Bloomberg/Annie Sakkab

Islamic Banking

Jordan's challenging operating environment constrains banks' ratings

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The operating environment is characterised by below-potential GDP growth, elevated unemployment as well as slowly improving regional economic environment and rising social tension resulting from fiscal consolidation measures.


Fitch Ratings said that the operating environment in Jordan is stabilising but remains challenging for banks.

The rating agency stated that the long-term issuer default ratings (IDRs) of Fitch-rated banks are driven by their standalone credit profile, as defined by their viability ratings (VR), which are correlated with as well as constrained by the Jordanian operating environment.

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 as banks continue to clean up their balance sheets from legacy impaired loans.

Additionally, the banks continue to demonstrate healthy profitability despite some margin pressure, with the net interest margins for some Jordanian banks coming under pressure in 2018 as a result of rising funding costs and limited assets repricing ability.

Jordanian lenders continue to demonstrate strong funding profiles underpinned by large and granular retail deposits.

The sector's loans/deposits ratio remains healthy at below 80 per cent and Jordanian banks maintain a comfortable stock of liquid assets, including interbank placements, cash balances and sovereign securities.

Fitch also confirmed its BB long-term IDR of Arab Bank, adding that the ratings are constrained but not capped by Fitch's view on Jordanian sovereign risk.

The lender is geographically diversified across the in the GCC and outside the MENA region, as well as about half of its holdings of liquid assets in Europe and other highly rated sovereigns which are expected to offset the impact of a sovereign crisis.

However, Arab Bank'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.

TAGS : Arab Bank, Jordanian banks, Fitch Ratings, fiscal consolidation measures

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