However, the operating environment remains challenging due to sluggish growth, according to Fitch Ratings

by HABHAJAN SINGH / pic source: www.jordanislamicbank.com

Jordan Islamic Bank (JIB), the state’s largest Islamic bank which provides more than half of the nation’s total Islamic financing, is on a firmer ground.

In its latest evaluation, Fitch Ratings Inc revised JIB’s outlook to ‘Stable’ from ‘Negative’ and affirmed the bank’s long-term issuer default rating at ‘BB-’.

“The outlook change reflects the stabilisation of the operating environment in Jordan, while the affirmation reflects limited changes to JIB’s credit profile since the last review.

“However, the operating environment remains challenging due to sluggish growth, the significant influx of Syrian refugees, which is putting pressure on the country’s resources, and the rising government debt trajectory,” the global rating agency stated in a note dated Feb 28.

JIB — a subsidiary banking unit of Al Baraka Banking Group BSC (ABG) — is the largest Islamic finance player in Jordan, with a market share that would deem it as a bank with potential systemic impact on the overall banking system.

It commanded 11% of the total banking sector deposits as at the end of the third quarter of 2017 (3Q17).

At the same time, the bank represented 56% of the total Islamic banking sector assets and 55% of total Islamic financing at the end of the same period, according to figures shared by the rating agency.

For the financial year 2017, the bank posted a net profit of US$76.4 million (RM297.96 million) on the back of US$310 million in revenue.

The bank is chaired by Adnan Ahmed Yousif, who is the president/CEO of ABG. Its management team is led by CEO/GM Musa Shihadeh.

There are some some 657,000 registered Syrian refugees in Jordan, according to figures from the United Nations High Commissioner for Refugees.

More than 80% live below the poverty line on less than US$3 a day, mirroring the situation facing more than 5.5 million Syrian refugees across the region, the agency said.

Asset Quality

As JIB is essentially a domestic bank, Fitch said its ratings and outlook were constrained by the challenging operating environment in Jordan and sovereign-related risks.

“The bank’s asset-quality risks are driven by its concentrated exposure to the Jordanian operating environment, where financing and funding is mainly domestic and the bank has high concentrations to the government or to government-guaranteed entities,” it said.

JIB’s largest exposure is to National Electric Power Co, representing 1.6 times the bank’s equity at end-3Q17 against a government guarantee covering 100% of the exposure.

“Asset-quality metrics remain adequate due to the bank’s conservative risk appetite and longstanding relationships with customers. The impaired financing ratio was 4.3% at end-3Q17 and reserve coverage was 81%.

“However, this excludes the bank’s surplus investment risk fund reserves for its financing book. If added to specific reserves, reserve coverage would have been 106% at end-3Q17,” it said.

The report said JIB’s profitability was good, with pre-impairment operating profit covering 3.5% of its gross financing in the first nine months of 2017, providing the bank with an extra cushion against an increase in impaired financing without hurting its capital.

“However, Islamic banks have lower profit margins than conventional banks due to limited Shariah-compliant investment opportunities in which to place their excess liquidity.

“Placements with the Central Bank of Jordan above mandatory reserves do not earn interest,” it said.

Support Rating

Meanwhile, the report noted JIB’s support rating of ‘4’ and support rating floor of ‘B+’.

The numbers “reflected the limited probability of support from the Jordanian sovereign due to constraints on its ability to provide it, although we believe willingness to provide support would be high as JIB is systemically important”, the report stated.

“Support from the bank’s main shareholder ABG is possible, but is not factored into the ratings,” it added.

In the report, Fitch acknowledged that important differences between Islamic and conventional banks were considered in JIB’s ratings.

“These factors include closer analysis of risk management, funding and liquidity, regulatory oversight, disclosure, accounting standards and corporate governance.

“Islamic banks’ ratings do not express an opinion on the bank’s compliance with Shariah. Fitch will assess non-compliance with Shariah if it has credit implications,” it said.