OREANDA-NEWS. Fitch Ratings has revised the Outlook of Jordan Islamic Bank (JIB) and Bank of Jordan (BOJ) to Stable from Negative. Their Long-term Issuer Default Ratings (IDR) are affirmed at 'BB-'. A full list of rating actions is available at the end of this commentary.

KEY RATING DRIVERS - IDRs AND VIABILITY RATINGS (VRs)
Both JIB's and BOJ's IDRs are driven by their intrinsic strength, as indicated by their VRs. Both BOJ and JIB are essentially domestic banks, and their ratings reflect a still difficult but improving operating environment in Jordan.

The revision of the Outlooks to Stable reflects Fitch's view of a stabilisation of the operating environment following the sustained implementation of an IMF programme, a rebuilding of reserves, a smaller budget deficit and a modest improvement in the growth outlook.

The ratings reflect asset quality risks, which are mainly driven by the banks' concentration to the Jordanian operating environment - where lending/financing and funding is mainly domestic, large lending concentrations to the government or government-guaranteed entities exist, and where BOJ has a high proportion of liquid assets invested in government securities.

The ratings also reflect well-established domestic franchises, solid funding bases, adequate capitalisation, and sound liquidity. The ratings further take into account the banks' healthy profitability. Both banks have a long track record of solid profit generation.

Both banks have a solid and diversified deposit base. Accordingly, deposit concentration is low. Highly liquid assets, consisting of cash and interbank placements, accounted for 24% of JIB's assets at end-3Q14 and 25% of BOJ's (the latter includes government securities maturing within one year; JIB does not hold non-sharia compliant securities, so liquidity is mainly bank placements).

Asset quality indicators remain adequate due to both banks maintaining conservative risk appetites and maintaining longstanding relationships with customers. JIB's non-performing financing represented an acceptable 4.6% of gross financing at end-3Q14, a slight increase on end-2013. Reserve coverage remained an adequate 74% and unreserved impaired financing represented 9% of Fitch core capital at end-3Q14. BOJ's impaired loan ratio improved to 7.6% at end-3Q14 from 8.7% at end-2013. The improvement was largely due to recoveries and write-offs. Reserve coverage also improved to 101%.

RATING SENSITIVITIES - IDRs AND VRs
Both banks are sensitive mainly to operating environment risks. Changes in Fitch's perception of risks relating to Jordan, in either direction, could affect the banks' ratings. Material deterioration in asset quality could have a negative rating impact on the banks' IDRs and VRs. Upside potential depends mainly on material positive developments in the local economy, and an expansion of growth opportunities.

KEY RATING DRIVERS - SUPPORT RATINGS AND SUPPORT RATING FLOORS
The banks' Support Ratings of '4' reflect the limited probability of support from the Jordanian sovereign due to constraints on its ability to provide it, although we consider willingness to provide support would be high as both banks are systemically important. In JIB's case, support from the bank's main shareholder, Al Baraka Banking Group, is possible, but is not factored into the ratings.

RATING SENSITIVITIES - SUPPORT RATINGS AND SUPPORT RATING FLOORS
These ratings are sensitive to changes in Fitch's perception of the Jordanian sovereign's ability or willingness to support the banks.

The rating actions are as follows:

Jordan Islamic Bank
Long-term IDR affirmed at 'BB-'; Outlook revised to Stable from Negative
Short-term IDR affirmed at 'B'
Viability Rating affirmed at 'bb-'
Support Rating affirmed at '4'
Support Rating Floor affirmed at 'B+'

Bank of Jordan
Long-term IDR affirmed at 'BB-'; Outlook revised to Stable from Negative
Short-term IDR affirmed at 'B'
Viability Rating affirmed at 'bb-'
Support Rating affirmed at '4'
Support Rating Floor affirmed at 'B+'