Complex Made Simple

HBTF’s ratings affirmed financial strength rating outlook revised to ‘stable’

Capital Intelligence (CI), the international credit rating agency, announced that it has affirmed Housing Bank for Trade & Finance’s (HBTF) Long and Short-Term Foreign Currency Ratings (FCRs) at ‘BB-‘ and ‘B’, respectively. HBTF’s Long-Term FCRs are constrained by the ratings assigned to the sovereign (‘BB-‘/’B’/’Stable’), reflecting HBTF’s base of operations in Jordan and its exposure to the Jordanian sovereign, mainly in the form of Jordanian government paper. Accordingly, the Bank’s FCRs remain highly correlated with the sovereign’s creditworthiness.

The downgrade of the sovereign or any improvement in Jordan’s creditworthiness would have a corresponding effect on the Bank’s FCRs. The Outlook for HBTF’s FCRs remains ‘Stable’, in line with the Outlook for Jordan’s Sovereign FCRs.

The Support Level is set at ‘3’, in view of the high likelihood of official support from the Central Bank of Jordan (CBJ) in case of need, as well as from the institutional shareholders including Qatar National Bank, who would be willing to support the bank in the unlikely scenario of financial distress. The shareholders have repeatedly fully subscribed to a number of rights issues over the years.

The Financial Strength Rating (FSR) is affirmed at ‘BBB+’ underpinned by the Bank’s robust liquidity metrics and solid capital adequacy ratio (CAR), as well as its sound and better than sector average operating profitability, owing to the Bank’s superior net interest margin (NIM), and favourable cost efficiency. The FSR is also supported by HBTF’s good and better than peer average return on average assets (ROAA) and sound quality of earnings, which are mostly derived from retail banking, and show a fair degree of geographical diversification. The FSR is nevertheless constrained by the still high level of non-performing loans (NPLs), which remained moderately above the banking sector average despite the higher amount of renegotiated loans during 2013.

Furthermore, the difficult operating environment and increased geopolitical risks in the broader region (affecting the Bank’s Syrian subsidiary to a large extent) are likely to continue weighing on the Bank’s asset quality. The FSR is also constrained by the high concentration in Jordanian sovereign debt (currently rated ‘BB-‘ / ‘B’ by CI), which elevates the credit risk of the Bank. More specifically, the sizeable holdings of Jordanian government securities, though a common feature in the Jordanian banking system, create concentration risk, which on its own exceeded two times the Bank’s capital at end-June 2014.

At the time of the last review in 2013, the Outlook on the FSR had been revised to ‘Negative’ from ‘Stable’, given the worsening NPLs, together with the increased amount of renegotiated loans, and the challenging operating environment in Jordan and the broader region. In view of the material improvement in the NPL ratio in H1 2014 and the enhanced loan loss reserve (LLR) coverage, combined with the increase in net profitability and liquidity levels, the Outlook for the FSR is revised to ‘Stable’ from ‘Negative. The ‘Stable’ Outlook reflects CI’s expectation that the Bank’s NPL ratio is likely to decline further in the near term, with the LLR coverage maintained at the current sound level.

HBTF is a systemically important institution in the Jordanian banking system, commanding leading market shares in assets and customer deposits. At end H1 2014, HBTF had the biggest branch network and the largest client base of over one million customers in the Kingdom of Jordan. HBTF’s nationwide branch network effectively gathers relatively cheap and significant amounts of non-interest bearing retail customer deposits. The deep customer deposit base – in combination with a comparatively small loan portfolio – has consistently produced a highly liquid balance sheet with the best liquidity metrics in the Jordanian banking system.

In 2013, NPLs grew at a much slower pace, amid a modest recovery in the local economy, while in the first half of the current year NPLs declined in both money and proportionate terms. On a positive note, LLR provisioning was increased in 2013, resulting in nearly full LLR coverage for NPLs. Due to the sharp slowdown in the Jordanian economy in preceding years, as well as the worsening geopolitical environment in the region (especially in neighbouring Syria), HBTF’s loan asset quality had deteriorated sharply. In this regard, HBTF’s above average operating profitability – underpinned by a strong NIM and good cost control – has allowed the Bank to absorb elevating risk charges during the last three years. This, in turn, has preserved the Bank’s capital adequacy at a solid level, notwithstanding the relatively high dividend payout ratio in recent years. The Bank’s CAR has a high Tier 1 component.

HBTF was established in 1974 as a Specialised Credit Institution (SCI) with a social mandate to relieve the acute housing shortage in Jordan by offering long-term credit facilities to meet the country’s residential and business needs. Since the Bank’s specialised role as a lender to the construction and housing sectors effectively ceased nearly two decades ago, HBTF has successfully diversified its credit activity into other key sectors of Jordan’s economy including trade, retail and manufacturing. With a universal banking business model in place and 120 branches in Jordan, the Bank maintains operations in London, Bahrain, Algeria, Palestine and Syria. HBTF’s other prominent shareholders include Kuwait Real Estate Investment Consortium, Libyan Foreign Bank (16.1 per cent) and Jordan’s Social Security Corporation (15.4 per cent). Total assets were JD7.56bn ($10.7bn) at end-June 2014, while total capital amounted to JD1.04bn ($1.46bn).