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TMA04

B300-2

Name: Ismail abd ulmajeed farhat

ID: 0600040410694

Tutor: Noura Eissa

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Jordan's banking sector has historically moved from strengh to strengh,

posting impressive results along the way despite political and economical

instability affecting the region. This growth was a consequence of

effective and efficient management practices and a well regulatedopertaing enviroment spearheaded by the Central Bank of Jordan (CBJ).

Banking in Jordan traces back to the early 1900's with the establishment

of the"Ottoman Bank" in 1925. Soon after, the largest commercial

Palestinian bank"The Arab Bank" was relocated to Amman as a result of

the 1948 Arab-Israeli war and a number of local and foreign banks

subsequently started their operations in Jordan.

Benefiting from favorable economic conditions, the banking sector has

undergone major progress, as deposits and loans more than doubled

between the mid-1970's and the early 1980's. During the same period thenumber of financial institutions tripled. The government encouraged the

expansion of banking services as a key driver to its economic

development policy and took a number of measures to enhance it,

beginning with the deregulation of interest rates in 1988, which helped

attract deposits from other Arab nations and remittances of many

Jordanians who had never used banks before. By the mid-1980's, Jordan

was the only Arab country in which the value of banks' assets exceeded

its GDP.

In the past decade, the numbers posted by the sector were no less than

impressive; total commercial bank assets rose from JD12.9 billion in

2000 to JD30.1 billion until the end of August 2008 while total deposits

increased from about JD8.2 billion to JD16.0 billion during the same

period. The Jordanian banking sector is considered overbanked as it

currently consists of 24 banks including 16 locally licensed ones, three of

which are Islamic, serving a population of 5.8 million. By the end of

2007, the top 3 banks in Jordan controlled 76.9% of total customer

deposits while holding 71.6% of total sector assets, therefore, and in an

effort to force banks towards further consolidation, the CBJ raised theminimum capital requirements for banks to JD40 million in 2004.

However, the ease in which banks where able to raise new capital was a

stumbling block in the path to a less fragmented banking sector, for that

reason the CBJ is considering raising the minimum capital requirement to

JD100 million in upcoming years.

Deposits and loans more than doubled between the mid-1970's and the

early 1980's

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with economic problems and avoid their adverse effect on the economy.

8) Regulating credit: The CBJ regulates the quantity, quality, and cost of

credit to meet the requirements of economic development and monetary

stability.

9) Other roles: The CBJ has also actively participated in the

establishment of a number of financial institutions and corporations.

THE JORDANIAN ECONOMY

In spite of the many challenges the Jordanian economy faced during

2007, highlighted in the significant increase in international oil prices, theeconomy continued its growth drive, albeit at a slightly slower pace

compared to the past few years. As of the third quarter of 2008, Gross

Domestic Product (GDP) at both constant and current market prices grew

by 6.5% and 27.0%, compared with 6.6% and 10.5% respectively during

the second quarter of 2007.

Inflation in Jordan rose rapidly in the past three quarters, with the

consumer price index surging by 15.4% until November 2008 compared

to 5.4% during the same period last year. This sharp increase in the prices

of good and services was mainly driven by external factors, the most

significant of which was the skyrocketing prices of oil which, combined

with the removal of fuel subsidies, left Jordan's population exposed to

surging fuel prices. However, oil prices have fallen steeply since July

2008 and these favorable oil prices will help the Kingdom relief from

inflationary pressures caused by fuel imports.

On the level of public finance, the state budget, including grants, showed

a deficit amounting to JD381.6 million in the first three quarters of 2008

against a surplus of JD84.9 million during the same period in 2007;

however when foreign grants are excluded the real budget deficit surgedto JD874.6 million compared to a surplus of JD63.8 million in 2007. On a

different note, gross domestic debt reached JD5.291 billion by the end of

September 2008 compared to JD3.181 billion for the same period in

2007.

On the monetary front, the CBJ's foreign currency reserves rose by

JD422.1 million, or 8.3%, during the first ten months of 2008 to reach

JD5.494 billion compared with their level at the end of 2007. In addition,

domestic liquidity (M2) increased by JD850.0 billion, or 56.8%, during

the first 10 months of 2008 compared with the same period in 2007.

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The value of national exports grew by 39.2% and the re-exports by 38.9%

in the first ten months of 2008 to stand at JD3672.1 million and JD956.1

million respectively.

On the other hand the value of imports has risen by 32.2% to stand

at JD10.303 billion during the same period. In light of the above, theTrade\ balance deficit, calculated as the value of total exports minus the

value of imports, grew by 27.0% during the first ten months of this year

reaching JD5.675 billion compared to JD4.467 billion during the same

period last year despite the increase in exports and re-exports .

SECTOR PERFORMANCE

Fuelled by a booming economy in the past few years, Jordan was exposed

to an abundance of liquidity and increased investment which brought

about unprecedented performance for all the banks in the sector.

Operating revenues soared, deposits and credit facilities increased and

investment portfolios generated phenomenal revenues, leading to an

overall expansion of the sector.

Assets During 2007, the banking sector recorded impressive results led

by the favorable economic conditions, where aggressive economic

expansion resulted in increased demand for capital thus enabling banks toincrease their profits and assets base.

In the period from 2000 to 2007, Jordanian banks' assets grew by 107.7%,

increasing from JD12.9 billion to reach JD26.8 billion. Banks' assets

continued their growth in the first ten months of this year to reach JD39.7

billion by the end of October.

In the period from 2000 to 2007, Jordanian banks' assets grew by

107.7%.

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Total direct credit facilities extended by the banking sector grew by

148.5%, increasing from JD4.5 billion in 2000 to reach JD11.3 billion

in 2007.

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INTERNATIONAL RATING AGENCIES

The safety and soundness of banks and saving institutions is usually

measured and rated by a number of rating agencies. As for Jordan thebanking system was rated by the following agencies:

Standard & Poor's

Standard & Poor's, in their report issued on July 4th 2007, awarded the

banking system in Jordan a rating of BB/Stable/B for foreign currency,

and BBB/Stable/A-3 for local currency. The report also scaled the

banking industry at group 8 out of 10.

Capital Intelligence

The international credit rating agency; Capital Intelligence, ranked some

of Jordans banks as follows:

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The general trade sector came in the first place accounting for 21.55%

(JD2.435 million) followed by the construction sector with 17.19%

(JD1.942million) and the industrial sector which accounted for 11.93%

(JD1.348 million) of the total direct credit extended.

The increase in lending by banks was a natural consequence to the

changing scene in the Jordanian economy. The overall boom in the

kingdom resulted in an increase in deposits which in turn enabled banks

to increase the amount of facilities they could grant to debt-thirsty

companies and individuals who resorted to financial institutions for

financing their projects and needs, while successfully maintaining

comfortable ratios of deposits to facilities.

As shown in the graph below, average capital adequacy ratio for banks in

2007 stood at 21%, higher than CBJ's recommended ratio of 14%, while

nonperforming loans to total loans ratio remained stable in the past three

years

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DepositsAs for customer deposits, total deposits grew to JD15.988 billion by the

end of 2007 with an increment of 94.4% over the figures recorded in the

year 2000. The following chart clarifies further the upward movement of

the deposits balance during the past 10 years.

As for the first 10 months of 2008, deposits reached JD17.8 billion

increasing by 11.5% over 2007 year-end figures.

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Profitability

Jordanian banks' managements have taken a big leap forward in terms of

efficiency and effectiveness evident by the soaring profitability in recent

years, indicating a better utilization of assets on hand.

During 2007, the overall profit of ASE listed banks grew by 14.9% to

reach JD639.74 million, it further grew by 22.1% in the first nine months

of 2008 to reach JD781.3 million. The following chart depicts the

profitability of the listed banks in the past 6 years.

Going forward, we believe that banks' profitability will be affected by

higher credit costs, in addition the decline in the stock market which will

be translated into lower brokerage fees, mark-to-market losses and lowertrading income.

THE BANKING SECTOR ON THE ASE

The banking sector, which constituted 55% of total market capitalization

as of November 2008, is the largest sector on the Amman Stock

Exchange (ASE).

There are 15 banks listed on the ASE trading on the first market, except

for Society General Bank Jordan which is traded on the second market.

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The ASE general index closed out the year 2007 at 3675.0 points, rising

by 36.3% from its year-end level in 2006, its highest point for the year.

The strong performance of the ASE especially in the last quarter of 2007

can be attributed to a number of heavyweight stocks especially in the

banking and mining sectors as these sectors' indices increased during the

year by 29.7% and 70.0% respectively.

In the first two months of 2008 the banking sector index showed a high

correlation with the ASE general index. However, by the end of February

the two indices began to diverge as a result of the extraordinary

performance of heavyweight stocks in the mining & extraction sector.

This has drove the general index to a year-to-date increase of 29.9% at

the end of June, while the banking sector index only rose by 7.5% for thesame period.

In the following months, and as a result of the current global financial

crisis, all sector indices witnessed a decline which realigned the general

and banking sector indices; they currently stand at a loss of 24.9% and

18.1% respectively since the beginning of 2008.

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The upcoming years will prove challenging to the Jordanian banking

sector as a result of the current financial crisis, as tighter lending

regulations adopted by most banks in Jordan in the face of increased

uncertainty will probably affect their profitability. Internal factors such as

high domestic inflation and decreased spending power of Jordanianconsumers will also affect the banks' asset quality and thus the

effectiveness of the banks' credit policies and risk management will

be put to the test.

Banks with high exposure to Arab and international markets will be hit

the hardest amid highly uncertain economic conditions in these countries

which is expected increase the number of non-performing loans as the

full effects of this financial turmoil is yet to materialize. Lower income

due to deteriorating capital markets is also in the folds, as trading andbrokerage income will be reduced significantly.

This, however, is not expected to slow down the Jordanian economy,

since banks in Jordan sit on a substantial amount of excess liquidity and

the common belief suggests that any eligible borrower will have no

difficulty getting access to credit facilities.

The upcoming few months will be difficult for most banks around the

world and Jordanian ones are no exception. However, conservative

regulation and monitoring from the central bank, in addition to wise

lending policies adopted by most banks in the kingdom will at least

ensure that the Jordanian banking sector is well equipped to face theses

threats.

ARAB BANK GROUP (ARBK)

The Arab Bank group (ARBK) was founded in 1930 in Jerusalem as the

first private banking institution in the Arab World with a capital of 15,000

Palestinian pounds and seven shareholders. However, due to the 1948Arab- Israeli War the Arab bank was relocated to Amman.

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Financial performance of the ARBK has been impressive over the years

as the bank's bottom line exceeded all other banks in the sector with the

final 2007 net income growing 24.1% from 2006 results to reach

JD549.449 million. The bank's assets also showed an impressive growth

in 2007 increasing by 18.1% to reach JD27.178 billion, whilst itsshareholders' equity reached JD4.862 billion.

As for 2008, ARBK reported a net income of JD477.08 million during the

first nine months compared to JD405.53 million in the same period last

year, representing a growth of 17.64% thus maintaining its leading

position amongst banks. Furthermore, the value of assets within the group

grew by an impressive 20.8% to reach JD32.84 billion by the end of

September 2008, while the total shareholders' equity rose by 11.2%

reaching JD5.405 billion.

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Major Ratios

Major Shareholders

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CAIRO AMMAN BANK (CABK)

Cairo Amman Bank (CABK) was established in 1960 as a Jordanian

public shareholding company to take over the local and Palestinian

operations of Banque du Caire (Egypt).

In 2006, CABK increased its paid-up capital from JD45 million to

JD67.50 million through the capitalization of retained earnings. The

capital was further increased to JD75 million in 2007. Currently CABK's

paid-up capital stands at JD80 million.

In 2007, CABK reported a net income of JD20.9 million compared to

JD19.25 million in 2006, an increase of 8.6%.

Moreover, CABK's profits witnessed another substantial increase of

10.3% in the first nine months of 2008 reaching JD17.56 million. Total

assets also grew by 18.55% to reach JD1.564 billion at the end of

September, 2008.

Financial Highlights

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Major Ratios

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Major Shareholders

References:

http://www.menafn.com/rc_Report_Details.asp?rc_id=12060