Jordan's banking sector leading growth in the financial services sector

The financial services sector is one of the most robust and mature in Jordan, remaining resilient in the face of significant external volatility and retaining its role as a driver of economic growth in 2015. The banking sector in particular has been a major source of strength, with the Central Bank of Jordan (CBJ) maintaining a pro-growth monetary stance, following on from growth in deposits and profits at commercial banks in 2015.

Although the insurance and capital markets segments recorded more modest performance, the Amman Stock Exchange (ASE) is in the midst of an ambitious reform programme, which should see increased sukuk (Islamic bond) issuance in the coming years, bolstering capitalisation and liquidity, and a transformation under government ownership by the end of 2016, with the option to pursue privatisation plans at a later date.

Banking

Jordan’s banking sector is the strongest segment of its financial services industry, with a history of dating back to 1948, when Arab Bank moved its headquarters from Jerusalem to Amman. Banking accounted for 18.82% of GDP as of mid-2015, making it one of the largest economic sectors in the kingdom.

Despite ongoing regional volatility, low oil prices and slowing GDP growth within the kingdom, the banking sector remains resilient, stable and attractive to investors. There are 25 banks in operation, 15 are of which are listed on the ASE, led by the largest, Arab Bank; regional institutions, including the Kuwait National Bank, Egyptian Arab Land Bank, Blom Bank and National Bank of Abu Dhabi; and Western multinationals, including Citibank, Bank Audi and Standard Chartered.

“There’s a mixed picture in terms of performance in Jordan’s banking sector. In the retail sector 2015 was a good year, but for banks that provide trade finance services to customers who do cross-border transactions with Iraq, the picture isn’t so good,” Haytham Kamhiyah, general manager at Capital Bank of Jordan, told OBG.

Although banks remain largely profitable, two recent acquisition announcements indicate the sector could be set to undergo consolidation. The first announcement came in December 2015, when Kuwait’s Burgan Bank announced that it had sold its controlling stake in Jordan Kuwait Bank to a subsidiary of its parent firm, the Kuwait Projects Company, which reduced its risk-weighted assets by over $1.7bn.

Then, Jordan Dubai Islamic Bank (JDIB) announced in April 2016 that it had received a letter of intent from a consortium led by Jordan’s Bank Al Etihad to purchase MESC Investment’s stake in JDIB for its Jordanian business. MESC owns 52% of JDIB and has recently expanded operations in Africa, although officials who spoke with Reuters said the bank is looking to exit some markets in a bid to cut costs. The value of the proposed transaction has not been made public.

Islamic Finance

There are four Islamic banks operating in the market: JDIB, Jordan Islamic Bank, Al Rajhi Bank and Islamic International Arab Bank. Islamic finance holds considerable potential for future expansion in Jordan, with Reuters’ 2015-16 “State of the Global Islamic Economy” ranking the kingdom ninth among the top-10 Islamic finance industries globally, receiving strong support from the Jordanian government. Islamic bank deposits and equities comprise 18% and 11% of total deposits, respectively, while total assets stood at 14.9% in 2014, and are projected to have risen to between 15% and 17% in 2015, according to a December 2015 report in Islamic Finance News. Islamic bank liabilities comprised 21.8% of the national total in 2014 and are projected to have risen 22-25% in 2015.

Bank Performance 2015

Bank Audi reports that the banking sector out-performed the broader economy in 2015, during which time GDP growth hit 2.4%, a six-year low, against projections of 3% by the IMF. Awraq Investments, meanwhile, reports that out of 15 listed banks, eight posted an increase in net income during the first nine months of 2015, and five recorded net income growth of more than 10%. Arab Bank and the Housing Bank for Trade and Finance (HBTF) were market leaders: Arab Bank’s net income reached JD325.4m ($457.6m) and HBTF’s stood at JD93.1m ($130.9m), although Jordan Commercial Bank, Jordan DIB and InvestBank had the strongest net income growth at 165%, 139.34% and 41.49%, respectively, during the period. Sound regulation has been key to growth. “The regional turmoil is driving banks to be more cautious, and compliance is gaining more importance. A strong compliance system is good for the banking sector,” Ihab Saadi, CEO of HBTF, told OBG.

Assets & Deposits

The consolidated assets of banks operating in the kingdom rose by 5% in 2015 to hit $66.5bn, while total deposits, which account for an estimated 70% of the sector’s balance sheet, grew by 7.7% to $46bn, equivalent to 120% of GDP. The $3.3bn increase in deposits was 12% lower than that recorded in 2014, though close to 90% of total deposit growth was attributable to the private sector.

The Social Security Corporation and public non-financial institutions contributed to the majority of deposit growth on the public sector side. An estimated 87% of private sector deposit growth came from within Jordan, with resident private sector deposits accounting for nearly 80% of the total deposit base, giving banks the capacity to increase lending without turning to more foreign financing, according to Bank Audi’s report.

Financial soundness indicators are also strong: the sector’s non-performing-loan (NPL) ratio was 5.5%, while provisions as a percentage of NPLs stood at nearly 80%. Additionally, at 18.5% the kingdom’s capital adequacy ratio is well within Basel III requirements of 8%. The sector remains attractive to investment, with a return on assets of 1.4% and a return on equity of 11.1%.

By September 2016 deposits at licensed banks had increased by 3.3% to JD33.29bn ($46.8bn), compared to JD32.25bn ($45.4bn) in the same period in 2015, according to the CBJ. The domestic private sector accounted for more than three-quarters of deposits at JD26.51bn ($37.3bn), followed by JD3.67bn ($5.2bn) in the non-resident private sector and JD2.74bn ($3.9bn) in the public sector, or 11% and 8.2%, respectively.

Monetary Indicators

Local bank liquidity also remains elevated, with the ASE reporting that M2 money supply rose 8.1% in 2015, even as foreign currency reserves at the CBJ fell 1.4% in 2015 to JD9.9bn ($13.9bn), down marginally from JD10bn ($14.1bn) in 2014. The Bank Audi report, meanwhile, mentions that the CBJ’s foreign exchange (forex) reserves fell by just 0.9% in 2015 to $15.2bn, despite a continued current account deficit and sluggish capital inflows, although this came within the context of moves to de-dollarise forex reserves, as well as ongoing IMF disbursements under a $2bn facility, which expired in the summer of 2015, as well as continuous external borrowing.

The CBJ’s forex reserves covered nine months of imports at the end of 2015, up from eight months in 2014, and also covered 40% of money supply in Jordanian dinar, compared to 43.8% one year earlier. The Bank Audi report notes that the accumulation of foreign reserves has boosted investor confidence and should ensure that the dinar’s peg to the dollar is maintained. In 2016 and 2017 the Bank Audi report forecasts that the central bank’s monetary policy will remain focused on maintaining the attractiveness of the Jordanian dinar in a bid to safeguard rebuilt reserve buffers, a strategy the IMF has encouraged the authorities to take.

Pro-Growth Policies

In a bid to improve lending, the CBJ maintained a pro-growth monetary policy in 2015, reducing key interest rates in February and July, and publicly pushing commercial banks to pass these rate cuts on to their customers. Competition within the sector is supporting this move. “The retail market is becoming extremely competitive since more banks are targeting it. This fierce competition has obligated banks to lower their interest rates for home loans,” Yousef Ensour, general manager at Bank Audi, told OBG.

The CBJ reduced its overnight deposit rate by a cumulative 125 basis points (bps) in 2015 to reach 1.5% in June 2016, and twice cut its rediscount rate by 50 bps to 3.75%, in addition to lowering its repo rate by a cumulative 3.5% as of June 2016. The CBJ is maintaining an expansionary monetary stance in 2016 as a result of low inflationary pressures – inflation was at -0.9% in 2015 and was expected to hit 2% in 2016 – before shifting to an anti-inflationary policy in the event the US moves to boost rates further.

Credit facilities, sovereign exposure and deposits at the CBJ drove banking activity in 2015, with credit growth regaining lost momentum as a result of the CBJ’s rate cuts. The weighted average interest rates on credit facilities in the form of loans and advances fell to 8.25% in 2015, down from 8.84% in 2014, and credit growth, which had been robust in the years to 2013, regained some traction, even as consumer and small and medium-sized enterprise (SME) lending remained low. Total credit facilities rose by 9.7%, 12.5% and 6.2% in 2011, 2012 and 2013, respectively, to reach JD18.9bn ($26.6bn), although growth slowed to 1.8% in 2014 before rebounding in 2015 as total credit facilities rose 9.6% from JD19.3bn ($27.1bn) to JD21.1bn ($29.7bn). The CBJ reports that loans and advances increased by 10.7% in 2015 to reach JD18.5bn ($26bn) after expanding by 2.5% in 2014 to end the year at JD16.7bn ($23.5bn).

By the end of May 2016 credit facilities extended by banks and other institutions totalled JD22.17bn ($31.18bn), a 9.6% increase on JD20.23bn ($28.45bn) during the same period in 2015, according to the CBJ. Of that JD21.88bn ($30.77bn) was lent by licensed banks.

Sme Lending

Bank Audi notes, however, that around 58% of total credit facility growth was attributable to the central government’s investment drive, with public sector entities such as the National Electric Power Company (NEPCO) continuing to comprise banks’ largest credit exposure. Resident private sector lending rose by a more moderate 5% in 2015, as a result of limited numbers of strong corporate counterparties, a lack of lending opportunities and economic conditions.

The European Bank for Reconstruction and Development (EBRD) reports that 70% of Jordanian SMEs, which make up 98% of all businesses in the kingdom, are credit constrained, leading the government to shift its focus to boosting SME lending, most notably through the recent launch of a privately owned credit bureau, a first for the region. Indeed, the government has pushed through a number of initiatives with banks and multilateral institutions to offer more credit to smaller businesses to help bridge the financing gap for SMEs.

The CBJ has offered funding at lower interest rates to Jordanian banks that provide loans to SMEs at preferential rates, Nemeh Sabbagh, CEO of Arab Bank, told OBG late in 2015. As well as calling for improved access to finance for small businesses, the CBJ has made JD1bn ($1.41bn) available to SME lending programmes, according to Ziad Fariz, governor of the central bank.

In addition, in September 2016 the EBRD launched the Trade Ready initiative, which will expand the Trade Facilitation Programme and Advice for Small Businesses schemes. It will offer training for Jordanian banks to improve the regulatory environment.

Credit Bureau

Jordan’s private credit bureau – established in 2015 by Italy’s CRIF and overseen by the CBJ – is expected to ensure better monitoring of borrowers, which should increase the ease of doing business in the country. Although some stakeholders have described the reportable debt threshold as too high, making it difficult for banks to accurately determine risk, the bureau marks an important step towards boosting SME and consumer lending in Jordan (see analysis). “There are almost half a million people who fall into the microfinance sector and are dealing with up to 30% interest rates,” Ahmad Amoudi, general manager of CRIF Jordan, told OBG. “This is where credit bureau can help increase the bankable market. We need to ‘graduate’ people from microfinance and help them finance themselves at a cheaper rate.”

Capital Markets

Home to public shareholding companies since the early 1930s, Jordan’s capital markets are some of the most mature and open in the region, with the government launching its first securities market, the Amman Financial Market (AFM), in January 1978. The AFM originally acted as both a bourse and regulatory authority, although reforms during the 1990s, including the promulgation of the Securities Law No. 23/1997, separated regulatory functions from trading and restructured the market to meet international standards, in addition to creating a regulatory framework for the issuance of new financial instruments. The law also created three new institutions – the ASE, Jordan’s sole bourse, the Jordan Securities Commission (JSC) and the Securities Depository Centre (SDC).

Ase

Established on March 11, 1999, the ASE is a government-owned but independent exchange regulated by the JSC, with 228 listed companies and a market capitalisation of JD18bn ($25.3bn) in 2015, according to Awraq Investments. Securities traded on the ASE include stocks, bonds and rights issues, with the bond market offering Treasury bonds and bills, as well as public and private institution bonds.

The ASE is also increasingly welcoming new Islamic finance products after a historic first sukuk was launched in 2011, when Al Rajhi Cement issued a seven-year, JD85m ($119.5m) sukuk. In April 2014 the government passed new bylaws specifying the structure and transfer framework for new sukuk issuance. Following this, the JSC unveiled its sukuk framework in July 2014. Sovereign sukuk sales are expected to diversify the kingdom’s funding sources. In 2016 the CBJ issued two Islamic bonds, in May and October. The first, a five-year, JD75m ($105.5m) deal, will help finance NEPCO purchases, while the second JD34m ($47.8m) issue with a five-year tenor will fund government projects.

JSC & SDC: The JSC is the primary regulatory body for the ASE and manages issuance, disclosure and financial services activities with the goal of adopting international best practice, enhancing investor protection and contributing to national economic development through capital market expansion. The JSC’s connection to the ASE’s trading system allows it to instantly monitor and pursue all trading operations in detail.

A financially and administratively independent body, the SDC is responsible for the registration, deposit, transfer of ownership and safekeeping of various securities on the ASE, in addition to acting as a clearance and settlement house for ASE transactions. The establishment of the ASE in 1999 also saw the government launch a central registry and depository of authenticated shareholders, and today the SDC maintains a digital list of all shareholders and listed companies.

First To Third Market

Since the JSC and the ASE rolled out structural changes to the bourse in 2012 ASE listings are organised under a three-tiered system comprising first, second and third markets. To qualify as first market, a company must post positive earnings before tax for two years out of the three preceding the listing at a minimum rate of 5% of paid-up capital, according to the ASE. New entrants to the first market must first spend one year on the second market, and the total equity of first-market firms cannot be less than minimum paid-up capital levels of JD5m ($7m), with a free float of at least 10% for any company with under JD50m ($70.3m) in paid-up capital. Second-market status requires that companies’ net shareholder equity must be at least 50% of paid-up capital, with a 5% minimum free float for any companies with under JD10m ($14.1m) in paid-up capital. Any firm failing to meet requirements for first- or second-market status, or failing to fully disclose financial results on time, are relegated to the third market.

ASE IN 2015: Capital markets did not perform as well as the banking sector in 2015, with the Bank Audi stating that the ASE Index finished the year down 1.35%, while its market-capitalisation-to-GDP ratio fell from 76% to 71%. The average price-to-earnings ratio hit 14x in 2015, and the average price-to-book-value ratio stood at 1.3x, with Bank Audi reporting that weak market pricing comes within the context of an inefficient and illiquid market: the ASE’s annual turnover to market capitalisation was 19% in 2015, against a regional average of 69% and a global average of 123%.

Awraq Investments, meanwhile, reported that the ASE’s price index weighted by free float shares fell to 2136.3 points at the end of 2015, a 1.35% decline from 2014. However, with much of the MENA region, and particularly the GCC, significantly affected by low oil prices, the ASE’s performance is considered better than most other Arab markets. Indeed, the ASE reports that the total market capitalisation of Arab exchanges decreased by 11.3% in 2015 to $1.08trn, making the ASE one of the most resilient in the region.

Although the exchange’s market capitalisation fell by 0.5% in 2015 to JD18bn ($25.3bn), representing 70.7% of GDP, the trading value recorded a particularly strong performance, rising by 51% to hit JD3.4bn ($4.8bn), compared to JD2.3bn ($3.2bn) in 2014. The number of traded shares reached 2.6bn through 899,000 transactions, compared to 2.3bn shares and 956,000 trades in 2014.

Foreign Ownership

As one of the region’s most open exchanges, the ASE benefits from high levels of foreign ownership. Nader Azar, CEO of the ASE, reported in December 2015 that roughly half of listed shares were owned by foreigners, including 36.7% by Arab investors such as GCC companies and individuals. Foreign investment in the ASE rose in 2015, with the value of shares bought by non-Jordanian investors hitting JD981.7m ($1.4bn), equivalent to 28.7% of the ASE’s trading value. The value of shares sold by foreign investors totalled JD971.1m ($1.36bn), for a net foreign ownership increase of JD10.6m ($14.9m), compared to a JD22.2m ($31.2m) decline in 2014. Listed companies also recorded a positive performance in 2015, with 219 companies reporting that during the first three quarters of 2015, profits before taxes rose to JD1.3bn ($1.8bn), compared to JD1.2bn ($1.7bn) during the first nine months of 2014, for an 11.2% increase.

Ase Reforms

After launching a 10-year economic development plan known as Jordan 2025, emphasising private sector participation in the economy and targeting 7.5% annual GDP growth by 2025, the government has also moved to enact a number of reforms to the capital market. As such, in 2015 the ASE’s board of directors approved the ASE Strategic Plan 2016-18, which includes a number of objectives and initiatives aligned with the government’s broader economic vision.

Potential Privatisation

The most significant reform on the books is a planned restructuring of the ASE. In June 2015 the Cabinet approved in principle the bourse’s transformation into a public shareholding company. The move is expected to help the ASE meet international benchmarks, increase its competitiveness, enhance investor confidence, and improve awareness of the exchange and its role in the Jordanian economy, according to the ASE’s 2015 annual report. However, more recently, the Council of Ministers decided to pursue these objectives by restructuring the bourse to become a fully government-owned company. The exchange may yet decide to go public at a later date in more favourable market conditions (see analysis).

Meanwhile, other updates are preceding as planned. As part of its efforts to implement a new electronic trading system, the ASE, alongside bourses in elsewhere in the region, has been meeting with pan-European marketplace, Euronext about the possibility of using its new trading software. However, the technology will initially be used by European markets. Jordanian officials have also been participating in talks with their partners in Beirut, Muscat and Tunis about the possibility of studying offers by companies that provide surveillance systems that interface with trading securities platforms.

A further development for the ASE was the July 2016 announcement published in the Jordan Times stating that the Jordan Investment Fund will be listed on the exchange. The fund’s aim is to invest in infrastructure endeavours in the country to raise funds for priority projects. The government decided to list the fund after local financiers expressed interest in investing.

Insurance

Although it is smaller than the capital markets and banking segments, Jordan’s insurance industry is also supporting financial services growth on the back of higher profits, gross written premiums (GWPs) and penetration. The Jordan Insurance Federation (JOIF), an industry group originally formed in 1956, reports that there are 25 insurance companies in operation at present, with three of the largest players – Arab Orient Insurance Company (AOIC), Jordan Insurance and the Middle East Insurance Company – holding a combined market share of 35.6% as of the end of 2015, dominated by AOIC, with 18.66%. The rest of the market is highly fragmented, with none of the other 22 companies holding more than a 6.5% market share.

“Competition in the insurance sector is tough and players are dropping prices in order to secure contracts, which translates to a lower margin of profit,” Mustafa Melhem, CEO of AOIC, told OBG.

Regulatory Reforms

As part of an austerity drive, the government undertook an overhaul of the insurance industry in 2012, which included a move to dissolve the sector’s regulator, the Insurance Commission of Jordan. The upper and lower houses of parliament approved the transformation into the Insurance Administration Directorate within the Ministry of Industry, Trade and Supply in April 2014 despite industry criticism that the commission would be better suited to operate as part of the CBJ. These concerns were heeded in February 2016, when the Cabinet approved a recommendation to shift insurance regulatory responsibilities to the CBJ, stipulating that the transfer must take place within one year, with a new framework for the industry to be released two years after that. The new framework is expected to focus on solvency and corporate governance of underwriters, similar to CBJ reforms rolled out for the banking sector in 2015, in addition to creating new regulations separating the life and general insurance businesses at composite companies.

Underwriting Growth

Although the industry has lately been characterised by fierce competition within a crowded market, the sector has nonetheless been on a strong growth path in recent years. After recording a 30.5% increase in net profits in 2014 to hit JD32.7m ($46m), up from JD22.7m ($31.9m) in 2013, the country’s underwriters recorded a more mixed performance in 2015, according to the JOIF.

While sector-wide profits eased in 2015 some indicators showed improvement. Total assets rose by 3.3% to reach JD870.2m ($1.23bn), compared to JD842.5m ($1.18bn) at the end of 2014. Total investments simultaneously rose by 2% to JD533.6m ($750.4m). Paid-up capital across the sector grew from JD268m ($376.9m) to JD269m ($378.3m) by the end of 2015, while retained earnings in 2015 stood at JD16m ($22.5m), compared to JD14m ($19.7m) for 2014.

Premium Growth

Premiums have also been on the rise, with the JOIF reporting that GWPs increased from JD525.7m ($739.3m) in 2014 to JD550.4m ($774.1m) in 2015, of which the life and medical segment comprised JD215.4m ($302.9m), or 39%. General insurance GWPs were up 1.2% from JD330.9m ($465.4m) in 2014 to JD334.9m ($471m) in 2015. Broken down further, the motor and medical lines made up the largest share of GWPs, at 40.3% and 28.1%, respectively, followed by fire insurance (12.6%), life insurance (11.1%) and general accident (3.4%). The credit, life and medical lines showed the strongest premium growth in 2015, expanding by 40.2%, 15% and 9%, respectively, while marine and aviation, and general accident GWPs fell by 16% and 7%, respectively. Total paid claims declined from JD372.9m ($524.4m) to JD371.8m ($522.9m), reflecting improvements to technical underwriting.

“Life insurance will perform particularly well despite the economic turbulence in Jordan and in the region, because the business is still in its infancy and there is plenty of room to grow, even if it is a very competitive market already,” Raja’ei Noursi, deputy general manager of Jordan-based underwriter Delta Insurance, told OBG.

Indeed, every segment of the industry was profitable in 2015: net technical profits for the marine business reached JD5m ($7m), compared to JD3m ($4.2m) for fire, JD3.8m ($5.2m) for general accident lines, JD6.3m ($8.9m) for life insurance, JD8m ($11.2m) for the medical segment and JD7.5m ($10.5m) for motor insurance. However, overall profits contracted, with JOIF reporting that industry net profits hit JD22.1m ($31.1m) in 2015, a 32.6% decline from 2014.

M&A Potential

Stakeholders in the insurance industry have long called for consolidation in the wake of rising competition and the insurance industry could be set for a period of mergers and acquisitions. Jordan’s youngest insurer, First Insurance Company, merged with Yarmouk Insurance Company, a composite underwriter, in March 2016, marking the first insurance merger in Jordan in 25 years. First Insurance became Yarmouk’s shareholder and now controls 76%, while the combined paid-up capital of the new entity is JD28m ($39.4m). With 22 firms competing for less than 60% of the market, the industry is certainly in need of consolidation.

Outlook

Although growth did not reach the same high as 2014, Jordan’s financial services market remains a powerful economic engine and growth driver, particularly the banking industry, with significant potential for new mergers and acquisitions here and in the insurance segment. The sector will continue to face challenges as a result of Jordan’s ongoing economic slowdown, although robust deposit and lending growth should offer considerable knock-on benefits to the economy.