Complex Made Simple

Jordan Islamic Bank’s ratings affirmed on ‘stable’ outlook

Capital Intelligence (CI), the international credit rating agency, announced today that it has affirmed Jordan Islamic Bank’s (JIB)’s Long and Short-Term Foreign Currency Ratings (FCRs) at ‘BB-‘ and ‘B’, respectively. JIB’s FCRs are constrained by Jordan’s sovereign ratings (‘BB-‘/’B’/ ‘Stable’), reflecting JIB’s base of operations in Jordan and its exposure to the Jordanian sovereign in the form of balances at the Central Bank of Jordan (CBJ). 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 Support Level of ‘3’ is affirmed, on the basis of the high likelihood of support from the Central Bank of Jordan in case of need, and from the parent Al-Baraka Banking Group in Bahrain. The Outlook for JIB’s FCRs remains ‘Stable’, in line with the Outlook for Jordan’s Sovereign FCRs (‘BB-‘/B’).

The Bank’s Financial Strength Rating (FSR) is maintained at ‘BBB-‘, on a ‘Stable’ Outlook, underscored by the Bank’s sound asset quality as a result of the much improved loss-reserve cover for non-performing financings (NPFs), ample and improving liquidity, good profitability, and JIB’s established Islamic banking franchise. The FSR is nevertheless constrained by the low total capital to total assets ratio, customer concentration risk, the low share of non-profit sharing income (NPSI) to gross income, and the challenging operating environment combined with high geopolitical risk factors (as is the case for all Jordanian banks).

JIB continues to control the largest share of Islamic banking assets and deposits in Jordan, despite keen competition, following the entry of a number of other GCC-based Islamic institutions over the past. The ongoing regional instability, however, has elevated credit risk in the local market and created challenging operating conditions for all Jordanian banks as a group. Although this has translated into higher NPFs for JIB in recent years, as was the case with conventional banks in Jordan, the Bank’s NPF ratio remains one of the lowest in the local market. Moreover, loss-reserve coverage for NPFs improved further during 2013 and into the first half of 2014.

Having had consistently high levels of liquidity prior to 2012, reflecting the comparatively low share of financings in total assets, JIB’s liquidity position changed significantly in that year following the extension of a government guaranteed large medium-term financing to a systemically important public sector entity. Although liquidity tightened as a result and has since remained lower than the sector average, the Bank’s liquidity metrics improved in 2013 and into 2014 – and are currently at a very comfortable level. Being an Islamic bank, JIB is precluded from investing surplus liquidity in interest earning government securities and T-bills. As a result, while conventional banks have increased their exposure to high-yielding Jordanian government paper over the past, JIB has redeployed surplus liquidity into government guaranteed financings (there are currently no Sukuk instruments in Jordan to invest surplus JOD funds). The Bank’s funding is predominantly sourced from customer deposits; these have continued to grow at a steady pace in the first half of this year.

The capital adequacy ratio (CAR), calculated to Islamic Financial Services Board (IFSB) methodology, remained at a comfortable level – underscoring the Bank’s high exposure to government guaranteed financings and CBJ placements, both of which are zero risk-weighted. Nonetheless, JIB’s ratio of total capital to total assets remained limited and below the average for the conventional banks in Jordan. As a mitigating factor, the Bank’s rate of internal capital generation has been sound in recent years, reflecting its good net profitability and benefiting from a moderate dividend payout ratio.

Having seen a rebound in net profit and return on average assets (ROAA) in 2012, JIB’s profitability at both the operating and net levels improved in 2013 and into H1 2014, on the back of higher net profit sharing income, although non-profit sharing income declined during the same periods. The higher level of net profit sharing income (and gross income) generated was driven by an expanded financing portfolio, although the growth pace slowed down during H1 2014. At the same time, the Bank’s improved and sound operating profitability – a result of a healthy profit sharing margin and lean cost base – provides adequate absorption capacity for unforeseen financing losses.
Established in 1978 under a special decree, JIB is the oldest Islamic bank in Jordan. The Bank is listed on the Amman Stock Exchange and 66% of its capital is held by Al-Baraka Banking Group, which is in turn owned by Saudi Arabia based Dallah Al-Baraka Group, a large diversified business conglomerate founded in 1969 by Sheikh Saleh Abdullah Kamel. JIB undertakes financing and investment through Islamic modes of Murabaha (cost plus profit margin), Mudaraba (the Bank shares profits as capital provider), Musharaka (participation investment) and Ijara (lease financing). The Bank operates a network of 67 branches, 15 cash offices and 124 ATMs in Jordan. At end-June 2014, the Bank had total assets of JOD3.4 billion (USD4.81 billion) and total capital of JOD261mn (USD367mn).

Primary Analyst
George Panayides
Credit Analyst
Tel: +357 2534 2300
E-mail: [email protected]

Secondary Analyst & Rating Committee Chairman
Morris Helal
Senior Credit Analyst
E-mail: [email protected]

The information sources used to prepare the credit ratings are the rated entity and public information. CI had access to the published financial statements of the issuer for the purpose of the rating and had access to one or more of the following: the internal accounts; management; and other relevant internal documents of the issuer. CI considers the quality of information available on the issuer to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.
The rating has been disclosed to the rated entity and released with no amendment following that disclosure. Ratings on the issuer were first released in October 1985. The ratings were last updated in December 2013.
The principal methodology used in determining the ratings is Bank Rating Methodology. The methodology, the meaning of each rating category, the time horizon of rating outlooks and the definition of default, as well as information on the attributes and limitations of CI’s ratings, can be found at CI’s policy on unsolicited ratings including an explanation of the colour coding of credit rating symbols can be found at the same location. Historical performance data, including default rates, are available from a central repository established by ESMA (CEREP) at