Fitch: Jordanian Banks' Ratings Constrained by Operating Environment
OREANDA-NEWS. Fitch Ratings says in a special report that Jordanian banks' ratings are constrained by a challenging operating environment, as reflected in their Negative Outlook. This is the first peer review report published by Fitch on Jordanian banks.
The Negative Outlook reflect heightened political risk, weak external finances despite falling oil prices and continued concern over the country's public finances.
Jordanian banks, with the exception of Arab Bank Plc, have high exposure to domestic sovereign debt or sovereign credit exposures, which significantly increase the correlation between the banks and their operating environment. The banks' ratings are therefore effectively constrained by this. Consequently, any change in our view of the Jordanian operating environment is likely to be mirrored on these banks' Issuer Default Ratings (IDRs).
Arab Bank's IDRs (BBB-/Negative) are driven by the bank's standalone strength as indicated by the bank's Viability Rating (VR) of 'bbb-'. Its geographical diversification throughout the Gulf Cooperation Council (GCC), North Africa and Europe, as well as its holding of highly liquid assets, mainly in Europe, allow the bank to be rated higher than its peers in Jordan.
Despite the challenging operating environment, Jordanian banks have continued to demonstrate healthy liquidity, adequate capital ratios and resilient profitability. We do not expect pressure on capitalisation or liquidity as credit growth is likely to be sluggish in 2016 and banks have a cautious risk appetite.
Total credit facilities extended by banks rose 9.5% in 2015, which was mainly driven by government lending as part of the government's investment drive. Private-sector credit growth was 4% in 2015 and is expected to be sluggish in 2016, due to lack of lending opportunities.
Asset quality metrics are generally improving. The average impaired loans ratio for the banking sector dropped to 5.5% at end-1H15 from 7% at end-2013 as a result of banks cleaning their balance sheets of legacy impaired loans and the sector-average reserve coverage ratio improved to 80% at end-1H15 from an average of 65% over the past five years.
Liquidity remains healthy with an average loans-to-deposits ratio of about 70%, which is expected to be maintained given banks' stable domestic funding base and expected slow credit growth in 2016. Banks are largely funded by customer deposits and deposits are more granular than in the GCC, with a higher proportion of retail deposits.
Capitalisation is adequate with a sector-average capital adequacy ratio of 18.5% at end-1H15, which should be viewed in light of the banks' high concentration risk, the still tough operating environment and zero risk-weighting on government securities.
Fitch believes the sovereign has a high propensity to support the banking system as Jordanian banks, with the exception of Arab Bank, are mainly domestic. However, its ability to do so is constrained by its weak financial flexibility.