Global Arab Network | The Tough Economy Is Likely To Hurt Jordanian Bank Asset Quality

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The Tough Economy Is Likely To Hurt Jordanian Bank Asset Quality

Global Arab Network - - George Haddad

Wednesday, 08 July 2009 10:32

The current tough economic environment is likely to hurt the asset quality of Jordan's banks, but the medium-term outlook remains good, said Standard & Poor's Ratings Services in a report published today, "Banking Industry Country Risk Assessment: Jordan."

"Economic difficulties and the country's dependence on some cyclical sectors--such as export-oriented industries, real estate, and tourism--are, in our opinion, likely to hurt banks' asset quality because of the system's high exposure to these sectors," said Standard & Poor's credit analyst Mohamed Damak. "The medium-term outlook for Jordan's economy remains in our view good, however."

Standard & Poor's currently ranks Jordan's banking system in group 8 of its global Banking Industry Country Risk Assessment framework (BICRA; out of 10, 1 is the strongest). This classification reflects our assessment of the economy's dependence on some cyclical sectors, the banking system's exposure to the real estate sector which we view as high, its short track record of financial stability, and the risks stemming from operations in the Palestinian territories. Positive factors, we believe, are the system's capitalization which we view as adequate, its funding and liquidity profile which we consider as good, and our view that regulation and supervision is improving.

Standard & Poor's assessment of the Jordanian banking sector takes into account what we view as the supportive approach of the authorities toward their system. We believe that Jordanian authorities have limited financial flexibility. However, regulators seem to be relatively well equipped to take early corrective actions when a bank encounters difficulties. Due to the relatively fragmented nature of the banking system, though, regulators could take a selective approach to support in case of need, in our opinion, and possibly be more likely to help the large players that dominate the system.

Jordanian banks benefit from a broad exposure to the retail sector. However, Jordan's labor law is, we understand, more restrictive than that in other Middle Eastern countries, constraining banks' flexibility, we believe, to adapt to the changing economic environment. Nevertheless, in our view good quality infrastructure and limited government interference to date boost banking sector flexibility.

Global Arab Network

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