Jordan's banks to remain resilient despite challenging conditions: Moody's

Published January 29th, 2017 - 11:00 GMT
Moody's expects only a moderate uptick in real GDP growth in Jordan to 3.2 per cent for 2017, still below potential. (File photo)
Moody's expects only a moderate uptick in real GDP growth in Jordan to 3.2 per cent for 2017, still below potential. (File photo)

Moody's Investors Service says that although credit risks remain high for banks in Jordan, their sound capital and liquidity provide a buffer to downside risks, while profitability will remain stable in 2017, despite higher provisioning expenses, owing to improving margins.

Moody's report, entitled Banks–Jordan: Solid Capital Buffers, Regulatory Reforms and Higher Interest Margins Provide Support Amid Regional Turbulence, states that the conflict in Syria and Iraq has led to closure of borders, and weak financial conditions in Gulf countries weigh on trade, tourism and investor sentiment in Jordan and therefore on growth.

Therefore, Moody's expects only a moderate uptick in real GDP growth in Jordan to 3.2 per cent for 2017, still below potential. Furthermore, rising interest rates, driven by recent and future Fed rate increases and the Jordanian dinar's peg to the US dollar, will moderate demand for credit, especially from households. Under these challenging operating conditions, Moody's expects domestic credit growth of 6-7 per cent in 2017, down from 8 per cent in 2016.

Asset risks remain high for Jordanian banks due to credit concentration, including high exposure to the Jordanian Government, and rising household debt. Also, the Jordanian banking system's large size relative to GDP and substantial cross-border operations increases systemic and contagion risk. Banks' consolidated total assets stood at 278 per cent of GDP as of year-end 2015.

However, Alexios Philippides, Assistant Vice President at Moody's said, “We expect a broadly stable return on assets for Jordanian banks of around 1.4-1.5 per cent for 2017. Higher provisions against new non-performing loans will be largely offset by improving net interest margins as interest rates rise, as well as further operating efficiency gains.”

Also positively, new regulation in Jordan will support the resilience of the banking sector. Basel III capital requirements were implemented last year and a planned 2017 amendment of the Deposit Insurance Corporation law will create a more robust bank recovery and resolution framework, bringing it in line with the Financial Stability Board's 'Key Attributes'.

Finally, sound capital and liquidity provide a buffer to downside risks. The system's capital to assets ratio of 12.7 per cent at end-2015 compares well to regional peers, providing a solid buffer against unexpected losses. Banks also have a stable deposit base and liquid assets equivalent to 42 per cent of total assets.

By Sarah Spendiff

 

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