announced today that it has affirmed Arab Banking Corporation Jordan’s (ABCJ) Long and Short-Term Foreign Currency Ratings (FCRs) at ‘BB-‘ and ‘B’, respectively. CI had recently lowered ABCJ’s and all the other Jordanian banks’ Long-Term FCR to ‘BB-‘ from ‘BB’, following the agency’s recent lowering of Jordan’s Sovereign Long-Term Foreign Currency Rating (FCR) to ‘BB-‘ from ‘BB’. Jordanian banks’ FCRs remain highly correlated with Jordan’s Sovereign Ratings. The Outlook for ABCJ’s FCRs remains ‘Stable’, in line with the Outlook for Jordan’s Sovereign FCRs.

The Bank’s Financial Strength Rating (FSR) is maintained at ‘BBB’ on the basis of solid capital adequacy, good liquidity, sound profitability at both operating and net levels, and effective risk management. The FSR is constrained by the Bank’s small balance sheet and limited market share, ongoing concentration risks, falling non-interest income, and challenging domestic and regional operating environment. The Outlook for the FSR is ‘Stable’. In view of ABCJ’s strong ownership and the very high probability of support from the parent Arab Banking Corporation (ABC) in case of need, the Support level of ‘2’ is affirmed. The likelihood of support from the Central Bank of Jordan is also high.

ABCJ’s balance sheet continues to expand at a measured pace, reflecting its conservatism and sound credit policy. Although the Bank still ranks among the smaller institutions operating in Jordan’s banking sector, its key financial ratios remain superior to many of its larger peers despite the challenging economic conditions and stressed credit environment. The quality of the credit portfolio remained satisfactory, as measured by the still lower than sector average non-performing loan ratio and improved loan-loss reserve coverage.

Despite a further marginal increase in operating profit in H1 2013 vs the same period in 2012, the Bank’s net profit and return on average assets (ROAA) recovered (annualised basis), lifted by a lower loan provision charge. By comparison, net profit and ROAA had slipped in 2012 due to increased provisioning. Although non-interest income has steadily declined in recent years, in part due to lower commissions at the brokerage subsidiary, ABCJ’s gross income generation remained strong and better than peer banks thanks to a very healthy net interest margin. The latter is a reflection of the significant share of high-margin retail loans in the credit portfolio.

The capital adequacy position remains solid, despite the payment of a large cash dividend to shareholders in respect of 2012 earnings; the capitalisation of reserves had reinforced the capital base over the years. Liquidity ratios remain very comfortable, in common with other Jordanian banks, underscoring the rather low share of loans in total assets as well as the significant investment in Jordanian government bonds. Customer deposits constituted the largest source of funding.

ABCJ was established in January 1990 after Bahrain-based Arab Banking Corporation and the Housing Bank for Trade and Finance (Jordan) acquired the assets and liabilities of the Jordan Securities Corporation, which at the time was undergoing liquidation. The acquisition was structured as a debt conversion. In 1998, in line with Housing Bank for Trade and Finance’s (HBTF) divestiture programme, HBTF sold its entire 25.46% stake to ABC. This effectively raised ABC’s participation in the Bank to the current 86% level from 60%. The remaining 14% shares are held mainly by Jordanian investors. The parent’s risk profile is sound, with total assets of $24.5bn and total capital of $4.2bn at end 2012.

ABCJ benefits from the technical support provided by its parent, while enjoying access to the Group’s widespread international network. The Bank follows a universal bank business model with emphasis on retail and commercial banking, primary capital markets, securities trading, loan syndications and project finance. At end-June 2013, the Bank had total assets of JOD880mn (USD1,239mn) and total capital of JOD128mn ($180mn).