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Middle EastMarch 5 2007

Financial blue skies amid the region’s storms

Given its sound financial infrastructure and current economic boom, the surge in Jordanian bank profits looks set to continue. Stephen Timewell reports from Amman.
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Political crises surround this little kingdom but despite having Israel, Palestine, Syria and Iraq on its borders, Jordan is relishing its role as an island of stability and is managing to attract considerable amounts of foreign investment and produce strong economic growth.

Between 2000 and 2005, economic growth almost doubled to 6% a year compared with the previous five-year period and according to the latest International Monetary Fund (IMF) Article IV consultation in November, 2006, growth was expected to be 6% or more in 2006.

But while Jordan is vulnerable to outside shocks and constrained by a weak economic structure and a high government debt burden, forecast by Standard & Poor’s at 80.5% of gross domestic product (GDP) in 2006, the rating agency believes these factors are mitigated by its strong economic growth prospects and the government’s continued prudent policies.

Over the years, Jordan has established itself as a safe, well-regulated and well-managed economy and although it does not have the resources of its oil-rich neighbours in the Gulf, it is becoming a haven for investors. Dr Umayya Toukan, governor of the Central Bank of Jordan, explained to The Banker that foreign direct investment hit a record $2.8bn in 2006 and that the surplus savings in the region were being attracted by the competitive rate of return from Jordanian assets.

In addition, Jordan is a key centre for Iraq-related business. As one banker noted, Jordan can be a beneficiary when there are crises in the region and when there are good times too.

The Jordan Investment Board (JIB)’s latest figures show how much foreign appetite there is for new projects in the country and also how much is coming from the Arab world. Dr Maen Nsour, chief executive of the JIB, says: “It has been boom time here in 2005-06”. He explains foreign investment under the Investment Promotion Law was just Jd96m ($137m) in 2004 but this tripled to Jd277m in 2005 and tripled yet again in 2006 to reach Jd845m. The interesting aspect of this surge was that 91% of the foreign investment last year came from the Arab world.

Home-grown investment

Domestic investors were also keen to seize the opportunities available and more than doubled their investments in such new projects to Jd987m.

Mr Nsour acknowledges Jordan’s well-educated work force and good infrastructure, adding that Arab investors are not deterred by political insecurities in the region.

Construction is booming in Jordan, particularly in the capital Amman, but there is also a great deal of interest in the Aqaba Special Economic Zone (ASEZ) and areas around the Dead Sea, where Mr Nsour says there is huge potential for the development of tourism and industry. Tourism accounted for about 10% of GDP in 2006 and, with big developments planned, looks set to expand in the future.

Jordan also benefits from its membership of the World Trade Organisation (WTO) and other free trade agreements with the EU, the Greater Arab Free Zone and in particular with the US. Jordan’s close ties to the US were demonstrated by the fact that 30.7% of exports in 2005 went to the US, compared with 42.6% to Arab countries.

Sell-off prospects

Privatisation is also now attracting interest after a slow period earlier in the decade. Revenues were expected to reach $800m in 2006 after slumping to $55.8m in 2005, and with the help of the IMF look likely to increase rapidly. With major privatisation projects such as Royal Jordanian Airlines, the Aqaba Railway and the Amman-Zarqa Light Railway on the block in 2007, among others, the prospects are healthy.

Key to Jordan’s economy is sound economic management and a strong banking sector. The recent IMF report noted: “The central bank continues to conduct prudent monetary policy,” adding that there are no pressures in the foreign exchange market, the value of the Jordanian dinar is appropriate, and the fixed exchange rate regime has served Jordan well.

Dr Toukan is also keen to emphasise the strength and profitability of the banking sector. First, he notes that the 15 Jordanian commercial and Islamic banks and eight foreign banks are very well capitalised at more than 20% of assets, and that Jordan is introducing Basel II capital adequacy regulations in January 2008 in an effort to boost risk management capabilities in particular and ensure good corporate governance. The banks, at more than 20%, are well above central bank capital stipulations of 12% and also well ahead of Basel requirements.

In terms of profitability, the banks’ return on equity stood at 17% in mid-2006, with return on assets at 2%, well above the 2000 levels of 4.2% and 0.3% respectively. Mr Toukan also acknowledges the important reduction in non-performing loans (NPLs) and improved provisioning during this period, with NPLs declining to 5.4% from 14.6% in 2000 and provisions coverage increasing to 84.8% at present from 42.8% in 2000.

Serving customers

Mr Toukan notes the important role of the banking sector in the economy, with the total banks’ assets-to-GDP ratio close to 225% at mid-2006. With more than 513 branches and 96 representative offices across the kingdom, Jordan’s modest population of close to six million people is relatively well served. This is less the case in neighbouring Palestine (population 3.7 million), where there are 53 branches of eight Jordanian banks in the West Bank and Gaza; these operations are regulated by the Palestine Monetary Authority based in Ramallah.

In Jordan, Arab Bank, which last year celebrated its 75th anniversary, is the dominant player with a 35% share of the local market. The bank was established in Jerusalem in 1930 by Abdul Hameed Shoman, whose vision was to create a financial institution to serve Arab countries. It has a global network of more than 400 branches (89 branches in Jordan), subsidiaries and affiliates in 28 countries.

The extremely conservative and risk-averse bank has maintained a high liquidity policy that has served it well through the series of regional political crises and turmoil it has endured over the decades. In January, Standard & Poor’s assigned the bank its A-minus long-term and A-minus-two short-term ratings, in line with other rating agencies, saying: “The ratings reflect the group’s superior geographic diversification, robust capitalisation, very strong liquidity and good asset quality.”

For 2006, Arab Bank Group, the firth largest Arab bank, posted record pre-tax profits of $790m, a 24.1% increase on the previous year. Shareholders’ equity went up significantly to $5.9bn following a $1.5bn initial public offering (IPO), the first since 1964, and total assets rose to $32.6bn, up nearly 19%. In Jordan, the net profit of the Jordanian branches reached Jd263.3m, an increase of 31.6% over 2005; about 20% of the group’s consolidated balance sheet is deployed in Jordan itself.

The early 2006 $1.5bn IPO represents an important part of Arab Bank’s major restructuring plan. “We expect this upward trend in the activities of the Arab Bank to continue in light of the strategy adopted by the bank and the restructuring that is taking place in our various departments,” says chairman and CEO Abdel Hamid Shoman. Meanwhile, the bank’s capital adequacy ratio stood at a high 23.9% with a Tier I ratio of 21.9% at end-September 2006. The bank plans to use the fresh equity for expansion in the Gulf and Europe (see below).

Riding the boom

Jordan’s second largest bank is the Housing Bank for Trade & Finance, which has 96 branches in Jordan, six branches in Palestine and subsidiaries in Syria and Algeria. It has also produced strong profits as well as equity growth. With about 15% of the Jordanian banking market, Housing Bank achieved a 24% growth in pre-tax profits in 2006 to reach Jd130.1m and a 16.9% return on equity after tax. Total assets rose 28% over the previous year, on the back of the overall economic boom, reaching Jd4.1bn.

Like its competitors, Housing Bank significantly increased its shareholders’ equity in 2006, more than doubling it to JD835m, clearly with expansion in mind. Omar Mathias, head of treasury, explains that his bank is keen to acquire financial institutions in Jordan but is also looking for acquisitions abroad. It is also considering a regional stock exchange listing, probably in Dubai.

Meanwhile the country’s up-and-coming institution, Jordan Kuwait Bank (JKB), produced another outstanding set of results in 2006, with pre-tax profits up 42.4% to $78.9m, a return on equity (after a capital increase) of a high 36.8%, and total assets up 17.1% to $2.3bn.

Chairman and former prime minister Abdel Karim Kabariti, in explaining the best performance in the bank’s history, says: “The results demonstrate a valid proof of the progressive trend witnessed by the Jordanian economy in the past year.”

With a solid network of 47 domestic branches, JKB wants to focus on retail in what it believes is an overbanked market. Mr Kabariti’s plan is to make retail 40% of the business in 2008 and maintain the bank’s enviable low NPL ratio of 0.3%. Located near Iraq and Lebanon, JKB believes Jordan is attractive for investment with the real estate market booming and strong tourism opportunities, particularly with potential competitors for the tourist dollar such as Israel and Egypt.

Jordan’s banking sector is trying to seize the opportunities now emerging. All the major banks have had significant capital increases preparing the ground for acquisitions and expansion. Given the sound financial infrastructure already in place and the positive economic climate, Jordan is ripe for expansion and the surge in banks’ profits looks set to continue.

NEW BLOOD OPTS FOR A MAKEOVER AT ARAB BANK

In July 2005 a new era began in the Arab world’s most venerable financial institution, Arab Bank, as Abdel Hamid Shoman took over as chairman from his late father, Abdulmajeed Shoman. The Shoman family had already built Amman-based Arab Bank into the broadest based Arab bank, with a global network of more than 400 branches and affiliates covering 28 countries, but now the new leader, Abdel Hamid, is in the midst of major restructuring that will take it in new directions.

Last year, the $1.5bn initial public offering (IPO) and the formation of Europe Arab Bank represented the start of the transformation. Headquartered in London with a paid-up capital of €500m, Europe Arab Bank operates all the Arab Bank branches and subsidiaries in the UK, Germany, Austria, France, Spain and Italy. “EAB will operate as the arm of the Arab Bank to facilitate trade activities between Europe and the Arab world,” Mr Shoman explains.

After successful results in 2005 and 2006, the bank is planning to use its capital increase to expand into new areas. “We need an investment banking presence and we are applying to the Dubai International Finance Centre (DIFC) to establish AB Capital. This will be our investment banking arm in the region, owned 60% by Arab Bank, and focusing on the UAE and Saudi Arabia,” says Mr Shoman.

He expects AB Capital to start two months after DIFC approval. The new entity is expected to work in co-operation in Saudi Arabia with the Riyadh-based Arab National Bank, which is 40% owned by Arab Bank. With investment banking providing a new focus in 2007, Mr Shoman is looking to strengthen the group’s private banking capabilities in 2008 through combining its various European private banking operations.

Elsewhere, Arab Bank is looking to expand in Egypt and north Africa. “Each year from 2007 we want to open 15 branches in Egypt. We will also look at mergers and acquisitions in Egypt as well as other places such as Algeria and Libya,” Mr Shoman says. “Our policy is to gradually increase the percentage of our assets in retail to about 30%-35%. We also believe Palestine is a good market for us in due course.”

The bank is implementing a strategy in the Arab world on several levels. “Our aim,” says Mr Shoman, “is to increase the efficiency of the operating revenues and to provide new services and personalised services to our customers where ever they operate. During the past two years the bank has established Arab Bank Syria and acquired 50% of MNG Bank in Turkey, as Turkey is a vital partner in the trade with Middle East countries.”

In the Gulf, where the bank operates branches and subsidiaries in the United Arab Emirates, Qatar, Bahrain, Oman, Yemen, Saudi Arabia and Oman, Mr Shoman plans to increase branch activities in competition with the local banks.

The bank is also looking to expand its insurance interests and move into uncrowded markets such as Tunisia and Algeria. It is also livening up its rather staid and traditional image with a new branding campaign beginning in March. And reflecting the global nature of its operations, the bank is further strengthening its compliance division, which already has 90 employees spread across its global network.

Arab Bank is well known for its conservatism and policy of maintaining very high liquidity. That is not changing but many other things are. And Mr Shoman is determined to give new energy and direction to one of the Arab world’s most formidable players.

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