Bankers say prospects for 2011 hinge on stepped-up economic
growth in Gulf Arab states which are a main source of remittances and foreign
direct investment, particularly into the real estate sector which has been hit
hard by the slowdown.
"The speed of recovery in the sector will depend on the
Gulf economies recovering fully by reviving inflows, remittances and improving
business climate," said Marwan Awad, CEO of Ahli Bank and chairman of
Jordan's banking association.
Jordan emerged at the start of 2010 from the worst economic
contraction in decades that halved growth to 3.2 percent.
It followed years of boom during which banks saw loan growth
outpacing that of deposits, as the country's free market reforms attracted
billions of dollars of investments from both local and foreign investors.
The sharp slowdown was primarily caused by the global
finance crisis, but Jordanian banks have also faced a challenge from more
aggressive regional competitors such as Lebanon's Bank Audi, which set up
operations in Jordan to attract depositors from neighboring Iraq.
Prospects for an improved bottom line in 2011 depend on
whether the worst is over in terms of banks' provisions for non-performing
loans which rose to almost 8 percent of the total $19.7 billion loans this year
from 6 percent last year.
Much of the lending has been channeled to commercial and
residential real estate projects, where bankers say the biggest risks remain.
"Banks are a mirror of the economy and if there is a
pickup this will help clients to service their debts and this will allow us to
control the growth in non-performing loans we have seen in the last few
years," Awad said.
Jordan's two largest lenders Arab Bank and Housing Bank,
which account for almost 40 percent of the total assets of the banking sector,
have already put aside hefty provisions, which bankers say will cushion them.
Many banks were also able to re-negotiate quickly company
debt with top clients such as Jordan's largest real estate firm Taameer, to
prevent defaults as falling share prices and lower real estate collateral
exacerbated a sense of crisis.
Awad said non-performing loans were still lower than the
peak of 16 percent in 2001, and the banks have been shielded by generally
prudent lending, minimal exposure to Western markets and a strong supervisory
system by the Central Bank of Jordan.
Although business has plummeted, most banks have proved
resilient and high profile bankruptcies have so far been averted, bankers say.
In a positive sign, risk averse banks flush with over 3.9
billion dinars ($5.5 billion) of liquidity in the domestic money market were now
again looking to lend rather than sit on idle cash after a period of market
uncertainty.
"Banks have liquidity. They have the ability to lend
and they have been looking for credible businesses and products to
finance," said Haethum Battikhi, assistant general manager of
Jordan-Kuwait Bank which has expanded its financing of cash-short local firms
to ease a liquidity crunch.
With corporate business sharply lower, both conventional and
Islamic banks were turning their attention to growth potential in retail, which
had helped cushion banks such as Cairo-Amman Bank and Islamic lender Jordan
Islamic Bank both with strong retail franchises.
But even with a pick-up in Gulf money and capital inflows
next year, competition is likely to intensify next year.
Many banks will continue to rely on wide interest rate
margin between deposit and lending rates and fee-based income to improve banks'
bottom line and average profitability.
The downturn could push much needed consolidation as
family-dominated smaller banks that avoided mergers and acquisitions during the
boom years for fear of diluting their ownership, bankers say.
Those pressures would mount if the Central Bank of Jordan
(CBJ) moved to raise capital requirements beyond a 100 million dinars minimum
in a sector witnessing global players like HBSC and regional banks such as
Dubai Islamic Bank capturing a bigger share in the retail sector.
"Consolidation of the sector will gather momentum ...
but we have ego problems within the banking sector that need to be surmounted.
A lot will on the Central Bank and its policy," said Bassem Khalil
Al-Salem, chairman of Capital Bank.
