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Jordan Kuwait Bank’s ratings affirmed

Capital Intelligence (CI), the international credit rating agency, announced today that it has affirmed Jordan Kuwait Bank (JKB)’s Long and Short-Term Foreign Currency Ratings (FCR) at ‘BB-‘ and ‘B’, respectively. CI recently lowered JKB’s and all other Jordanian banks’ Long-Term FCR to ‘BB-‘ from ‘BB’ in December 2013, following the agency’s lowering of Jordan’s Sovereign Long-Term FCR to ‘BB-‘ from ‘BB’. Jordanian banks’ FCRs remain highly correlated with the sovereign’s creditworthiness.

The Outlook for JKB’s FCRs remains ‘Stable’, in line with the Outlook for Jordan’s Sovereign FCRs. This reflects JKB’s incorporation and base of operations in Jordan, as well as its exposure to Jordanian sovereign debt. A possible downgrade of the sovereign or any improvement in Jordan’s creditworthiness would have a corresponding effect on JKB’s FCRs.

The Financial Strength Rating (FSR) is affirmed at ‘BBB’ on the basis of the Bank’s strong capital base and continuing sound liquidity, coupled with consistently high profitability. The FSR is also supported by the recent improvement in the non-performing loans (NPL) ratio, together with the increase in the effective coverage of NPLs. The FSR is constrained by high concentrations in both sides of the balance sheet – particularly relating to government sovereign debt and government related entities – and the ongoing challenging economic conditions in Jordan and the region, which could adversely affect the Bank’s recovering asset quality. The Bank’s NPLs, though improved, remain comparatively high and still susceptible to elevated credit risk in the local economy. The ‘Stable’ Outlook for the FSR is maintained. In view of the high probability of support from the Central Bank of Jordan in case of need, the Support Level of ‘3’ is maintained.

JKB has established a successful business franchise over the years and evolved into a well recognized brand name in the Jordanian marketplace. While still ranking among the medium sized institutions, the Bank has significantly expanded its market shares of deposits and loans in the banking sector. JKB’s credit portfolio had suffered a setback in 2011 due to the effects of the economic slowdown, starting in 2009. This had resulted in a sharp increase in NPLs together with much weakened loan-loss reserve coverage. On a positive note, the NPL ratio improved markedly at end Q3 2013, mainly as a result of considerable loan settlements. Similarly, loan-loss reserve cover for NPLs improved in 2012 and into Q1-Q3 2013, as a result of stepped up provisioning levels. The ratio of unprovided NPLs to free capital also fell significantly during the first nine months of 2013. In that regard, the Bank’s ongoing strong operating profitability provides the financial flexibility to increase provisions as necessary. JKB’s robust income generation is underpinned by good levels of recurring net interest and non-interest income.

The Bank has maintained consistently sound capital ratios over the years, reflecting a strong rate of internal capital generation and a reasonable dividend payout rate. The ratio of total capital to total assets remains rather high and denotes a moderate degree of leverage. Although JKB’s liquidity had tightened in recent years to below that of peer banks, reflecting its larger share of loans in total assets, key liquidity ratios have remained comfortable within the global context. In Q1-Q3 2013, JKB’s key liquidity metrics improved due to the twin effect of healthy customer deposits growth and curtailed lending. Customer deposits remained the principal source of funding.

Established in 1976, JKB served as the first example of improving and expanding economic relations between Jordan and Kuwait. The Bank underwent a change in ownership in mid-2008, after its largest shareholder Bahrain-based United Gulf Bank sold its 44.1% stake to Burgan Bank in Kuwait, a group sister bank of Kuwait Projects Company Holding (KIPCO). The change in shareholding was initiated at the KIPCO level and underscored the Company’s goal to reorganize its financial services businesses. Burgan Bank, which currently owns 50.92% of JKB, is a very well established institution in Kuwait. The Bank’s other major shareholder is Social Security Corporation (Jordan, 21.04%). JKB remains primarily a corporate bank and has a modest retail banking operation. The Bank reported consolidated assets of JOD2,489mn (USD3.5 billion) and total capital of JOD400mn (USD563mn) at end-September 2013.

Primary Analyst
George Panayides
Credit Analyst
Tel: +357 2534 2300