Rating Action Commentary
ֳ Rates Jordan Islamic Bank 'BB-'; Outlook Stable
Thu 16 May, 2024 - 6:36 AM ET
ֳ - Dubai - 16 May 2024: ֳ has assigned Jordan Islamic Bank (JIB) a Long-Term Issuer Default Rating (IDR) of 'BB-' with a Stable Outlook. ֳ has also assigned JIB a Viability Rating (VR) of 'bb-'.
Key Rating Drivers
JIB's IDRs are driven by its standalone strength, as indicated by its 'bb-' VR. The VR considers JIB's only adequate capitalisation given the bank's high leverage and sovereign exposure. It also reflects JIB's strong domestic franchise, stable asset quality, acceptable profitability, and stable funding and good liquidity. The 'B' Short-Term IDR is the only option mapping to a 'BB-' Long-Term IDR.
Challenging Operating Environment: The operating environment remains challenging due to below-potential and structurally weak GDP growth, monetary tightening, high unemployment and geopolitical risks. ֳ expects moderate bank credit growth of 3%-4% in 2024, and forecasts low real GDP growth of 2.3% in 2024 and 2.8% in 2025 due to increased geopolitical risks and its negative impact on tourism. Acceptable domestic credit conditions should balance out gradual fiscal consolidation and slower regional growth.
Strong Domestic Franchise: JIB had a market share of 9% of banking-sector assets and 46% of Islamic banking-sector assets at end-2023. It has good distribution capabilities (89 branches) and a strong brand. The bank benefits from growth opportunities in Islamic banking. JIB has no direct or indirect exposures to Palestine.
High Sovereign Exposure and Concentration: JIB is highly exposed to the Jordanian sovereign through financing of government-related entities, holdings of sovereign securities and balances with the Central Bank of Jordan (CBJ; end-2023: 33% of total assets, or 3.9x common equity Tier 1 (CET1) capital). JIB's financing is concentrated on real estate-related sectors, split between Ijara Muntahia Bittamleek (mostly leasing of residential properties; end-2023: 24% of gross financing), retail housing (10%) and wholesale real estate (4%). These risks are mitigated by JIB's adequate risk management.
Stable Asset Quality: JIB's stable Stage 2 and 3 financing ratios (end-2023: 10.3% and 3.1%, respectively), negligible Stage 3 financing generation, good total loss allowances coverage of Stage 3 financing (132%) and high exposures to the sovereign support our assessment of the bank's asset quality. However, high concentrations expose JIB to event risk. ֳ expects asset quality to remain stable, with a Stage 3 financing ratio of 3% at end-2024.
Acceptable Profitability; Mild Decline: JIB's operating profit was 1.7% of average total assets in 2023 (2022: 1.8%; 2021: 1.9%) but under pressure from declining net financing margins (2023: 2.9%; 2022: 3.2%; 2021: 3.6%) and low growth. Low cost of risk and stable operating efficiency support JIB's profitability. ֳ expects stable profitability, with operating profit at 4% of risk-weighted assets (RWAs) and 1.7% of average total assets in 2024.
Only Adequate Capitalisation: JIB's CET1 capital ratio is stable (end-2023: 20.2%) due to low growth and adequate internal capital generation. It is above the 15% sector average and 9% regulatory minimum (including buffers) due to 0% risk-weights on local-currency sovereign exposures (as for all banks), and the 30% alpha factor (as for all Jordanian Islamic banks). The latter provides a 70% discount to risk weightings on credit risk exposures financed by investment accounts (these were 48% of undiscounted credit risk exposures at end-2023).
The discount translates into high leverage that is above peers', with a ֳ-calculated tangible leverage ratio of 9.4%, demonstrating lower loss absorption buffers. ֳ expects stable capitalisation, with a 19.5% CET1 capital ratio and 9.3% tangible leverage ratio at end-2024.
Stable Funding; Good Liquidity: JIB is mostly funded by stable and granular retail customer deposits (end-2023: 84% of customer deposits) that result in very low funding concentration. The bank's high-quality liquid assets represented an adequate 19% of total assets at end-2023, covering an adequate 22% of customer deposits and mitigating liquidity maturity mismatches.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A downgrade of the Jordanian sovereign rating or a significant deterioration in the domestic operating environment would lead to a downgrade of JIB's ratings.
An increase in JIB's risk appetite pressuring asset quality, profitability and capitalisation could also lead to a downgrade of the bank's ratings.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade of JIB's ratings would require an upgrade of the Jordanian sovereign rating and sustained improvements to the operating environment, in tandem with stable business, risk and financial profiles.
JIB's Government Support Rating (GSR) of 'b' reflects a limited probability of support from the Jordanian authorities. This considers the sovereign's weak financial flexibility, but also JIB's high systemic importance, and the authorities' strong willingness, in ֳ's view, to support domestic banks to maintain market confidence and stability given high contagion risk among domestic banks.
A downgrade of the sovereign rating would likely result in a downgrade of JIB's GSR. An upgrade of JIB's GSR would require a stronger ability to support domestic banks, either through an upgrade of the sovereign rating or a strong reduction in sovereign indebtedness. The GSR is also sensitive to changes in ֳ's view of the Jordanian sovereign's willingness to support the bank.
VR ADJUSTMENTS
The operating environment score of 'bb-' is above the 'b' category implied score due to the following adjustment reason: macroeconomic stability (positive).
The business profile score of 'bb-' is above the 'b' category implied score due to the following adjustment reason: market position (positive).
The capitalisation and leverage score of 'b+' is below the 'bb' category implied score due to the following adjustment reason: leverage and risk-weight calculation (negative).
Date of Relevant Committee
26 April 2024
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
JIB's GSR is driven by Jordan's sovereign Long-Term IDR.
ESG Considerations
As an Islamic bank, JIB needs to ensure compliance of its entire operations and activities with sharia principles and rules. This entails additional costs, processes, disclosures, regulations, reporting and sharia audit. This results in a Governance Structure Relevance Score of '4' for the bank, which has a negative impact on the bank's credit profile and is relevant to its rating in combination with other factors.
In addition, Islamic banks have an ESG Relevance Score of '3' for exposure to social impacts, above sector guidance for an ESG relevance score of '2' for comparable conventional banks, which reflects certain sharia limitations being embedded in Islamic banks' operations and obligations, although this only has a minimal credit impact on the entities.
Except for the matter discussed above, the highest level of ESG credit relevance, if present, is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation of the materiality and relevance of ESG factors in the rating decision. For more information on ֳ's ESG Relevance Scores, visit /topics/esg/products#esg-relevance-scores.
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Jordan Islamic Bank | UK Issued, EU Endorsed |