After weathering the global financial crisis, Jordan’s banking sector is now in a healthier shape to face the challenges of the new decade. With a string of new development initiatives either under way or on the horizon, the kingdom’s banks are now well-placed for future growth, with a robust customer base and good liquidity to see its major lenders forward.

Meanwhile, banks are moving towards newer mar-kets, such as small and medium-sized enterprises (SMEs – see analysis), and looking to boost retail and corpo-rate business. The sector has been addressing the prob-lem of non-performing loans (NPLs) with extensive provisioning, while also buttressing itself against future external shocks in a region prone to political uncertain-ty. The year ahead looks to be one of steady, sustained growth, with banks tightening operating costs while developing fee- and interest-based business lines.

REGULATION: The sector is supervised and regulated by the Central Bank of Jordan (CBJ), which was set up in 1964 as an independent body and has exclusive power to issue or withdraw banking licences. It also analyses the data and statements that are required to be submitted by lenders and examines banks’ compli-ance with its regulations. The CBJ has the power of oversight regarding individual banks’ practices, using the US’s National Credit Union Administration capital adequacy, asset quality, management capability, earn-ings and liquidity ratings system in its assessments.

The CBJ is also overseeing the implementation of Basel II and Basel III. Regarding the former, the CBJ has tended to go beyond the requirements of the interna-tional standard in its own regulations, setting, for exam-ple, a minimum capital adequacy ratio of 12%, rather than the 8% required by Basel II. As of early 2013, all of Jordan’s banks had met the local standard for this.

CROWDED MARKET: The banking sector that the CBJ oversees is a large one in terms of number of entities, particularly when referenced against the size of the country and its economy. Jordan has a population of 6.4m, with a nominal GDP of JD5.96bn ($8.4bn), as of the third quarter of 2012, according to local investment bank Capital Investments. Halfway through 2012, 26 banks were in operation, with 695 branches and 75 rep-resentative offices between them, according to Jordinvest data. The number of players has been grow-ing until quite recently too, with the Islamic Al Rajhi Bank the most recent entrant, in 2011. The CBJ’s preliminary index of population to the number of banks stood at 8100 citizens per branch at the end of 2011.

Thus, the sector is seen by many as being over-banked, a view that has also prompted the CBJ to raise the minimum paid-up capital for local banks to JD100m ($141m), as part of plans to encourage consolidation.

Yet the banks have been able to meet the new require-ment independently, rather than by seeking mergers.

This is largely a consequence of bank’s structures; many of the smaller banks tend to be family-owned busi-nesses, reluctant to share management with other families, or are local branches of foreign entities with wider, international strategies for development.

IN THE BLACK: Despite the large number of players, the sector continues to be profitable and attractive to participants, despite recent challenges. “Prior to the end of 2008, the sector was doing extremely well,” Haethum Buttikhi, the assistant GM of retail banking at Jordan Kuwait Bank, told OBG. “Compared to the internation-al scene, it continued to do well afterwards. No bank lost money, there was no government bailout and no intervention from the CBJ. The central bank insisted banks could not lend more than 100% of deposits, so there were few liquidity issues and no sub-prime issues.”

Thus, the sector weathered the storm remarkably well.

The Jordanian economy, as with many other emerging markets, also felt the fallout from the US and European crises later than the countries in which the problems originated, with real GDP continuing to grow well in 2008 – up by 7.2% – and in 2009, when it rose 5.5%. The slow-down became most noticeable in 2010, when the growth rate fell to 2.3%. The 2009-10 period also saw loan and deposit growth decline, while foreign assets were also affected by global withdrawals from riskier emerging markets. The CBJ acted by issuing a guaran-tee on all bank deposits until the end of 2010, ending a temporary rush of withdrawals, and by slashing its key interest rates repeatedly between 2008 and 2010 to support economic activity.

Since 2010 there has been an economic recovery, albeit a slow one, as other external shocks have affect-ed the economy and the sector. The Arab Spring, which began in 2011, dented confidence, while the ongoing war in neighbouring Syria and continued turbulence in Iraq have also had an impact. The interruption of Egyptian gas supplies also hit the country’s economy badly, while government efforts to reduce energy sub-sidies depressed confidence and demand.

The conservative institutional culture within the sec-tor has encouraged banks to provision for external shocks and maintain the levels of liquidity necessary to enable a nimble response to any future challenges, a well-learnt lesson from weathering the crisis.

The result is a banking sector today that has received plaudits from international bodies such as the IMF, whose last Article IV consultation report, from May 2012, described the banks as “profitable and well-cap-italised”, and noted the CBJ “continues to exercise pru-dent regulation and supervision”.

PERFORMANCE: Recent times have thus seen the sec-tor grow, despite major regional and international tur-bulence. Indeed, total sector assets increased on an annual basis throughout the period from 2005 to 2010, rising from JD26.81bn ($37.69bn) in 2007, to JD29.8bn ($41.9bn) in 2008, JD31.96bn ($44.95bn) in 2009, then JD34.97bn ($49.19bn) in 2010, according to CBJ figures. Total deposits also grew steadily, from JD15.99bn ($22.5bn) in 2007 to JD22.5bn ($31.6bn) in 2010, while credit facilities went from $15.95bn to $20.42bn, over the same period, according to Bank Audi figures.

Yet while growth continued, the rate at which it occurred declined. The high point for asset growth was 2008, which saw 11% growth, year-on-year (y-o-y), before falling to 7.4% in 2009, then rising to 9.4% in 2010, as the economy began recovering from the global downturn. The same pattern could be seen in the rate of credit growth – 15.3% in 2008, down to 2.3% in 2009, then 8.5% in 2010. Deposits took more of a hit, however, with growth there falling from 13.1% in 2008 to 12.3% in 2009, and then further to 10.8% in 2010.

While the signs of a recovery were there at the end of 2010, the unprecedented events of the Arab Spring in 2011 affected all regional markets negatively, and Jordan was no exception. Yet the sector still managed some robust growth. Total assets increased to JD37.69bn ($53bn) in 2011, a hike of 7.7%, while total deposits rose by 8.3%, to JD24.4bn ($34.3bn). Total credit facilities extended grew by 9.7% to stand at JD15.85bn ($22.3bn) by the end of 2011 – a significant increase, as it was higher than the 2009-10 growth rate.

This credit growth was partly the result of CBJ activ-ity aimed at ameliorating the effects of the global down-turn. Pursuing an active monetary policy, interest rates were systematically reduced by the CBJ, leading to a fall in average interest rates charged by the licensed banks over the period. CBJ figures show that the weighted aver-age interest rate on overdrafts fell from 9.83% in 2007 to 8.8% in 2011, while loans and advances saw this rate drop from 8.86% to 8.67% over the same period. The lowering of interest rates also hit savings rates, with these falling from 1.1% in 2007 to 0.7% in 2011.

ASSETS: According to the CBJ’s 2011 annual report most asset growth came from domestic assets, which saw an 8.8% increase, while foreign assets rose by 3%. Over-all too, the proportion of foreign assets out of total assets has declined in recent years, a clear indicator of the troubled state of the banking sectors in Europe and the US, the traditional locations for Jordanian banks to hold balances. In 2007 foreign assets made up 24.3% of the total, with this falling to 16.7% by year-end 2011.

Domestic asset growth in 2011 was itself mainly in the claims on public and private sector categories, while cash in vaults and balances at the CBJ fell. The rise in total deposits was strongly influenced by a 15.2% increase in demand deposits, although savings deposits also rose, by 13.4%. The private sector led the way, too, with public sector deposits declining 1.1% in 2011, y-o-y, while private sector deposits made by residents rose 8.5%. This category of deposits has long constituted around 80% of all deposits, with 2010 seeing 81.5% of all deposits falling in this group, and rising to 81.7% in 2011. Private sector non-resident deposits accounted for 10.7% and 10.9% during these two periods, while public sector deposits went from 6.95% to 6.3%.

CREDIT: Breaking down the figure for credit facilities, 2011 saw no change to the overall pattern of credit extended per type of activity. General trade remained the highest, apart from the “others” category (which is largely composed of individual consumers), followed by construction, then industry and mining – a pattern repeated for many years. Again, it was the private sec-tor that accounted the bulk of this – some 93.2% of the overall increase. Although the public sector received only a small proportion of the total, credit extended to the public sector was up 31.4%, while that to the pri-vate sector shrank by 4.5%. Some 85.4% of all credit extended was in the form of loans and advances, 12.8% in overdrafts and 1.8% in discounted bills and bonds.

RESULTS: The 2007-11 period thus saw a compound annual growth rate for the sector’s consolidated bal-ance sheet of 8.9%, an impressive result considering the turbulence of the period. The growth story contin-ued in 2012. Data from the third quarter of the year showed that the economy as a whole had expanded 2.8%, in terms of GDP, up from 2.5% for the same peri-od of 2011. Total deposits held at licensed banks also increased, by 2.4% between year-end 2011 and the end of 2012, according to the CBJ, to stand at JD25bn ($35.2bn). Credit facilities extended also grew, with the outstanding balances totalling JD17.83bn ($25.1bn) by the end of 2012, up 12.5% on the end of 2011.

SUMMED UP: The total assets story showed a contin-uing trend in declining foreign assets, while domestic assets rose. Total domestic assets in the banking sys-tem as a whole (including those of the CBJ) were up by JD3.51bn ($4.9bn), or 24% by the end of 2012 com-pared to the end of 2011, while foreign assets fell 29%, some JD2.69bn ($3.8bn), between the same periods.

The CBJ was the main actor affecting these changes – the central bank increased its net domestic assets by 54.4% during the year, while its net foreign assets fell 31.7%. The licensed banks saw a more modest rise in net domestic assets – by 0.5% – while their collective foreign assets grew by JD570.4m ($802m).

The year 2012 also saw a change in interest rates, with the weighted average increasing for most types. Overdraft rates rose between the end of 2011 and the end of 2012, to reach 9.3%, while the rate on loans and advances rose to 8.95%. On the deposit side, demand deposit rates fell slightly from 0.43% to 0.42% over the same period, though savings account rates rose, reach-ing 0.76%. This did not choke credit growth, however, with the public services and utilities sector experienc-ing the most rapid expansion as a recipient of credit. This segment saw credit extended rise 78%, industry saw 16% growth with financial services following close behind with a 13% increase. The construction sector received 6% more credit than it had the year before, and the industrial sector received a 4% bump. Deposit growth was again led by private sector residents, with a JD481m ($677m) increase between the end of 2011 and the end of 2012, according to the CBJ. Public sec-tor deposits were also up, by JD153m ($215m), although the deposits of non-residents fell by JD49.6m ($70m) Deposits in foreign currencies increased over the period too, by 38% or JD2bn ($2.8bn), while local currency deposits were down by JD1.4bn ($1.97bn), or 7.4%.

Comparing the assets, deposits and credit extend-ed parameters, historically, the largest part of assets is made up of credit extended, with this the pattern across the 26 banks. Jordinvest data up to the end of 2011 showed that for the sector as a whole, some 28.7% of licensed banks’ assets were cash and balances at the banks, 22.6% investment portfolio, and 43.2% credit facil-ities. At that time, only four banks had a lower propor-tion of credit facilities to total assets than this average. These were the sector’s two top lenders by size – Arab Bank (ARBK) and the Housing Bank for Trade and Finance (HBTF) –along with the Arab Jordan Invest-ment Bank and Société Générale de Banque Jordanie.

Further looking at credit facilities by business type, the Jordinvest figures show 10.4% of all credit extend-ed to businesses went to real estate, 13.9% to retail, 5.9% to government and public sector, 8.2% to SMEs (see analysis) and 61.6% to large enterprises. This mix may be about to change, however, as banks look again at the pluses and minuses of their corporate portfolios.

MAIN PLAYERS: The two largest players in the sector are ARBK and HBTF, which between them account for around 40% of the industry, in terms of assets (see analysis). This leaves the remaining 60% divided between 24 banks, 14 of which are Jordanian, and 10 foreign. Of the local banks, three are Islamic – the Islamic Inter-national Arab Bank (a subsidiary of ARBK), Jordan Islam-ic Bank, and Jordan Dubai Islamic Bank – while one of the foreign outfits is also Islamic – Al Rajhi Bank.

Among the local conventional banks, ARBK and HBTF dominate, with third place in terms of asset size being taken by Jordan Ahli Bank (ticker name AHLI). With 56 branches in total, six of which are overseas (in Cyprus, Palestine and Lebanon), AHLI had JD2.65bn ($3.73bn) in assets at the end of 2012, according to a statement from the bank to the Amman Stock Exchange (ASE). This was up 6.2% y-o-y, while the bank’s net profits had risen 9.5% to JD25.4m ($35.7m). The bank’s NPL ratio fell over the year, from 10.35% to 9.11%. AHLI’s major shareholder is the Muasher family from Jordan. Fourth of the top five conventional banks in terms of assets is Jordan Kuwait Bank (JOKB), which has 53 branches in Jordan and three outside, in Palestine and Cyprus. Results from September 2012 posted by the bank showed total assets at JD2.34bn ($3.29bn), 2.75% up on the total for the end of 2011. Total profit after tax for the first nine months stood at JD36.42m ($51.22m), up 10.73% on the first ninth months of 2011, as total income rose from JD81.18m ($114.18m) in the first three quarters of 2011 to JD88.74m ($124.81m) over the same period of 2012. In fifth position in 2012 in terms of assets among conventional banks was the Bank of Jordan. Founded in 1960, and with 96 branches and offices, it also has subsidiaries in Palestine and Syria. Its unaudited 2012 financial statement to the ASE showed total assets of JD2.07bn ($2.91bn), up from JD2.05bn ($2.88bn) at the end of 2011, though a January 2013 Reuters report said the bank stated its assets had fallen by 2% over the year to JD2.01bn ($2.82bn). The bank also reported in Jan-uary that its net profit fell by 9.3% in 2012, to JD33.2m ($47m), while deposits rose 4% to JD1.55bn ($2.18bn).

ASE-LISTED BANKS: All of the top five banks are list-ed on the ASE, along with 10 others, with banking a major sub-sector of the index’s financial board. The oth-er listed conventional banks on the exchange are, in descending order in terms of asset size: Cairo Amman Bank, Bank Al Etihad, Capital Bank of Jordan, the Arab Jordan Investment Bank, Jordan Commercial Bank, the Arab Banking Corporation Jordan, Invest Bank and Société Générale de Banque Jordanie.

ISLAMIC BANKS: Two Islamic banks are also listed – Jordan Islamic Bank (JOIB) and Jordan Dubai Islamic Bank (JDIB) – with both showing impressive asset size and growth. The former, which is both the largest and oldest Islamic bank operating in the kingdom, announced in February 2013 that its assets had risen 4.2% in 2012, y-o-y, to stand at JD3bn ($4.2bn). Oper-ational income was also up, by 22.8%, to JD96.1m ($135m). The bank was thus able to report that net prof-its had risen over the year, by 29%, to stand at JD36.5m ($51m). JOIB is a subsidiary of the Bahrain-based Al Bara-ka Banking Group. JDIB, meanwhile, reported in its most recent statement to the ASE for the third quarter of 2012 that its assets had reached JD379m ($533m), up from JD350m ($492m) at the third quarter of 2011.

The segment will have to face strong competition from other regional countries before it can become a lead-ing Islamic finance destination, but the demand is there. The segment’s continued integration of technology and IT-driven services should also play a large role in the future, and the years ahead could well see Islamic banking taking a much stronger position in Jordan.

CLEANING UP: The impact of the global downturn on the Jordanian economy, followed by other external shocks, principally the Arab Spring, certainly affected the bottom lines of many businesses, as well as the pock-ets of many citizens. Many corporate clients have faced liquidity issues in consequence of these economic woes and/or from bad decisions made in such a climate. Thus, all the sector’s banks have had to face the prob-lem of NPLs and extra provisioning.

CBJ figures quoted by the IMF in its 2012 Article IV consultation report show NPLs as a proportion of total loans standing at around 4.1% in 2007, a recent low, after which they steadily began to increase. By 2009, they stood at 6.7%, rising to 8.2% in 2010, then 8.5% in 2011. Jordinvest calculated the average NPL to facili-ties net of interest-in-suspense still higher – at 9.4% in 2011, or JD1.63bn ($2.29bn), up from JD1.51bn ($2.12bn) in 2010. For 2012, the non-annualised CBJ figures for the first six months show the ratio falling from 8.5% in 2011 to 8.4%, while NPLs net of provi-sions/equity fell from 13.4% to 10.4%. Thus, the signs are that the NPL issue is being brought back into line. Indeed, banks have been focusing on improving their credit portfolios to reduce NPLs. The CBJ data also shows the coverage ratio improving, from 52.3% in 2011 to 63.2% in the first half of 2012.

The generally conservative policies pursued by Jor-dan’s banks have also stood them in good stead, along with CBJ requirements on the issuing of collateral against loans. In 2011, according to Jordinvest, the value of col-laterals obtained hit JD10.41bn ($14.64bn), giving a coverage ratio for NPLs of 6.4 times. Around 70.7% of the collaterals obtained came from the corporate sector, with around 50.4% in the form of real estate.

REVISED FOCUS: Jordan’s banks have also been refo-cusing away from corporate to retail, private banking and SMEs, with this restructuring of their portfolios also aimed at improving credit quality overall. While NPLs have certainly affected profits, banks have made oth-er moves to protect their overall performance. The CBJ figures show net profits after taxes rising from JD366m ($514m) in 2010 to JD382m ($538m) in 2011, then JD229m ($322m) for the first half of 2012. Indeed, both the top two banks, ARBK and HBTF, announced substantial profit rises for 2012, the former up 15% y-o-y, while the latter saw 4.5% net profit growth, accord-ing to company statements in February 2013. Most other banks also reported increased profits in 2012.

Most banks also have good liquidity ratios and cap-italisation levels. CBJ figures show the former at 161% in 2010, 153% in 2011 and 148% for the first half of 2012 for the sector as a whole, while the average cap-ital adequacy ratio went from 20.3% to 19.3% to 18.6% during the same three periods. This represents a declin-ing level, although still a strong one that is ahead of both CBJ and Basel II requirements. One stress on liq-uidity may be the government, which has resorted to the Treasury bill and bond market repeatedly recently to finance the budget deficit. This has soaked up a sig-nificant proportion of funds, particularly as only insti-tutional investors are able to purchase such papers, with banks the dominant buyers, particularly given the com-paratively good rates and yields (see Capital Markets chapter). Yet despite this, liquidity remains solid, accord-ing to the CBJ figures, with the sector looking in good shape for further sovereign issues in 2013.

OUTLOOK: There is a mood of optimism among bankers, with industry players feeling that the sector had learnt the lessons from the last few years of financial and polit-ical turbulence and taken time to address issues of loan quality and portfolio diversity. The economy is also widely believed to have gone through the worst and now be ready to see sustained growth, albeit not at pre-crisis levels. The arrival of grant money from Jordan’s Gulf allies, as well as multilaterals, plus the resumption of Egyptian gas flows in the latter part of 2012 added to the optimism. “If politics in the region normalise, Jor-dan becomes an ideal place to invest. It has a mature legal environment,” Kamal Al Bakri, the GM of Cairo Amman Bank, told OBG. The government has major plans for new projects, such as the Red Sea-Dead Sea Con-duit, the expansion of Aqaba, the development of shale oil and other energy-related projects, particularly in renewables. All of these will give the economy a lift and require project financing, to the benefit of the sector.