Jordan exists in a sea of crises. Boasting a business upturn fuelled by chaos in neighbouring Iraq – whose business families and their multinational partners often prefer to base themselves in Amman – it survives even while tensions in the Palestinian territories and Lebanon suggest that darker days are ahead for the region.
Judging from a range of indicators, from first-half (H1) 2006 bank results to a spike in local property prices, Jordan has successfully retained its image as a safe investment hub in the Middle East, open to local and foreign investors; its booming real-estate sector is now hosting a number of multi-billion dollar schemes.
Jordan’s most successful banks reported increased profits in H1 2006, at the same time as the local equities market – heavily weighted towards bank stocks – was falling. The Amman Stock Exchange (ASE) rose sharply in late 2005 but then dipped sharply in early 2006, as most banks’ share prices fell.
According to data drawn from official Jordanian sources by Amwal Invest, an Amman-based investment bank, the sector’s total income after tax increased by 8% year on year in H1 2006 from JD277.9m to JD299.5m ($392.3m to $422.7m). Those who reported growth in their bottom line included key players Arab Bank, Bank of Jordan, Housing Bank, Jordan Islamic Bank, Jordan Kuwait Bank (JKB) and Société Générale.
Pressure is growing on smaller banks. Central Bank of Jordan (CBJ) licenses 23 banks operating in Jordan and eight branches of foreign banks. With the top three banks holding more than 75% of total assets there are fears that smaller and weaker banks cannot sustain profitability. CBJ is thus actively working to encourage banks to merge by raising the minimum capital requirement from JD40m to JD100m by 2010.
However, Mousa Abu-Awad, CBJ assistant executive manager for banking supervision, says: “No official regulation to raise the minimum capital requirement has been put into place yet. The proposal is being researched, and the bank estimates the regulation will be issued by 2010 – at the latest.” Mousa noted a lack of enthusiasm and support from smaller banks to merge.
Equities downturn
Amwal Invest reports that ‘wannabe’ investors flooded into the ASE in H2 2005, inflating the banking sector index by 133.6% to reach 16,892 points at year-end; it had already peaked at 19,631.4 points in November. As Amwal observed, in a report issued on October 16: “It soon became apparent that the market was overvalued. Even companies with strong fundamentals did not escape the wrath of the panic that ensued.”
Profit taking fed into panic, and the index had declined to 11,960 points at the end of September this year. As Amwal points out, all banks, with the exception of Société Générale and JKB, saw their share prices fall.
The 2005 ASE boom had another effect: demand for credit facilities was inflated by loans for margin investments, as well as by the upsurge in construction projects across Jordan. Banks officially allocated credit facilities worth JD 220m for share purchases in 2005. Despite the equities market downturn, credit facilities for share-buying continued to rise in H1 2006, reaching JD431.4m by June; in reality, the amounts of margin lending were probably much higher still. Meanwhile, the construction boom continues, with credit facilities growing 92.3% year on year in H1 2006, to JD1.4bn in June.
Arab Bank abroad
Venerable giant Arab Bank, the fifth-largest bank in the Arab world, holds the largest market share in Jordan – 26% of total assets – followed by Housing Bank, with 17%. Chairman and chief executive Abdel Hamid Shoman significantly increased Arab Bank’s capital earlier this year through a rights issue (of JD1080m), raising the bank’s lending capacity by $18bn and increasing total equity over time to a reported $5.4bn. Now, having resolved difficulties in the US, Mr Shoman intends to use this new capital to extend Arab Bank’s geographical coverage, to widen its distribution channels, and to diversify its services and financial products.
A key aspect of Arab Bank’s new structure is the establishment of Europe Arab Bank (EAB), a wholly owned subsidiary licensed by the UK Financial Services Authority in May this year. Arab Bank is in the process
of migrating established European operations to this new subsidiary with the successful migration of Arab Bank Italy to EAB announced in October, and its German business announced in early September. EAB, which had a total equity of o254m as August 1, 2006, will expand and handle the Arab Bank operations in the EU and foreign markets in the Middle East and north Africa.
According to Mr Shoman, “we expect to complete this migration by end of 2006 or early 2007”.