Rating actions on two Jordanian banks reflect their high sovereign and regional exposure and the increased economic downside risks
Limassol, May 10, 2011 -- Moody's Investors Service has today taken the following rating actions
on Jordan's three rated banks:
- Arab Bank plc: the bank financial strength rating (BFSR)
has been downgraded to C- from C, while the local-currency
(LC) deposit ratings were confirmed at Baa1/P-2. The bank's
LC deposit ratings now have a negative outlook.
- Arab Bank plc (Dubai Branch): the branch's FC deposit ratings
have been confirmed at Baa1/P-2 with a negative outlook,
in line with the parent bank's LC deposit ratings.
- Housing Bank for Trade and Finance: both the long-term
LC deposit rating and BFSR have been downgraded to Baa2 and D+ respectively
from Baa1 and C-. The short-term LC deposit rating
of P-2 was confirmed. The bank's LC deposit ratings
of Baa2/P-2 now have a negative outlook.
- Cairo Amman Bank: the long-term LC deposit rating
and BFSR have been confirmed at Ba2 and D- respectively.
All of the bank's ratings now have a negative outlook.
Today's rating actions conclude the review initiated by Moody's
on the three banks' ratings on 14 February 2011. The review
had been triggered by Moody's downgrade of Jordan's LC sovereign
rating (to Ba2 from Baa3) and the rating agency's concerns about
the banks' sizeable sovereign exposure, in addition to the
current political turmoil in the region that could potentially have a
negative impact on economic activity and on the banks' financial
performance. The negative outlook assigned to all three banks'
deposit ratings reflects the continued fragile regional political landscape
and related downside economic and financial risks.
RATINGS RATIONALE
Arab Bank Plc
The downgrade of Arab Bank's BFSR to C-, mapping to
a Baa1 rating on the long-term scale (from C, which mapped
to A3), is mainly driven by the bank's sizeable regional exposure
to countries in the Middle East and North Africa (MENA) that are facing
increased political and economic risks following the recent political
turmoil. The group's combined overall exposure to countries
such as Egypt, Tunisia, Libya, Bahrain, Syria
and Yemen is around 36.5% of its total assets, although
Moody's understands that its Bahraini branch exposure of around
10% of its total assets is mainly to regional corporates and not
to the local economy.
Moody's notes that the BFSR downgrade also takes into account the
weaker asset quality that the bank reported in recent years, with
the gross non-performing loans (NPLs) ratio increasing to 8.63%
in 2010 from 8.27% in 2009 and 4.15% in 2008,
while the provisioning coverage for these problematic exposures was at
around 72% (excluding interest in suspense) as of December 2010.
Going forward, the group could be faced with additional asset quality
pressure because of the likely economic slowdown in the politically troubled
countries to which it is exposed. Increased loan loss provisions
during 2010 have also exerted negative pressure on the group's profitability,
with net income declining by 46.5% from 2009.
Moody's adds that these credit challenges are balanced by Arab Bank's
strong franchise both in Jordan and the MENA region, and its good
track record in weathering various crises in the region over its 80-year
history. The bank has a very strong reputation, benefiting
from "flight to quality" status with consumers, and
an unmatched retail deposit franchise relative to its peers. The
bank's conservative liquidity profile -- with almost a third
of its balance sheet in the form of cash and bank placements -- and
its strong capital position with a Tier 1 of 13.7% as of
March 2011, provides a good level of protection to the group's
creditors from any political shocks.
Arab Bank's long-term LC deposit rating remains unchanged
at Baa1 as it is now rated at the same level as the bank's baseline
credit assessment and in line with Jordan's LC deposit ceiling.
Previously, Arab Bank's baseline credit assessment was rated
higher than its long-term LC deposit rating, which was constrained
by the respective sovereign ceiling.
Housing Bank for Trade and Finance (HBTF)
The downgrade of Housing Bank for Trade and Finance's BFSR to D+,
which maps to a Baa3 rating on the long-term scale (from C-,
which mapped to Baa2), incorporates the bank's sizeable exposure
to Jordanian government securities that are rated Ba2. Such exposures
comprise around 150% of its Tier 1 capital or 18% of total
assets, and inevitably weigh on the bank's balance sheet and
ratings given the high correlation between sovereign and banking risk.
The rating action also considers HBTF's asset quality, which
has weakened in recent years, with the gross NPLs ratio increasing
to almost 10% in 2010 from 7.1% in 2009 and 2.7%
in 2008, and modest provisioning coverage of 63% as of December
2010.
Moreover, HBTF's rating downgrade also takes into account
the bank's exposure to Syria, which is also undergoing political
turmoil. This exposure is raising the bank's risk positioning
despite its conservative lending practices. HBTF has a consolidated
49%-owned affiliate (International Bank for Trade &
Finance) in Syria, representing 17.3% of its total
assets, or 21% of net loans and 18.3% of total
deposits.
Against these credit challenges, HBTF has a high Tier 1 of 21.87%
and very strong liquidity position, with 36.6% of
its total assets placed in cash and bank deposits, and a loans-to-deposits
ratio of a low 47%. These credit-positive features
offer a strong buffer to absorb unexpected losses or liquidity strains
both in Jordan as well as Syria.
Although HBTF's long-term LC deposit rating was downgraded
to Baa2 from Baa1 due to the underlying BFSR downgrade, the bank
still benefits from one notch of rating uplift as a result of our assessment
of potential external support from Qatar National Bank (rated C-,
mapping to a Baa1 rating on the long-term scale), which is
a significant shareholder (34.4%). The uplift reflects
Qatar National Bank's commitment to HBTF and its aim to gain a majority
shareholding.
Cairo Amman Bank (CAB)
Moody's has today also confirmed Cairo Amman Bank's BFSR of D-,
mapping to a Ba3 rating on the long-term scale, as the bank's
high sovereign exposure (amounting to around 200% of its Tier 1)
does not exert any rating pressure considering that the Ba2 sovereign
rating is higher than the bank's baseline credit assessment.
The confirmation also takes into account the improvements that the bank
has undertaken over the past few years by diversifying its revenue streams
and improving its asset quality. CAB's gross NPLs ratio stood
at a modest 5.27% in 2010, with a 120% provisioning
coverage and a Tier 1 capital ratio of 13.2%. Moreover,
the bank's retail book profile, which is geared towards government
employees, has proved resilient throughout the past two challenging
years and has shielded the bank from asset quality problems.
The bank's long-term LC deposit rating was confirmed at Ba2,
benefiting from one-notch of systemic support uplift relative to
the bank's baseline credit assessment due to its importance in the local
market and the payment system.
PREVIOUS RATING ACTIONS & PRINCIPAL METHODOLOGIES
Moody's previous rating actions on the three rated Jordanian banks were
implemented on 14 February 2011:
- Arab Bank's BFSR was downgraded to C from C+,
its LC long-term deposit rating was downgraded to Baa1 from A3
and both were placed on review for a possible downgrade.
- Arab Bank's Dubai branch FC long-term deposit rating
was downgraded to Baa1 from A3 and placed on review for a possible downgrade.
- Housing Bank for Trade and Finance's BFSR of C-
and its LC deposit ratings of Baa1/P-2 were placed on review for
a possible downgrade.
- Cairo Amman Bank's LC long-term deposit rating was
downgraded to Ba2 from Ba1 and was placed on review for a possible downgrade
together with its BFSR of D-.
The principal methodologies used in assigning these ratings were "Bank
Financial Strength Ratings: Global Methodology" published in February
2007 and "Incorporation of Joint-Default Analysis into Moody's
Bank Ratings: A Refined Methodology" published in March 2007.
Headquartered in Amman, Arab Bank Group had total assets of JOD36.6
billion (US$51.8 billion) as of end-March 2011.
Headquartered in Amman, Housing Bank for Trade and Finance had total
assets of JOD6.7 billion (US$9.4 billion) as of end-December
2010. Headquartered in Amman, Cairo Amman Bank had total
assets of JOD1.8 billion (US$2.6 billion) as of end-
December 2010.
REGULATORY DISCLOSURES
Information sources used to prepare the credit rating are the following:
parties involved in the ratings, parties not involved in the ratings
and public information.
Moody's Investors Service considers the quality of information available
on the issuer or obligation satisfactory for the purposes of maintaining
a credit rating.
The rating has been disclosed to the rated entity or its designated agents
and issued with no amendment resulting from that disclosure.
Moody's Investors Service may have provided Ancillary or Other Permissible
Service(s) to the rated entity or its related third parties within the
three years preceding the Credit Rating Action. Please see the
ratings disclosure page www.moodys.com/disclosures on our
website for further information.
Moody's adopts all necessary measures so that the information it uses
in assigning a credit rating is of sufficient quality and from sources
Moody's considers to be reliable including, when appropriate,
independent third-party sources. However, Moody's
is not an auditor and cannot in every instance independently verify or
validate information received in the rating process.
Please see ratings tab on the issuer/entity page on Moodys.com
for the last rating action and the rating history.
The date on which some Credit Ratings were first released goes back to
a time before Moody's Investors Service's Credit Ratings were fully digitized
and accurate data may not be available. Consequently, Moody's
Investors Service provides a date that it believes is the most reliable
and accurate based on the information that is available to it.
Please see the ratings disclosure page on our website www.moodys.com
for further information.
Please see the Credit Policy page on Moodys.com for the methodologies
used in determining ratings, further information on the meaning
of each rating category and the definition of default and recovery.
Limassol
Nondas Nicolaides
Vice President - Senior Analyst
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
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London
Yves Lemay
MD - Banking
Financial Institutions Group
Moody's Investors Service Ltd.
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Moody's concludes rating review on three Jordanian banks
