October 02, 2008

Fitch Ratings says in a special report published today that the Jordanian banking sector has seen a number of regulatory reforms that have strengthened banks’ risk management, increased transparency and improved capitalisation.

However challenges remain, with a large number of banks dependent on a small and relatively undiversified economy.

The market remains over-banked, with 23 full commercial banks serving a population of 5.9 million. The Central Bank of Jordan (CBJ) has encouraged consolidation in the system, although so far there have been few signs that banks are keen to consolidate, partly reflecting a culture of family ownership in Jordan. The banking sector remains dominated by Arab Bank which, together with the Housing Bank for Trade and Finance, accounts for over 35% of total system assets. Most Jordanian banks – with the notable exception of Arab Bank – are focused on the local market, although some exposure to the Palestinian Territories remains an added risk factor.

Fitch views the CBJ as a relatively active and competent regulator. Banking supervision has been strengthened in recent years, and has shifted to a risk-based rather than rule-based approach. Prudential regulations are in place to limit banks’ exposure to certain sectors such as construction, the CBJ has strict loan classification and provisioning guidelines, and prudential regulations place relatively conservative limits on banks’ liquidity ratios. Accounting standards have been brought into line with international best practice, and the Basel II framework was introduced in January 2008. The quality of disclosure is high by regional standards.

Fitch also notes that, while banking system indicators remain sound and asset quality has been improving in recent years, concerns remain. Increasing volatility in local and regional stock markets, a possible property market bubble and political instability in the Middle East continue to have the potential to negatively affect performance. Continued high oil prices would also negatively affect economic growth in Jordan. Margin pressure is likely to continue from intensifying local and foreign competition. Because of the banks’ local focus, current international credit market conditions have not yet had a significant impact on the banking system; however, the Jordanian economy and, therefore, the banking system may be affected by a global economic slowdown, even if only through a decrease in foreign direct investment flows and a reduction in export activity.

A copy of the report, entitled ‘Jordanian Banking System and Prudential Regulations’, is available on the agency’s subscription website, http://www.fitchratings.com.

http://www.ameinfo.com/170207.html
 

October 2, 2008

Qatar National Bank (QNB) is looking to secure a $1.5 billion loan, banking sources close to the situation said on Thursday.

The sources said market conditions will mean the borrower will have to rely on its relationship lenders for support and the facility would have to be structured as a club loan to minimise syndication risk.
One banker added it remains to be seen whether the facility can be put together given the current turmoil in the market and scarce liquidity.

Qatar National Bank’s previous deal — a $1.85 billion loan signed in September 2007 — is the largest for a Middle Eastern bank borrower.

The margin of 19.5 bps over LIBOR set a new pricing benchmark at the time for bank borrowers in the region, undercutting the 25 bps paid earlier in 2007 by Abu Dhabi Commercial Bank Gulf International Bank, Arab Bank, and Arab Banking Corp.

QNB has a long-term rating of Aa3 from Moodys and a long-term foreign currency rating of A+ by S&P.

The state of Qatar has majority ownership and management control of QNB. – Reuters

Boston, MA

The financial resulting from sub prime lending will not only affect the US, but also the rest of the world. Europe is already feeling it, as it experiences economic slowdown and fears of banks failing. Regulators and Central Banks have already started taking precautions… for example, the FSA of London and the Irish regulators have put a halt on the short selling of shares of financial institutions and banks, albeit temporarily.

Central Banks internationally are also taking precautions. For example, the Central Bank of Jordan is increasing the minimum capital requirements of banks and have passed a regulation whereby no more than 20% of banks’ capital can be used for real estate lending.

The following is a brief list of effects which the financial crisis is expected to, and/or is having, on the Middle East:

1) More attention is being placed on liquidity (for example, the Central Bank  of UAE is giving banks access to short-term loans (albeit expensive!) to ease the tension caused by this crisis… available fund is over $13.6 billion)…  See http://www.business24-7.ae/articles/2008/9/pages/uaecentralbankgivesbanksaccesstoemergencyfunds.aspx 

2) Central banks are taking measures to regulate the high levels of credit growth in the region, especially across the Gulf (the UAE experienced a 49% growth for the first half of 2008). Some initiatives include imposing minimum liquidity levels, minimum capital to be used for specific types of loans (such as real estate, etc…

3) The value of investment funds containing stocks affected by the crisis (especially those of failed institutions, and financial institutions in general) have lost value; therefore, many investors (especially private banking clients and insurance companies, have experienced losses at various levels.

4) Due to tightened regulations, it is possible that individuals might find it harder (or more costly) to obtain loans, especially from their local banks… and might end up going to international banks who, because they might not be as active in these types of loans, might have not reached their limits imposed, and are able to grant them.

5) It is believed that because the US is the largest consumer of oil, the current financial crisis and economic conditions (i.e. recession, depression) has led to the  recent declines (albeite slight), in the price of oil.

6) Middle Eastern sovereign wealth funds are investing in US Banks, which in turn may lead to their benefit if / when they recover.

7) Dollar-pegged currencies are devaluing along with the dollar, which affects the economy of many countries in the Middle East.

8 ) Many Middle Easterners who work in these companies in the US have lost their jobs and are moving back in masses to the region, making available more skilled workforce in certain countries (specifically in Dubai, UAE). Since availability of this type of experience has generally been scarce, the large influx of these individuals could very possibly cause a decrease in the salaries they are paid. 

9) Foreign investments in Arab countries (and many Asian) could increase, as opportunity and growth are expected in these regions… at the same time, investments in real estate and US stocks and financial institutions might increase as Middle Eastern wealthy individuals cease this opportunity to buy low.

10) Many stock markets plunged in the midst of fears and, in my opinion, lack of proper understanding of what is happening in the world.

Again, just like the problem started, I have a sinking feeling that the Worlds’ greed in trying to capitalize from such a crisis instead of taking the Lessons Learned and taking proper measures, will lead into similar events in other parts of the world… Its like they say, history repeats itself. Unfortunately, no one realizes that: “If we always do what we always did, we’ll always get what we always got.”

I would appreciate any comments and ideas on how it will affect the Middle East… please feel free.

Some interesting articles:

http://www.ameinfo.com/152041.html

http://www.dailystar.com.lb/article.asp?edition_id=1&categ_id=3&article_id=96182

http://www.ft.com/cms/s/0/36674e8e-2d9c-11dd-b92a-000077b07658,dwp_uuid=d355f29c-d238-11db-a7c0-000b5df10621.html

One of the largest banks in the US failed yesterday. The Federal Deposit Insurance Corp took control due to media leaks and customer fears. It was then sold to JP Morgan Chase & Co for $1.9 billion.

Note the following comments:

• “JPMorgan said the transaction means it will now have 5,410 branches in 23 U.S. states from coast to coast, as well as the largest U.S. credit card business.”
• “It vaults JPMorgan past Bank of America Corp to become the nation’s second-largest bank, with $2.04 trillion of assets, just behind Citigroup Inc. … Bank of America will go to No. 1 once it completes its planned purchase of Merrill Lynch & Co.”
• “The bailout also fulfills JPMorgan Chief Executive Jamie Dimon’s long-held goal of becoming a retail bank force in the western United States.”

Please find article here: http://news.yahoo.com/s/nm/20080926/ts_nm/us_washingtonmutual_jpmorgan_news

Liquidity

This is just another reminder how important liquidity is in banks.

Today, most banks’ loans-to-deposits ratios are close to 100%. What does that mean? That means they have given out close to 100% of customers’ deposits at the bank, which means that if customers panic or they suddenly want their money back in masses, the bank is unable to pay them what is rightfully theirs, and the bank can very much collapse.

What is a good loan-to-deposit ratio?

It has to be put in context… it can all depend on where the bank is operating (country, region, etc…), is where it operates economically, socially and / or politically stable… etc…

A ratio of 80% is usually average, though these days 90% + is very common.

Banks need to think of their depsoiting customers (and not just those who provide you with the highest profits i.e. those who take out loans….), instead of just concentrating on their shareholders…

Other Comments

Also if you notice, many of the comments in the article from JP Morgan Chase is focused on becoming the 2nd largest bank, having regional reach, acquiring the most credit card business, etc… You would think that banks these days would be more careful in maintaining their liquidity and customer promises rather than just buy others obligations that cannot be met.

There is nothing wrong with taking advantage of an opportunity, but greediness is what got the US in this crunch in the first place.