Fitch affirms JIB at BB-; outlook stable

Fitch Ratings has affirmed Jordan Islamic Bank’s (JIB) long-term issuer default rating (IDR) at ‘BB-‘ with a stable outlook, short-term IDR at ‘B’ and viability rating at ‘bb-‘.

“JIB’s IDRs are driven by the Viability Rating. The affirmation reflects the bank’s solid domestic franchise (JIB is the domestic market leader in Islamic banking in Jordan), strong liquidity and healthy profitability. The ratings also take into account the difficult domestic (and regional) operating environment, high financing book concentrations and capitalisation that typically lags the sector average,” Fitch in a statement said.

“Pre-impairment operating profit continued to grow in 2011 and Q112 supported by stronger net financing income – the Islamic equivalent of net interest income and despite higher operating costs. Nonetheless, impairment charges rose in line with increased levels of non-performing financing, putting pressure on net earnings. Fitch expects broadly stable profitability in 2012, as impairment charges remain elevated and greater market competition compresses margins,” it added.

JIB’s non-equity funding consists entirely of (stable) customer deposits. The bank has a sound deposit franchise among smaller retail depositors – accordingly, depositor concentration is low. Liquidity is strong, supported by a healthy financing/deposit ratio (end-Q112: 63%) and a reasonable stock of liquid assets.

Asset quality has deteriorated (relative to end-2009) in line with the slowdown in the operating environment, but JIB’s indicators have remained manageable to date, comparing well with the sector average. Specific reserves coverage of non-performing exposures was moderate (end-Q112: 56%).

Capital adequacy is satisfactory in light of the bank’s risks. The Fitch core capital ratio (FCCR) stood at 23.3% at end-Q112. Capital ratio calculations are based on Islamic Financial Services Board (IFSB) standards, whereby risk-weighted assets are significantly lower than under Basel II. Recalculated as per Basel II, the FCCR would be substantially lower. JIB’s capitalisation has typically lagged peers.

Deterioration in the operating environment, asset quality and/or capitalisation could have a negative impact on the bank’s IDRs and VR. Conversely, upside potential depends on significant positive developments in the local economy.

JIB’s Support Rating and Support Rating Floor reflect the limited probability of support from the Jordanian authorities, notwithstanding the government’s supportive stance towards the domestic banking system. While Fitch believes that Jordan has a strong propensity to support JIB, potential support is limited by constraints on its ability to do so.

Changes in Fitch’s perception of risks relating to Jordan, in either direction, could affect the bank’s Support Rating or Support Rating Floor.

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