Jordan s Banking Sector Monthly Chart Book Mar Issue The Monetary Policy Tightening Cycle Begins, Liquidity Pressure Persists, LtD Ratio Approaching 70% February witnessed the second interest rate hike in less than two months. On Feb. 21, the Central Bank of Jordan (CBJ) raised the interest rates on its monetary policy tools by 50bps. The statement issued by the CBJ cited the global developments and the rising competitive pressures on the JOD as the main drivers behind the decision. In our previous issue, we expected interest rates to trend upwards, however, we were surprised by the timing and the magnitude of the hike as we anticipated a more gradual tightening process. The CBJ s aggressive decision is a hawkish sign that aims at setting the stage for more interest rate hikes in 2017. Looking ahead, we will closely monitor the dollarization activity in the market and the efficacy of the CBJ s monetary policy tools in enhancing the attractiveness of the JOD denominated saving vehicles. we believe that large banks, particularly Arab Bank (ARBK) and The Housing Bank for Trade and Finance (THBK), are best positioned to benefit from rising interest rates as they enjoy ample excess (unutilized) liquidity. Not to mention that THBK enjoys a low-cost funding base anchored by a very strong CASA franchise; the strongest in the kingdom. Medium and small sized banks, on the other hand, would underperform as competition on deposits would continue to weigh on their Net Interest Margins (NIMs). It s worth noting that the banking sector in Jordan suffers from structural liquidity distortions as epitomized by liquidity being concentrated in the kingdom s two largest banks (ARBK and THBK), which, we believe, has been exacerbated by an inactive/inefficient interbank market that does not facilitate the flow of liquidity from banks with excess liquidity to banks with liquidity deficiencies, thus resulting in small and medium banks suffering from elevated funding costs. Moving to the CBJ s monthly statistics, total deposits inched up by 0.4% MoM in, driven by a 0.7% increase in private sector deposits which more than offset the contraction in public sector deposits that posted a steep 3.6% decline during the month. Foreign currency deposits grew significantly during the month taking the dollarization ratio (22.6%) to its highest level since 2014. On a yearly basis, total deposits registered a 1.3% increase compared to 2016. This report must be read with the disclaimer at the end of the report 1
The growth in direct credit facilities (0.6% MoM) outpaced deposits growth in, buoyed by a 4.2% and 1.1% monthly increase in lending to the mining and general trade sectors respectively, thus pushing the loans to deposits (LtD) ratio to 69.8% vs 69.6% in December. Jordan s Banking Sector Interest rate on demand deposits inched by a slight 4bps during to reach 0.30%, while interest rates on saving and time deposits remained stable at 0.56% and 3.04% respectively. However, spreads widened during the month with interest rates on overdrafts and loans & advances expanding by 40bps and 9bps to 8.02% and 7.92% respectively. Money Supply (M1) tumbled sharply in, falling by 3.0% MoM to JD10.08 billion, on the back of a 2.4% decline in currency with the public, coupled with a 3.4% drop in JOD-denominated demand deposits. The drop in M1 was the main culprit behind the steep decline in M2 which posted its biggest monthly drop since 2012, falling by 0.8% MoM. On a separate note, Foreign currency reserves stood at USD12.2 billion at the end of compared to USD12.9 billion a month earlier; a drop of c.usd700 million. However, foreign reserves remain at very comfortable levels, covering 7 months of the kingdom s imports, and providing a strong protection for the USDJOD peg that has been always supported by the IMF which considers it the cornerstone behind economic stability in Jordan. We believe that the fears of devaluation are unwarranted and unjustified by fundamentals, and we expect to see dollarization subsiding in the near future. 2
34,000 33,000 32,000 31,000 30,000 29,000 28,000 27,000 26,000 25,000 Total Deposits (JOD million) 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% Deposits Growth % MoM (LHS) % YoY (RHS) 14.0% 12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 24.0% 23.0% 22.0% 21.0% 20.0% 19.0% 18.0% 17.0% FC Deposits to total Deposits Time 54% Deposits By Type Demand 30% Saving 16% 33,000 32,000 31,000 30,000 29,000 28,000 27,000 26,000 Domestic Credit (JOD million) 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% Growth in Domestic Credit -2.0% -4.0% 3
25,000 20,000 15,000 10,000 5,000 0 Domestic Credit Extended to Private Sector (JOD million) 75.0% 70.0% 65.0% 60.0% 55.0% 50.0% 45.0% 40.0% Loans to Deposits Interest Rates on Deposits Interest Rates on Loans 6.00% 5.00% 4.00% 3.00% 2.00% 1.00% 0.00% Demand Saving Time 11.0% 10.5% 10.0% 9.5% 9.0% 8.5% 8.0% 7.5% 7.0% Prime Lending Rate Loans and Advances Overdrafts Discounted Bills & Bonds 18000 16000 14000 12000 10000 8000 6000 4000 2000 0 Arab spring, Egyptian gas supply disruptions, NEPCO losses at unprecedented levels FC Reserves (USD billion) GCC grant, several Eurobond issues, contractionary monetary policy prioritizing the attractiveness of JOD over growth, coupled with fiscal reforms USD1.0 bn Eurobond Geopolitical tensions & worsening financial conditions in the GCC adversely impacting remittances, tourism, FDIs and most importantly exports 2012 2013 4
JD Million, unless otherwise stated 2016 2017 August October December Total Deposits 33,260 33,292 32,850 32,902 32,900 33,016 % MoM 0.54% 0.10% -1.33% 0.16% 0.00% 0.35% % YoY 3.54% 3.24% 1.45% 1.44% 0.92% 1.26% Private Sector Deposits 30,458 30,553 30,290 30,463 30,430 30,634 % MoM 1.03% 0.31% -0.86% 0.57% -0.11% 0.67% % YoY 4.20% 3.70% 2.56% 2.43% 1.84% 2.48% Domestic Credit 32,320 32,534 32,620 32,179 31,869 32,000 % MoM 1.31% 0.66% 0.26% -1.35% -0.96% 0.41% % YoY 7.83% 7.55% 6.82% 4.73% 4.11% 4.32% Direct Credit Facilities (DCFs) 22,313 22,448 22,499 22,737 22,906 23,045 % MoM 0.25% 0.60% 0.23% 1.06% 0.74% 0.61% % YoY 8.27% 7.73% 7.06% 8.02% 8.54% 8.93% DCFs Extended to: Mining Sector 241 248 254 290 288 300 % MoM -4.78% 2.99% 2.46% 14.11% -0.65% 4.16% % YoY 36.37% 26.36% 23.92% 51.83% 69.45% 50.65% Construction Sector 5,228 5,233 5,466 5,549 5,828 5,830 % MoM -0.64% 0.09% 4.46% 1.52% 5.01% 0.04% % YoY 8.56% 8.52% 11.76% 12.31% 18.82% 17.24% Industrial Sector 3,899 3,982 3,905 3,960 4,076 4,120 % MoM 1.34% -1.73% 0.81% -1.27% 0.38% -1.84% % YoY -0.89% -1.93% 0.78% -1.21% 2.68% -1.27% Interest Rates On: Demand Deposits 0.24% 0.24% 0.24% 0.24% 0.26% 0.30% Saving Deposits 0.60% 0.58% 0.56% 0.64% 0.56% 0.56% Time Deposits 2.95% 3.00% 3.00% 3.04% 3.04% 3.04% Overdrafts 7.62% 7.76% 7.65% 7.64% 7.60% 8.02% Loans and Advances 8.01% 7.99% 8.05% 7.90% 7.83% 7.92% FC Reserves (USD Million) 12,667 12,584 12,063 12,709 12,883 12,151 % MoM 1.01% -0.66% -4.14% 5.36% 1.37% -5.68% % YoY -16.89% -16.74% -19.40% -9.72% -8.98% -13.65% 5
Research Contacts: Mohammad A. Al Zou bi, CFA Senior Financial Analyst Tel: +962 6 5200330 Ext. 2364 Mohammad.alzoubi@capitalinv.com Trading Contacts: Khaldoun Al-Zou bi Head of Brokerage Tel: +962 6 5200330 Ext. 2351 Khaldoun.zoubi@Capitalinv.com Customer Service: Sawsan Saleh Head of Customer Service Tel: +962 6 5200330 Ext. 2349 Sawsan.Saleh@Capitalinv.com Disclaimer The information and opinions contained in this document have been compiled in good faith from sources believed to be reliable. Capital Investments makes no warranty as to the accuracy and completeness of the information contained herein. All opinions and estimates included in this report constitute and reflect our independent judgment as of the date published on the report and are subject to change without notice. Capital Investments accepts no liability whatsoever for any loss of any kind arising out of the use of all or any part of this report. Capital Investments and its related companies may have performed or seek to perform any financial or advisory services for the companies mentioned in this report. Capital Investments, its funds, or its employees may from time to time take positions or effect transactions in the securities issued by the companies mentioned in this report.this document may not be reproduced in any form without the expressed written permission of Capital Investments. The opinions contained within the report are based upon publicly available information at the time of publication and are subject to change without notice. Prior to investing, investors should seek independent financial, tax and legal advice. 6