Had it not being for the fact that JIB operates exclusively
in Jordan which is a relatively conservative market, the bank could have moved
to even greater heights. Not surprisingly this has impacted on the rating of
JIB. In fact, Standard & Poor’s (S&P), the international rating agency,
in its latest counterparty credit ratings assigned to JIB of BB/Stable/B in
September confirmed that JIB’s ratings “are primarily constrained by the fact
that bank operates in Jordan, which in S&P’s view creates high credit
risk.”
The strengths of JIB is that it has a strong retail
franchise with a satisfactory financing and liquidity profile, and has shown
great resilience in its asset quality and in sustainable profitability through
the economic downturn precipitated inter alia by the global financial crisis.
However, the bank would have to expand greatly especially in its capital
strength and adequacy to even aspire to an investment-grade rating.
JIB is 66 percent owned by Bahrain-based Albaraka Banking
Group (ABG), which is not renowned for supporting its subsidiaries with huge
capital injections. Its two flagship entities are indeed JIB and Albaraka Turk
Participation Bank (ATPB), both with huge potential but punching below their
weight. During the 2001 Turkish banking crisis, for instance, the Dallah
AlBaraka Group was conspicuous in its absence of throwing a lifeline to ATPB,
which like other banks in Turkey were experiencing varied degrees of runs on
their deposits. It was the Islamic Development Bank (IDB) that gave ATPB a line
of credit which was collateralized with some of the Turkish Islamic bank’s
prize assets — Murabaha and other receivables which were ring-fenced by the
IDB.
With its huge experience, JIB should be the natural gateway
for Islamic finance in the Palestinian Territories and perhaps more importantly
to Iraq and Syria. While the former two are still mired in political deadlock
in their respective situations, Islamic finance is starting to make genuine
inroads into Syria, where the central bank has already authorized five Islamic
banks, including one by ABG, which is JIB’s parent.
The genteel but experienced Musa Shihadeh, the vice chairman
and general manager of JIB since its launch, is also a pragmatic banker. He
knows the limitations of the geopolitics of his home market and those across
the border into the neighboring Iraq and Palestinian Territories. As such any
imminent forays into these markets would be nigh impossible if not premature.
Nevertheless, he is heartened by S&P’s ratings which he
stresses is a vindication of the “bank’s policy and strategy of continuing to
enhance its banking and financing activities in Jordan on the one hand, and
maintaining its special relations with foreign financial institutions on the
other hand.” The rating, he adds, is also an important motivation for JIB to
further improve its business and to contribute to the economic prosperity and
development of Jordan.
JIB, which held assets totaling $3.2 billion at end March
2010, focuses primarily on the domestic market servicing both retail and
corporate clients in consumer finance, construction finance and trade finance.
“We consider JIB,” stressed S&P, “to be of high systemic
importance in the Jordanian banking sector. We classify the authorities as
supportive toward the banking system. The long-term rating on JIB is therefore
one notch above its stand-alone credit profile, reflecting our expectation of
extraordinary parent support in case of need. JIB’s strategy emphasizes
sustained growth and further enhancement of its systems and integration within
the group, in our view. Although we acknowledge the bank’s good track record in
terms of asset quality, we remain cautious about the risks related to its rapid
growth in a country that in our view carries high economic risk.”
S&P however does not qualify the basis and assumptions
for its strong view of group support for any of its subsidiaries in times of
need. However it does stress that it “could align the ratings with the bank’s
stand-alone credit profile if we were to revise downward the potential for
extraordinary parent support.”
The rating rationale further extols JIB’s funding to be a
strength for the ratings, and its very high liquidity should enable it to
mitigate mild shocks. JIB’s total regulatory capital adequacy ratio under Basel
II of 14.5 percent is well above the minimum 8 percent. But it is at variance
with S&P’s estimated risk-adjusted capital ratio (RAC) which applies higher
risk weightings across the main asset classes and takes into account geographic
concentration of assets. Under the banking industry country assessments, Jordan
sits in Group 8, two lower than Group 10 which denotes the highest risk. As
such, JIB’s RAC under this S&P methodology is 5 percent which is lower than
the estimated average for international peers.
The stable outlook assigned to JIB is based on the
assumption that the bank’s business and financial profile will remain
relatively unchanged over the medium-term. But the rating agency warns that it
would take a negative view should JIB’s business profile changes especially if
it grew rapidly in a still uncertain operating environment.
JIB will have to work much harder to elicit a positive
rating action in the foreseeable future because “it would require an upgrade of
the sovereign foreign currency rating as well as a substantial improvement in
the bank’s financial profile, especially its capitalization.”
However, there are exciting new opportunities looming on the
horizon. The Ministry of Finance and the Central Bank of Jordan have given the
go-ahead for Al-Rajhi Bank in Jordan to explore the possibility of issuing a
sukuk. Assuming that the Treasury and the central bank are working on
introducing enabling legislation for sukuk origination and listing in Jordan,
this would open up new avenues of raising finance and investments for the likes
of JIB.
