tma04 b300-2
TRANSCRIPT
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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