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Middle EastFebruary 1 2010

M&A shake-up looms in Jordan

Arab Bank: boasts the largest branch network in JordanThe impact of the global downturn and tighter regulations imposed by Jordan's central bank looks set to change the future shape of the country's banking sector. Writer Stephen Timewell
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M&A shake-up looms in Jordan

In recent years, a strong real estate market and booming economy have helped Jordan's banking sector achieve record growth levels, with total assets soaring from Jd12.9bn ($18.21bn) in 2000 to Jd29.8bn in 2008. The global financial crisis, however, has changed that rosy picture. While the sector has been protected from the negative excesses experienced elsewhere by prudent central bank management and heavy regulation, Jordan's domestic banks now face some serious new challenges.

While all of Jordan's banks did well in boom times, the crisis has made it uncomfortably clear that the smaller family-owned banks face troubling questions about their future. With the Central Bank of Jordan wanting to double the minimum capital requirement for banks to Jd200m or more, and bring in larger regional banks, the banking landscape looks set to change and become increasingly competitive. Shunned in the past, mergers and acquisitions look set to take place in 2010.

At present, Jordan has 13 local commercial banks, three Islamic banks, including the recently established Jordan Dubai Islamic Bank, and eight foreign banks with a total of 593 branches at the end of 2008. Although Arab Bank - the 159th largest bank in the world with a 500-branch global network - is almost six times larger in asset terms than its nearest rival, Housing Bank ($45.6bn versus $7.7bn at end 2008), the picture in the Jordanian market itself is somewhat different.

Housing Bank, with 98 branches across the country, has the largest branch network, followed by Arab Bank with 79 branches, and together they claim a combined market share of 31.6% and 42.2% of the sector's credit facilities and deposits, respectively. Nevertheless, in terms of credit granted, Arab Bank is by far the largest with an 18.1% share, followed by Housing Bank (13.5%) and Jordan Kuwait Bank (8.1%). Arab Bank also claims a dominant 25.8% market share of deposits.

Changing environment

So what is the future for Jordan's domestic banks? All banks well exceeded the 12% minimum capital adequacy requirement and the sector averaged a 19.3% high in June 2009. Capital adequacy as such is not the issue and tight regulation has stopped Jordanian banks becoming over-leveraged and acquiring toxic assets. Also the sector's liquidity and profitability are relatively strong with the sector's return on average equity registering 11% in 2008.

But 2009 was undoubtedly a difficult year. As Haethum Buttikhi, assistant general manager of Jordan Kuwait Bank, the country's third largest, explains: "It's been tough, from 10 years of growth to no growth in 2009. We will have profits but no growth." Pre-tax profits for the first three quarters of 2009 at Jordan Kuwait were Jd41.9m, somewhat down on 2008 annual profits of Jd68.3m.

For the major Jordanian players, third-quarter 2009 results show significant declines on 2008 annual profits and they are likely to get worse before they get better. Housing Bank's Q3 pre-tax profits were Jd72.9m compared to Jd142m in full-year 2008; Bank of Jordan's Q3 profits were Jd29.8m compared to Jd44.3m in 2008; while Capital Bank's Q3 profits dropped to Jd4m from Jd19.7m in 2008.

Market restructure

Nevertheless, most banks are expected to stay in the black, though their outlook remains uncertain and to some extent determined by developments in the global economy, especially in the Gulf states, which provide considerable investment into Jordan.

The key issue is not necessarily capital, liquidity or profitability, as in other countries, but market structure. Can and will the large number of relatively small banks (those with paid-up capital of about Jd100m) survive into the post-crisis era? Will the long-awaited consolidation of the sector finally begin with many of the family-owned banks agreeing to merge?

Both Jordan Kuwait Bank and Capital Bank acknowledge they are keen to acquire but have also noted that merger talks they have had with family-owned banks have failed. Capital Bank general manager Haytham Kamhiyah says: "We believe in mergers and economies of scale, we are looking at acquiring a retail bank."

Vulnerable minnows

With at least 10 banks with a paid-up capital of around the current minimum requirement of JD100m or even less, and the Central Bank of Jordan pushing for a doubling, change is expected. Also, as many of the smaller banks look vulnerable, new entrants are likely to bring further upheavals, especially in Islamic banking.

Jordan Islamic Bank, established in 1978, has established a 57-branch network and more than 700,000 accounts in a country of just 6 million people. But big Islamic banks from the Gulf are coming in the form of Dubai Islamic Bank and Saudi Arabia's Al Rajhi Bank. Whether Jordan Islamic will be able to maintain its dominance of the Islamic market in the face of these regional giants remains to be seen, but competition is expected to become much tougher. The arrival of National Bank of Abu Dhabi also raises the competitive threshold for commercial banks.

While Jordan's banks have been largely insulated from the damage caused by the global financial crisis, they will not be isolated from the coming new era of competition. Size matters, and many smaller banks may need new structures to face the future.

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Moody's report finds Arab Bank in good health

In late December, Moody's Investors Services reaffirmed Arab Bank's A3 rating with a "stable" outlook, demonstrating not only that Jordan's largest bank was largely unaffected by the recent global financial turmoil but also vindicating the bank's conservative strategy and its cautious approach to managing risks.

The report highlighted Arab Bank's diversified structure, its strong domestic and regional presence with an asset base covering 500 branches across 30 countries, and the modest market-risk profile which has helped it avoid unfavourable market conditions.

Established in Jerusalem in 1930, Arab Bank takes pride in its conservative attitudes and Moody's acknowledged the bank's strong financial ratios. Liquid assets comprise more than 40% of total assets while core deposits comprise more than 80% of overall deposits reflecting a high level of stability and a solid funding base backing the bank's ample liquidity. The report underlined the bank's comfortable loan-to-deposit ratio of less than 70% as well as its strong capital adequacy of 16.3% under Basel II, exceeding the strict prudential requirements of 12% set by the Central Bank of Jordan.

The report also stressed that core liquidity remains high at group level while capitalisation remains very strong, providing a comfortable cushion against any unforeseen losses. It also noted Arab Bank's proven track record of stable core earnings (net pre-tax profit of $1061m in 2008, up 10.1% year on year, and net profit of $452m in the first half of 2009) reflecting the success of its highly diversified business model.

While chairman Abdel Hamid Shoman stated that the rating reflected strong confidence in the bank, he was also characteristically candid in an interview with The Banker on how he saw the future. While the bank announced a 50% acquisition of Turkland Bank in Turkey and 19% of Wahda Bank in Libya, new operations in Libya and the establishment of a fully owned subsidiary called Arab Sudanese Bank in Sudan in 2009, Mr Shoman was keen to stress the bank was looking primarily towards organic growth in 2010.

"We don't know how the global economy will pick up, our priority is to have high liquidity and manage assets carefully and continue monitoring the situation. It depends how things go.

"For 2010 there is no plan for acquisitions, only organic growth," he says. "As for 2009 profits, they are likely to be less than 2008 due to provisions, the drop in interest rates, the slowdown in the economy and the lack of expansion in lending."

Looking at 2010, Mr Shoman believes it will be better than 2009, but improvement will be slow - it will not be a U-turn, it will be steady at best.

"This economic problem is much stronger because businesses worldwide are much larger than before and we live in a global world. Things will not pick up quickly in 2010 unless they pick up in the US and Europe."

Referring to the bank's global operations, Mr Shoman says its operations through its London-based Europe Arab Bank will make a loss in 2009 due to the bank's efforts at cleaning up its balance sheet. However, 2010 profits in Europe are expected to increase, which in turn will give the group an extra push.

In the Middle East, Arab Bank is present in all countries except Iraq, where it has a licence, and Kuwait, where it is considering starting operations when the time and conditions are right. Besides increasing its branch network in Algeria, Egypt and Jordan, Arab Bank has 11 branches in Yemen and is by far the biggest bank in Palestine with 25 branches. Given its focus on organic growth, it is not looking to expand in Asia where it has a branch in Singapore and representative offices in China and South Korea.

Arab Bank is treading carefully in 2010; but with its rating reaffirmed and core financial indicators in sound shape, it is well placed to cope with the uncertainty ahead, as well as any possible upturn.

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