Lenders in Jordan thrive amid sluggish growth

Despite the strain on its economy, Jordan’s banking system is doing relatively well. Assets, deposits and loan activity all continued to rise in 2012. Published in MEED, 12 June 2013

Jordan’s economy is under strain from numerous sources these days, both international and domestic. The country has been hit hard by the conflict in Syria and the hundreds of thousands of refugees fleeing across the border in search of safety are adding to the pressure on Jordan’s already scant resources. At the same time, high oil prices are pushing up inflation and the level of grants from its richer allies was low last year at just $1.5bn.

All that led to sluggish economic growth of 2.8 per cent in 2012, according to the Washington-based IMF. That was slightly higher than the 2.6 per cent seen in the previous year, but lower than the 3 per cent that had been expected.

Despite this, Jordan’s banking system is doing relatively well. Assets, deposits and loan activity all continued to rise in 2012. Although in the case of deposits, the growth was a low 2.4 per cent, assets were up by 4.2 per cent and credit facilities rose by an impressive 12.4 per cent, the highest level since the global economic crisis began in 2008.

Rising profits

The main banks have also been posting rising profits. The net profit of Arab Bank, the country’s largest, grew by 15 per cent over the past year, from $305.9m in 2011 to $352m in 2012. Its closest rival, Housing Bank for Trade & Finance, saw its net income rise by 4.5 per cent over the same period, from $140m in 2011 to $146m last year.

In spite of the geopolitical and macroeconomic problems, Jordan’s government is able to make a decent case for the health of the banking sector. In a report sent on 27 March by Finance Minister Suleiman Hafez and central bank governor Ziad Fariz to the managing director of the IMF, Christine Lagarde, they did just that.

They pointed out that non-performing loans (NPLs) and provisioning ratios have started to improve, after a period of deterioration in the wake of the global financial crisis. Capital adequacy and liquidity ratios are solid, far exceeding the central bank’s requirements, and the returns on assets and equity remain strong. “Most importantly, our stress testing analysis suggests that the banking system remains resilient to potential shocks, due to large capital buffers,” the report said.

However, the improvements in some of the metrics they refer to is not always that great. While it is true to say that the NPL ratio has started to improve, from 8.5 per cent of all loans at the end of 2011 to 8.4 per cent by June 2012, the value of those bad debts actually increased over this time, from JD1.3bn ($1.8bn) to JD1.4bn. In addition, capital adequacy ratios may be within the central bank’s comfort zone, but they are falling rather quickly, from 20.3 per cent in 2010 to 19.3 per cent in 2011, and 18.6 per cent by June 2012. Although the government claims that returns on assets and equity remains strong, they have yet to recover the ground lost since 2008.

On the other hand, provisions coverage has clearly improved, from 52.3 per cent of classified loans at the end of 2011 to 63.2 per cent by mid-2012, according to central bank statistics. The loans-to-deposit ratio has crept up only slightly in that time, from 65 per cent to 68.5 per cent, and banks’ foreign currency exposure remains relatively limited, with around 11 per cent of loans in foreign currencies.

External risks

The problem for Jordan is that many of the biggest risks facing its economy are ones outside its control, notably the situation in Syria and global oil prices. The government has been taking some measures to shore up its position, including agreeing a 36-month, $2bn stand-by arrangement with the IMF in August 2012.

According to the IMF, this is designed to support macroeconomic stability and improve the country’s fiscal position, while protecting the vulnerable segments of the population, and fostering stronger and more inclusive growth. To date, some $769m of the facility has been drawn down. It was as part of a review process linked to the stand-by arrangement the government sent the economic report to Lagarde in March.

Amman has also been reforming its subsidies system and has signed a five-year investment programme by GCC states worth about 3 per cent of gross domestic product (GDP) annually. The overall level of grants is expected to more than double this year to $3.8bn, according to IMF projections.

Ratings downgrade

Despite all this, US ratings agency Standard & Poor’s (S&P) on 20 May lowered its long-term foreign and local currency sovereign credit ratings for Jordan from BB to BB-. The measures the government has taken to address its problems will not be enough, it says. It also placed a negative outlook on the rating, saying that it could downgrade the country further if the conflict in Syria leads to significantly higher financing needs in Jordan.

Some of the country’s banks were downgraded soon after. On 28 May, S&P lowered the ratings of both Arab Bank and Jordan Islamic Bank, part of the Bahrain-based Al-Baraka Banking Group, from BB to BB- with a negative outlook. In both cases, it noted that the banks hold a lot of Jordanian sovereign debt.

Other ratings agencies have been taking a similar stance. Capital Intelligence, for example, recently assigned a negative outlook to Jordan’s sovereign foreign currency ratings as well as the 11 banks it rates in the country.

It is not just Arab Bank and Jordan Islamic Bank that hold a lot of sovereign debt. The banking system as a whole has been increasing its exposure in recent years. Overall, claims on the public sector, including the government and public entities, has increased from 16 per cent of all banking assets in 2010 to 23 per cent of assets by the end of 2012. This not only concentrates the banks’ exposure to risk, it also means that there is less money to lend to other parts of the economy. “The high public-sector financing needs are crowding out Jordanian banks’ opportunities to provide funding to the private sector, and this is constraining the banks’ earnings diversification,” says Stathis Kyriakides, an assistant vice-president at ratings agency Moody’s Investors Service.

“We expect that credit conditions in Jordan will remain subdued and will weaken sharply in the event of a significant deterioration in the domestic political environment.”

As yet, investors are not showing too much concern. The Amman Stock Exchange’s financial index, which includes the 15 listed banks, has risen slightly over the past year, although it remains well below its historic level and trading activity is muted these days. “The share prices of the banks are not moving very much,” says one Amman-based broker, speaking after the recent wave of downgrades.

Positive signs

Amid the gloom, there have been some positive signs. While most of the recent credit growth has been accounted for by lending to the public sector, the efforts of the government to support bank lending to other key segments of the economy have been having an impact. According to Lebanon’s Bank Audi, the industrial sector in Jordan has been the main beneficiary of this so far.

“Jordanian banks’ rising lending activity to the economy over the past year was partly driven by the industrial sector, in line with the central bank’s commitment to promote medium-term funding for industrial firms,” says Marwan Barakat, chief economist and head of research at Bank Audi. “The central bank lowered the interest rates on medium-term advances extended to banks for the sole purpose of re-lending them to the industrial sector.”

However, the subdued nature of the wider economy means that opportunities for private sector lending are likely to remain constrained, restricting the potential for banks to grow. The reforms to the subsidy systems are certain to lead to upwards pressure on inflation, which in turn will add to the chances of higher levels of NPLs among both businesses and consumers.

For the long-term health of the economy, what Jordan needs is a resolution of the Syrian conflict and lower oil prices. In the meantime, the country’s banks will have to continue trying to make the best of a tough situation.