LONDON, 24 October 2007 — Jordan banks’ stable rating outlook is underpinned by durable franchises and satisfactory metrics, Moody’s Investors Service said in its new Banking System Outlook for the country. However, the report yesterday also noted that the country’s high credit growth is taking place amid a benign operating environment. Jordan’s small, but resilient economy, continues to offer limited but improving opportunities for the banking sector. A relatively high number of banks including local commercial, foreign and Islamic banks are currently operating for a population of 5.5 million, with intensifying competition as each bank seeks to augment its market share.

The market nevertheless remains concentrated, with the top three banks accounting for a market share of slightly over 40 percent, which continues to leave plenty of scope for consolidation. Smaller banks may thus find it difficult to retain a sustainable franchise, and could form the basis for merger and acquisition activity. “The possible involvement of any of the rated banks in consolidation activity that could strengthen their local franchise without any significant detriment to their financial metrics could have a positive rating impact,” Nondas Nicolaides, Moody’s analyst and author of the report, said.

Moody’s said that several improvements to the regulatory environment have been noted following preparations in line with the adoption of Basel II as of January 2008, mainly the enhancement of risk management systems and practices, which had lagged somewhat behind international standards (or were not actively in place for some institutions) and improved financial reporting in terms of transparency and disclosure. Furthermore, a compliance function was introduced in many banks and upgraded at others, while IT infrastructure has been greatly enhanced.

The report further said that GDP growth continued to be mainly driven by booming domestic demand, with consumption and investment fueled by rapid credit growth, rising property prices and inflows of private capital, mainly from the Gulf region. Credit continued to grow, with construction and consumer lending being the main contributors and the banks’ aggregate loan portfolio showing good granularity.

The rating agency expects to see current loan growth rates sustained over the short- to medium- term, while foreign banks that recently penetrated the Jordanian market and which have more experience and more products available in consumer financing are beginning to add a new dimension in the retail lending landscape.

With regard to the significant increase in consumer lending — which helps diversify the banks’ exposure — Moody’s noted that this lending is relatively young and is yet to be tested. In addition, sensitive sectors such as construction and real estate present risks. However, the banks continue to be very liquid, even by international standards, while healthy capitalization levels provide a comfortable cushion for growth and for absorption of possible loan losses.

“The Jordanian banking system seems to have benefited so far (although perhaps temporarily) from the continuing instability in neighboring countries. Certain capital inflows reach Jordan in search of a safe haven, while part of the Iraqi trade finance activity is carried out through the banking system in Jordan, providing significant fee income to the banks involved,” Moody’s stated.

“The rated banks’ declining level of problematic exposures is a positive rating driver, and we also note the banks’ improving core operating profits on the back of still wide margins,” the report added.