Demand for loans in Jordan is soaring, providing a wealth of opportunities for its 23 banks, eight of which are foreign and two Islamic. The country's banking system has been a prime beneficiary of Jordan's stable position among some of the region's most volatile countries. It has become a centre for Iraq-related financial transactions, for example, with banks accruing substantial fee income from servicing trade finance deals through Iraq.

The economic backdrop is proving supportive, with Jordan registering gross domestic product (GDP) growth of 6 per cent last year, a figure the International Monetary Fund (IMF) predicts will soften only slightly in 2008. The boom is crossing over into the financial sector, with local banks preparing to play a key role in financing major new economic projects.

Credit expansion

Credit is expanding in line with growth in construction and consumer lending. "Banks are expanding their credit books and concentrating on core business rather than their capital market portfolios," says Basel Jmeian, bank analyst at local investment banking services company Jordinvest. "They made a lot of money from the 2005 stock market boom but were hit by the correction in 2006. So from 2007, they started to cap the portfolio side."

Robust activity in the construction and tourism sectors has offset weaker external demand. Credit facilities extended to the construction sector grew by 23 per cent to JD1.9bn ($2.7bn) in the first nine months of 2007.

"Real estate is booming and is driving bank profits," says Nondas Nicolaides, analyst at ratings agency Moody's Investors Service. "But the biggest overall driver is the corporate segment."

Moody's expects loan growth rates to be sustained over the short to medium term, with economic activity underpinning the banks' balance sheets, as well as their revenue growth. "Loan books and balance sheets are growing," says Nicolaides. "But there are challenges as well - Jordan has to import most of its commodities, which is causing the import bill to rise."

Banks have steadily built up their balance sheets on the back of strong economic conditions. Total bank assets rose to JD26.8bn last year, representing a growth rate of 10.6 per cent. By April 2008, assets had swelled to more than JD28bn. Customer deposits rose by 9.6 per cent to JD16bn in 2007, while aggregate funded credit facilities rose by 15.7 per cent to JD11.3bn.

The performance of individual banks was mixed in 2007, with net profits ranging between a low of JD2.2m and a high of JD525m. The two biggest banks, Arab Bank and the Housing Bank for Trade & Finance, registered the biggest increases. Arab Bank's profits grew by 24 per cent year on year to JD525.4m, while the Housing Bank's grew by 17.7 per cent to JD111.4m. Jordan Kuwait Bank was next in terms of profit value, with JD45m.

According to Jordinvest, the 15 listed banks led the sector in terms of profits. Net profits for the sector grew by 15 per cent last year, with balance sheet growth also at 15 per cent. "First-quarter net income is in the 15-20 per cent zone and we forecast it to stay at this level for 2008 as a whole," says Jmeian.

Overall, Jordan's banks are well capitalised and non-performing loan ratios are low, allowing sufficient scope to mitigate future losses. Banks are most susceptible to making a loss through the bursting of a property market-linked asset bubble, which would bring down asset prices. However, banks have shrugged off bad loans from previous years. Gross non-performing loans as a percentage of gross loans (excluding interest in suspense) stood at just 7.19 per cent in June 2007, down from more than 20 per cent five years earlier.

Regulatory limits

The Central Bank of Jordan (CBJ) maintains a tight regulatory brief, requiring that credit concentration does not exceed 25 per cent of equity. According to the CBJ, the lowest capital adequacy ratio reported by a Jordanian bank is 14 per cent, above the 12 per cent minimum requirement. Average capital adequacy ratios currently stand at about 20 per cent. Following the adoption of the Basel II accords in January 2008, a small decline in these capitalisation levels is anticipated.

Jordan's banking sector is heavily concentrated, dominated by Arab Bank and Housing Bank. The two banks' combined capital represented 38.5 per cent of the sector's entire capital in 2007, and about 65 per cent of total bank assets. The top three Jordanian banks - including Jordan Kuwait Bank - account for a market share of just over 40 per cent.

That market domination is unlikely to change, say analysts. "The central bank has made it hard for new banks to enter the market so we don't see any new competition - it will remain dominated by the three main players," says Jmeian.

Housing Bank has the largest domestic footprint, with 96 branches. Last year, it entered a strategic alliance with Qatar National Bank, which had bought the Qatar Investment Authority's 20 per cent stake in Housing Bank - a potential precursor, the bank says, to an entrance into the Gulf market. Housing Bank already has a branch in Bahrain, though its most extensive presence is in the neighbouring Palestinian Territories, where it boasts 11 branches. It plans to further expand its regional presence through the creation of a 25-branch network in Syria's liberalising bank market.

Emerging opportunities

Housing Bank is not alone in targeting the emerging Palestinian market. Arab Bank and Cairo Amman Bank have also penetrated the market. Although loans extended to Palestinian areas accounted for less than 7 per cent of total Jordanian bank loans by mid-2007, this is likely to increase if economic conditions in the West Bank improve under the reformist administration of Prime Minister Salam Fayyad.

However, there have been problems in the recent past, with a high level of defaulting on loans, according to Moody's, particularly after the Palestinian Authority (PA) was unable to pay its employees in 2006. "Banks had to take big provisions on loans, but in 2007 they have released some of these provisions as the PA employees eventually got their salaries and started to repay the loans again," says Nicolaides.

There are still significant domestic opportunities to tap into. Local banks are starting to lead manage some key syndications, as the financial market becomes increasingly sophisticated. Arab Bank is the lead arranger on Jordan's largest ever project financing, the $700m build-operate-transfer financing of the first-phase expansion of Queen Alia International Airport. Housing Bank was appointed last year to lead manage a syndicated loan of JD66m by a consortium of Pakistani, Jordanian and Kuwaiti companies to finance a planned light rail system project between Amman and Zarqa.

Banks are also growing their retail franchises, leading to big increases in consumer lending - spurred on by the competition from foreign banks, which are able to leverage more sophisticated product offerings. Credit cards and housing loans are also potential areas for substantial growth.

So long as the Hashemite kingdom remains cocooned from regional turmoil, Jordanian banks are likely to prosper. Capital inflows are heading into this safe haven. Local banks are well placed to strengthen loan franchises, supported by a healthy economic climate.