Fitch Ratings: Jordan's Challenging Operating Environment Constrains Banks' Ratings

Link to Fitch Ratings' Report(s): Jordanian Banks: 2019 Peer Review

Fitch Ratings-Dubai/London: The operating environment in Jordan is stabilising but remains challenging for banks, Fitch Ratings says. This is due to below-potential GDP growth, elevated unemployment, a difficult, albeit slowly improving regional environment and rising social tension resulting from fiscal consolidation measures. 

The Long-Term Issuer Default Ratings (IDRs) of Fitch-rated Jordanian banks are driven by their standalone credit profile, as defined by their Viability Ratings (VR), which are correlated with and constrained by the Jordanian operating environment.

Arab Bank's (AB) Long-Term IDR of 'BB' is constrained but not capped by Fitch's view on Jordanian sovereign risk. AB's geographical diversification in the Gulf Cooperation Council (GCC) and outside the MENA region, as well as about half of its holdings of liquid assets in Europe and other highly rated sovereigns could help offset the impact of a sovereign crisis. Nevertheless, AB's high exposure to the Jordanian sovereign relative to its equity via holdings of government securities somewhat offsets the benefits of its geographical diversification and weighs on its ratings.

Jordanian banks' asset quality metrics have been well maintained through economic cycles, supported by the banks' conservative risk appetite. The sector's impaired loans ratio is declining (4.6% at end-1H18) as banks continue to clean up their balance sheets from legacy impaired loans. However, the ratio increased for some banks in 2018 as the implementation of IFRS 9 resulted in more conservative loan classification.

Banks continue to demonstrate healthy profitability despite some margin pressure. The net interest margins for some Jordanian banks came under pressure in 2018 as a result of rising funding costs (due to tighter liquidity) and limited assets repricing ability (due to high competition). However, pre-impairment operating profitability remains healthy, providing banks with good buffers against deterioration in asset quality without hurting their capital base.

The sector average capital adequacy ratio was 17.2% at end-1H18, comfortably above the minimum regulatory requirement. We consider capitalisation to be only adequate given banks' elevated loan book concentration and 0% risk weighting on local currency sovereign debt and sovereign guaranteed exposures. IFRS 9 expected credit losses charges had a manageable impact on most banks' capital, ranging from 2%-5% of banks' equity.

Banks continue to demonstrate strong funding profiles underpinned by large and granular retail deposits. The sector's loans/deposits ratio remains healthy at below 80%. Banks maintain a comfortable stock of liquid assets, including interbank placements, cash balances and sovereign securities.

Jordanian banks are mainly domestic (with the exception of AB), and Fitch considers the sovereign's propensity to support the banking system to be high. However, the sovereign's ability to provide support is constrained by its weak financial flexibility and high reliance on grants and IMF support.

The full report, "Jordanian Banks: 2019 Peer Review. Challenging Operating Environment Constrains Banks' Ratings", is available at www.fitchratings.com.

Media Relations Contact: Louisa Williams, London, Tel: +44 20 3530 2452, Email: louisa.williams@fitchratings.com

© Press Release 2019