A boost is needed

A boost is needed

INITIATION COV.

Founded in 1955, Jordan Ahli Bank (JAB), accumulates a banking experience that exceeds the 60 years. JAB, has been listed on Amman Stock Exchange since April 2007 and is, today, one of the 6 largest Jordanian banks in terms of assets.

In 2019, Jordan Ahli Bank operated through four business segments. The most important segments are Retail and Corporate banking divisions. Meanwhile, the bank has Treasury and Financial Brokerage segments. In addition to its widespread network on the local market, the Jordanian bank also operates through four subsidiaries. Offering various services, JAB’s subsidiaries are Ahli Microfinance Company (established in 1999), Ahli Brokerage Company (2006), Ahli Financial Leasing Company (2010), and Ahli Fintech Accelerator (2017).
Counter-current winds
JAB’s domestic market remains its main loan driver with 87% on average over 2010-2019, where more than 81% of the group’s assets are implemented. Like its peers, JAB’s credit facilities are skewed toward the private sector (only 1.5% captured by the public sector in FY 2019). Since 2010, JAB has achieved a 3.1% average growth rate in its loans portfolio, boosted by FY 2016 exceptional double-digit growth (17.9% YoY, vs. 5.0% displayed by the sector). Fostering a low-risk asset growth strategy, JAB’s credits where fueled by a special focus toward real estate loans. However, the upward trend achieved in loans was not displayed in revenues generation. During the relevant period, the Jordanian lender’s revenues followed a volatile pattern. In fact, being the core business of JAB’s activity, the interest revenue has been under pressure from interest rate hikes (over 2016-2018) and increasing funding costs (reminding that 75% of JAB’s balance sheet liabilities is composed of deposits). Even in 2019, with the waves of interest rates’ shrunk which led to a deposit cost decline, JAB’s net interest revenues’ generation was still under pressure due to the shrunk in interest income. However, the bank’s net interest income declined only by 0.5% due to its ongoing efficient resources structure management. This cyclicity was also displayed in JAB’s net profit, resulting in an ROE slightly below the sector’s achievements.
It is clear that JAB faced challenges at the image of the whole Jordan banking system. Indeed, the Syrian conflict in particular, coupled with social internal tensions, has depressed several Jordanian activities. In fact, the massive flows of refugees and the closure of former trade routes have weighed on the economic dynamism. JAB, like all its peers, is in need for a more favourable operating conditions.
Concerning this year, the Covid-19 pandemic caused a global economic crisis which has negatively impacted all the sectors and especially the banking one as banks would be forced to allow important amount of provisions to support the affected activities and customers. As a result, 2020 would not be lenient to JAB’s performance. JAB’s assets quality would slightly deteriorate (NPLs’ rate is expected to reach 6.5%), leading to a cost of risk at JOD 15.3m. As a result, the rise in the cost of risk which would be coupled with the less significant revenue generation capacity would negatively impact the bank’s bottom-line generation capacity. This performance would lead, therefore, to a shrinkage in the bank’s ROE which is expected to reach only 3.2% by the end of 2020. In contrast, the picture would be enlightened over 2021-2022 and our expectations are more optimistic as the pandemic would disappear. The bank’s core business perspectives (lowering its resources’ structure) would also increase its revenues’ generation capacity. We forecast JAB’s net interest income to stand at JOD96.6m by the end of 2022 (i.e. 79.8% of total operating revenues). In the medium run, rising the fee income as well as the trading income should further diversify and strengthen JAB’s revenues structure. This would have a positive impact on JAB’s ROE which would reach 8.9% by the end of 2022 (the fourth highest since 2010). Even with the expected increased competition, operating in a smoother environment would certainly accelerate the improvement pace of JAB’s NPLs ratio (6.2% by the end of 2022).
Some notable achievements
During the last years, JAB implemented strategies to encounter all the difficulties faced. The lender made a quite considerable progress by both improving its assets quality and developing digitisation. Indeed, the bank has followed a conservative policy at a response of a challenging operating context. This enabled JAB to possess a coverage ratio that draws near the 100%, leading to an almost under-control cost of risk, in 2018. In addition, the bank took several steps towards digitisation mainly through the deployment of Temanos T24 and the establishment of Ahli FinTech Accelerator. Progresses that are expected to bring gains in terms of cost-saving in the medium run.
Appreciable potential of 14.60%
We are initiating the coverage of JAB (a market cap of JOD157m as of 28th July 2020) with an ‘Add’ recommendation and a target price of JOD0.89 (+14.60% upside). This considerable upside potential is pushed upward by the DCF and Intrinsic value. In fact, based on the DCF, our NAV offers a significant potential of 24% reflecting the bank’s good capital generation capacity over the next years. The Intrinsic value also offers a strong potential of 31% thanks to an improvement in the bank’s operating efficiency and a recovering ROE (we expect a two-year forward ROE at 7.89%, leading to an implied P/Book of 0.65x vs. a spot P/Book at 0.47x). Regarding the dividend yield, JAB’s is fairly valued as almost all the sectors would not distribute or lower its dividend yield due to the pandemic. Therefore, this constraint would have a positive impact on the bank’s equity generation capacity as historically the bank’s payout ratio exceeded the 50% – aside for 2012 which kept confined, JAB’s capital generation.
Jordan is still pursuing important structural reforms, introducing new regulations to govern aspects of financial transactions, such as insolvency, digital payments, and public procurement. These measures are expected to resume economic growth in the coming period and boost the Jordan banking system.