• The inflation rate in Jordan in expected to reach 5.4% in 2007 compared with 6.3% recorded in 2006. However, it is projected that the inflation rate will reach about 8-9% next year mainly because of lifting the subsidies on certain items.
• Total revenues in 2007 expected to reach JD 4,074 million, representing an increase of 17.74% relative to 2006. However, total expenditure in 2007 is forecasted to reach JD 4,842.3 million resulting in a deficit of JD 768.3 million. During the first ten months of 2007, total revenues and grants reached JD 3,239.7 million, representing an increase of 13.2% compared to JD 2,861.9 million recorded during the corresponding period of 2006. Domestic revenues reached JD 2,994.1 million during the first ten months of 2007, compared to JD 2,686 million recorded in the relative period of 2006. Total expenditure totaled to JD 3,449.8 million during the first ten months of 2007, compared to JD 2,994.3 million recorded during the corresponding period of last year. The increase in total expenditure during the first ten months of 2007 is mainly attributed to the increase in current expenditure and the increase in capital expenditure.
Palestinian Banking Sector
Background
Palestinian Monetary Authority (PMA) was established as an independent entity in 1994 with its responsibilities stated in accordance to the protocol on economic relations. According to the protocol, the Shekel (New Israeli Shekel-NIS) would be one of the circulating currencies and that required reserves on shekel should be in-line with those in Israel. However, there has been no Palestinian currency for over fifty years and three foreign currencies circulate freely: the Israeli Shekel, the Jordanian Dinar, and the U.S. dollar. Generally, the largest share of currency denomination in both deposits and lending is in U.S. dollar. This was reflected through the period 1999-2003 where private sector US$ deposits at commercial banks averaged 61.5% of the total deposits followed by Jordan Dinar at 22% and finally NIS at 14.6%.
The historical development of the banking sector in Palestine was marked by weakness and deformity in its structure and activities due to the political circumstances that Palestine went through. However, the sector went through many developments since the establishment of PMA in 1994. There were eight banks operating in Palestine in 1994, two of which were national and the rest were foreign. Going forward there was a rapid expansion in the number of banks and branches operating in West Bank and Gaza since late 1990’s. Currently the banking system is comprised of 10 domestic national banks and 12 resident branches of foreign banks. Within foreign banks, 11 banks are Arab (9 Jordanian and 2 Egyptian) and one foreign namely HSBC Middle East.
Generally, banking operations are denominated in the three circulated currencies, NIS, JD and US$. However, the year 2000, which marked the start of the second Intifada, witnessed an exceptional temporary trend of increased NIS deposits compared to other currencies. This was backed by panicking agents whom perceived deposits in NIS as the easiest to access cash transactions.
Despite the major stress on the Palestinian financial system during the Intifada, the banking system has survived the severe recession. The sector continued to function although at lower levels but managed to avoid a major collapse. Banks continued to provide basic banking services to the population. It is estimated that during the period 2000-2004 total assets of the Palestinian banking sector grew at a CAGR of 2.71%. Customer deposits grew at a CAGR of 3.07% for the same period.
On the lending side, banks adopted a cautious policy due to the risky political and security environment. This was a direct result of the quality of bank’s loan portfolios that suffered with increasing level of non-performing loans and some collateral being destroyed as a result of military operations. It is estimated that during the Intifada non-performing loans increased from 8% in 1999 to around 30% in 2002.
Snapshot of the Banking Sector
In 2005, PMA’s latest data on banking sector reported that banking assets continued the rising trend and increased to US$5.49bn in October 2005, from US$5.11bn at the end of 2004. Foreign assets continued to form the bulk of banking assets, amounting to 44.2% or US$2.43bn. Credit facilities for residents formed 33.24% of the total assets, reaching
US$1.82bn at a relatively high growth of 31.86%.
The asset growth was funded from the liability side through public sector and government (PNA) deposits, which witnessed YTD growth rates of 3.09% and 29.89% at the end of October 2005 respectively. Public sector deposits and PNA deposits constituted 2.03% and 8.78% of total liabilities at the end of October 2005. More importantly, deposits of residents represented 63.59% of total liabilities. It grew by 2.96% to reach a new landmark of US$3.49bn at the end of October 2005.
PMA’s responsibilities mainly include licensing, regulating, and supervising the operating banking system ensuring that the capital adequacy ratios are respected this is in addition to protecting depositors. This role in effect is limited to the Palestinian banks without being able to offer these banks a Lender Of Last Resort (LOLR) facility which neither the Jordanians nor the Israelis have been willing to offer. Thus, although PMA has some of the powers and functions of a central bank, it does not issue its own currency. Consequently, the control of inflation is therefore beyond its remit and the only existing monetary instruments are required reserves and quantitative guidelines on lending and foreign assets offering limited scope for influencing monetary policy. Moreover, PMA has had no recent experience with any form of exchange rate management.
Looking forward if there were to be a Palestinian state, the PMA should become the central bank, charged with monetary and exchange rate policies. However, it is likely that the economy would remain dollarized even if a new national currency is introduced. This is mainly because the credibility of the new currency would require initially flexibility to exchange the three existing legal tenders for the new currency at a fixed rate. However, on the positive side inflation is still expected to stay at acceptable levels as there has been no recent history of high inflation to counter against.
In January 25th 2006, Hammas, won the Palestinian Elections, which had no negative effect on the Total Deposits that reached 4,202.50 with a 0.3% increase. The same goes for the Total Assets which increased by 2.4%, this increase was a bit lower than the 10% increase in 2005, nevertheless it was still an increase. During the year of 2007, Total Deposits and Total Assets reached 5,117.7 and 6,983.3 respectively with a 21.8% increase in both.
Economic Indicators for 2007
The relative importance of the assets:
Because the rise in assets to several major changes, mainly higher cash (coins and banknotes) almost doubled the value of $ 169.2 million, and rising stocks in banks in Palestine by 53% and by $ 117.4 million, while bank stocks outside Palestine has risen by 33.6% and by 810 million dollars for an amount that rises in the highest rate of increase in total assets, which amounted to 64.85%. It is noteworthy that the proportion of high bank balances outside Palestine did not exceed the rate of 2.9% between 2005 and 2006.
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The relative importance of liabilities:
The most pronounced changes in the liabilities side in 2007 to enable the residents Customer deposits increased by 741.9. Million dollars, which formed 59.4% of the total increase in liabilities, and this demonstrates the confidence of customers towards the Palestinian-banking sector, which is continuing despite the political circumstances experienced by Our Palestinian people.
Elsewhere property rights have risen to the banking sector through in 2007 by 21% to reach 707.1 million dollars, where this ratio exceeded the percentage of increase in paid-up capital, which amounted to 10.15%.
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The general direction of customer deposits
Customer deposits recorded in banks operating in Palestine rise in 2007 despite the current political and economic conditions affecting the national economy, and this demonstrates the importance of public confidence towards the banking sector, where Palestinian Customer deposits increased 21.8% and $ 915.2 million dollars compared with the year 2006 to reach the Worth 5117.7 million dollars, which represented a rate of 73.3% of the total liabilities of banks.
The general direction of credit facilities:
Reflected the situation and political and economic crises experienced by the Palestinian territories during the year 2007 negatively
On the direction of credit facilities, interruption of salaries and irregular financial payments reduced the size of the credit facilities extended by the Palestinian banking sector, where the volume of credit facilities at the end in 2007 by 7.4% and by 140 million dollars in 2006 compared with up to thus $1758.5 million, which represented a rate of 34.5% of the value of customer deposits after it was constituted as per 45.2% in the year 2006.
Jordanian Banking sector
Background & Economic Indicators for 2007
The banking sector plays a major role in the Jordanian economy, as it lies in the heart of the financial system and dominates it. According to the Department of Statistics (DoS), the finance, insurance, real estate and business services sector was the largest contributor to GDP growth in 2007, representing 1.5% of the overall 6% increase. The sector comprises 23 banks, of which 15 are listed on the ASE, representing 54% of the bourse’s total market capitalization. By the end of 2007, total assets of listed banks reached JD44,221.295 million, of which direct credit facilities were approximately JD 21,239.689 million. Situated in a region that officially received a high risk assessment by the Heritage Foundation & The Wall Street Journal , the Jordanian banking sector currently faces many challenges, Jordan scored 60% in the Financial Freedom category, while the economy’s overall ranking placed Jordan 5th out of 17 on a regional basis. Nevertheless, Jordan’s small but promising economy continues to offer improving opportunities for the banking sector, which has faced many developments in recent years, as the Central Bank of Jordan (CBJ) has been pushing to bring its regulatory and supervisory standards into line with international standards. As of January 2008, the CBJ’s guidelines for the establishment and operation of commercial and Islamic banks are in compliance with Basel II requirements. The CBJ has been regulating the banking sector’s code of conduct since 1964. In 2003, CBJ decided to increase the minimum capital requirement for local banks from JD 20 million to JD 40 million by the end of 2007. The adequate capital of JD 40 million was set with an ultimate objective to reach JD 100 million by 2010. Currently, there are 8 listed Jordanian banks which do not yet meet the JD 100 million paid up capital requirement. The increase in required capital was set so that banks would always be ready to meet up to their obligations and insure capital adequacy.
The biggest problem facing many local banks is the inability to compete globally in terms of size and operational range, while investment and asset related risks continue to be a major concern. The increase in capital is an attempt by the CBJ to ensure local banks’ domestic competitiveness when the market is encountered with high foreign competition. The Arab Bank, the first bank established in Palestine in 1930, moved its operations to Jordan in 1948 to be the brick stone for the establishment of other local banks, which thereafter pursued financial existence in the country. Standard Chartered, on the other hand, was the first foreign bank to commence operations in Jordan in1925 under the name of “The Ottoman Bank” and along with 8 other foreign banks, has enriched the economy with diversified experiences and investment capabilities.
The sector is dominated by two banks, the Arab Bank and the Housing Bank for Trade and Finance. The sum of both banks’ capital represented 38.49% of the sector’s total capital in 2007. Furthermore, listed banks have achieved positive progress in the sector’s main performance indicators during the year. As such, led by the sector’s large-caps,
net profits reached JD 837.567 million in 2007 compared to JD 720.235 million in 2006, growing by 16.29%. Recently, new banking trends have been waving in the horizon, cascading their effects onto the banking industry and creating new challenges and opportunities. The persistent economic boom is expected to spill over the financial sector in particular, as banks will play a major role in financing and facilitating a variety of targeted projects covering different areas.
This emphasizes the need for Jordanian banks branch out and boost in their range of activities both locally and internationally. The Arab bank has already acted upon this necessity, by creating strong global presence with its branches and subsidiaries scattered across major international cities. Moreover, The Housing Bank for Trade and Finance has already acquired majority stakes in subsidiary banks in both Syria and Algeria while the Bank of Jordan has received a license to commence operations in Syria. Meanwhile, Jordan Commercial Bank has begun providing services in Sudan.
The banking structure in Jordon follows the protocol of Structural Conduct of Performance (SCP), whereby heavily capitalized banks, though few in number, enjoy the better share of banking activities and gain the largest portion of the sector’s profits Meanwhile, the majority of the sector’s banks, consisting of small to medium cap banks, do not enjoy the benefits of their bigger peers, regardless of their core operational capabilities, or how much effort is devoted into their efficiency. This report portrays the banking sector’s governing and regulating body, structure, operations and financial performance throughout the four-year period of 2004-2007. It analyzes core business parameters such as interest, credit facilities and customer deposits.
Bank of Palestine PLC
Background
Bank of Palestine P.L.C. (BOP) is Palestine's first and largest national bank. The bank was established in Gaza in 1960 founded by the late Hashim Ata Shawa. The Shawa family is the largest shareholder group with 35% of the bank’s shares.
• BOP's authorized capital is USD 100,000,000 and its paid-up capital is USD 59,769,737. The bank was listed on the Palestine Securities Exchange (PSE) on Nov. 9th, 2005 and is considered as one of the top three "BLUECHIP" stocks. On average BOP represents 10% of the total market capitalization traded on the Palestine Stock Exchange. (Visit ).
• BOP is now the largest Palestinian bank with the most branches in Palestine totaling 30 branches and sub-branches and a network of 50 ATM machines in the West Bank and Gaza. BOP has 18 branches in the West Bank and 12 in Gaza, It is worth noting that BOP has the widest network of branches; 20% of the total, followed by the Arab Bank
• BOP introduced Master and Visa card to Palestine in 1996 and is Master Card International's Principal Member and sole provider for the Palestine region. BOP has over 2,000 POS (Point of Sale) machines in retail merchants all over Palestine. All credit card transactions in Palestine go through BOP.
• At the end of 2006, BOP held 11.5% of total deposits with Palestinian banks against 9.5% of the total in 2005. The bank also held 13.7% of total credit facilities in 2006 versus 12.9% of the total the year before. In 2007 BOP continued to gain market share and holds 14% of total deposits and 14% of total credit facilities.
• In 2007 customer deposits at BOP increased by over 44% from $452 million to $652 million.
Bank strategy
Due to the continued expansions in the West Bank, the Board of Directors decided On 1st October 2007 to move its General Management Head Office from Gaza to a prestigious landmark building in Ramallah in the West Bank. The official opening of the Ramallah Head Office was February 2007.
• BOP continues its strategic plan to expand in the West Bank and is in the process of opening five new branches in Hebron, Nablus, Abu Dis, Yata, and Ram. The Nablus and Hebron mega branches are bank-owned and purpose built. In May 2007 a new mega branch in Jenin was completed and opened.
• BOP aims to expand regionally with plans of obtaining a license to open a branch in Amman Jordan by early 2009. Over 50% of Jordan's population is of Palestinian origin. This represents a significant opportunity to expand our customer base regionally.
Balance Sheet
Income Statement
Financial Indicators
Trading Indicators
In 2007, BOP was the most traded share on the PSE, the following table shows the trading indicators:- rg Data 2007
Number of Shares Traded 50,185,887
Value of Shares Traded USD 209,641,495
Turnover Ratio 83.97%
Number of Executed Contracts 25,434
Shareholders’ Equity
2006 2007
Paid-up Capital 36,299,146 59,769,737
Statutory Reserved 5,662,343 7,730,896
Other Reserves 3,999,138 3,999,138
Retained Earnings 10,470,591 17,661,534
Shareholders Equity 56,252,149 89,874,558
Assets, Liabilities & Income
2006 2007USD) 31/12/2007 (USD)
Total Assets 602,681,283 849,146,602
Total Liabilities 546,429,135 759,272,044
Net Income 13,903,924 20,685,527
Jordan Kuwait Bank
Background
Jordan Kuwait Bank was established in1976. The paid-up capital of the bank was increased gradually from JD 5 million to the current JD 100 million in 2008.
The bank has a network of around 50 branches and offices in Jordan, Nablus, Ram Allah and Cyprus. The Bank’s management is intending to open a new branch in Hebron.
In addition to the wide coverage provided to JKB through its correspondent network, the Bank has existence and representation in regional markets through a strategic alliance with United Gulf Bank, a major shareholder, and which is one of Kuwait Projects Company (KIPCO)’s group banks. The Bank provides banking, investment and financial services to its clients.
Subsidiaries: Arab Orient Insurance Company was established in 1996 and was licensed to write general insurance business. The paid up capital of the company is JD 10,000,000 and the shareholders are both local and regional investors.
The ownership percentage of JKB in Arab Orient Insurance amounts to 65.70%.
AM Best recently gave the Company B+ (Secure) rating with Stable Outlook.
United Financial Investments Company (UFICO) UFICO is a Jordanian public shareholding company acting as a stockbroker at Amman Stock Exchange. It was established in 1980 as a private company. In 1996, UFICO became a public shareholding company with a paid up capital of JD 1.5 million. Furthermore, UFICO’s capital was raised to JD 2 million. In 2006, the paid-in capital increased from JD 2 million to JD 5 million, through stock dividends and at a ratio of 150%.
The ownership percentage of JKB in UFICO amounts to 50.46%. The company provides several financial services like trading and financial markets research.
Major Investors Owning More Than 5% in JKB is United Gulf Bank - Bahrain 44. 091% and Social Security Corporation - Jordan 21.111%.
Currently, JKB’s market share in terms of credit facilities is 8.70% with a target to reach 10% in 5 years time. As for the deposits, current market share stands at 6.40%.
Moreover, within the 14 listed banks, JKB total contribution to the sector’s profits of JD 840,656,168 reached 5.40% compared to 5.43% in 2006 when including the Arab Bank’s profits. When excluding the Arab Bank’s profits from our calculations, JKB’s contribution reaches 11.06% compared to 13.49% in 2006; ranking second after The Housing Bank for Trade and Finance. Jordan Kuwait Bank ranked third in terms of asset size with a share of 4.56% of total assets and a share of 4.94% of total paid-in capital.
JKB has a well-diversified and stable portfolio based on their investment policy. All investment decisions made and risks taken are ensured to be in line with the bank’s risk appetite. The Bank’s investment strategy focuses on matching the bank’s interest-bearing assets with its interest-bearing liabilities to manage interest rate gaps.
The Bank also mitigates risks through diversifying sources of funds and investing in different financial instruments with the target of maximizing the returns at a given acceptable level of risk. The bank’s investments include CDs issued by the Central Bank of Jordan and international banks, Government Bonds, Treasury Bills and highly rated international bonds in US Dollar and other currencies, and bonds issued by local institutions.
Regarding stock markets, a conservative policy that focuses on geographical and sector diversification is followed. The Bank has around JD 242,758,281 million invested in its portfolio. 90% of this portfolio is allocated to bonds and the other 10% is invested in stocks. The bank’s stock investments represent around 20.89% of the new approved capital which is way below the Central Bank’s allowed ceiling of 50%, confirming the bank’s conservative approach in investments.
Moreover, the Bank provides foreign exchange, money market and margin trading services to its clients where leverage of up to 15% is granted.
In 2004, the international rating agency Capital Intelligence has raised the outlook of the Bank’s financial strength from ‘stable’ to ‘positive’ with a BBB rating.
Bank rating was upgraded to BBB+ in 2007. This rating was attributed to a number of reasons that were argued and apposed by management:
• Relatively small balance sheet
• Some tightening in liquidity
Bank Strategy
An aggressive yet conservative 5- year strategy is set to achieve the following:
• Local positioning in terms of increased market share and distinguished services.
• Increased focus on retail as opposed to being, to an extent, a corporate bank. Bank management targets to increase the retail’s share of total direct credit facilities to 40% compared to an average of 5.9% contributed currently.
• An annual increase of no less than 18% on the ROaE and steady growth in terms of profitability indicators
• Maintaining the Non Performing Loans ratio at minimum
• The introduction of new products in a manner that projects entrepreneurship
• Out branching into the region under joint ventures with strategic alliance.
• The management is targeting to achieve a growth rate of 10% and above for total footings, 15% for profit margin and an operational cost increase rate of 10% and below.
Measures
• Evaluating the bank’s performance relative to local and regional banks' performance. Weaknesses are addressed and dealt with promptly to ensure smooth running of all operations through the Internal Audit Department that assesses the performance of the bank's different departments, branches and subsidiaries to make sure that all processes are running in a way that serves the bank's strategic, operational and financial goals.
• Update and follow up periodically on control measures to ensure risk aversion and complete transparency.
• Continuous human resource development with capacity building and training.
• Ensuring compliance with Basel I, Basel II, Central Bank of Jordan requirements as well as banking regulations in other counties where the bank operates.
Challenges
• Management expects a higher inflation rates and prices in Jordan which will affect their product pricing and consequently their bottom line.
• Central Bank of Jordan's cautious stand in terms of approving changes to banking sector.
Balance Sheet
Income Statement
Financial Indicators
Main Financial Indicator
The Bank’s profitability has been showing significant improvement in the past 5 years .Net operating income (gross profit) has been increasing at a decreasing rate. The year 2004 witnessed the highest growth in net operating income as it increased at a rate of 111%. This growth is attributed to the augmentation in net interest and commission income. Starting from 2005, net operating income growth rate decreased gradually to reach 21.4% in 2007.
Income from Financial Assets and Instruments –which includes income from trading financial assets and income from available for sale financial assets-was volatile during the 5-year phase. In that period, total income generated from those two items remained positive with varying decrease and increase rates. The highest rise was recorded in 2007 and amounted to 698.06% as the Bank managed to reduce its loss from trading financial assets from JD 352,846 to JD 69, 591 and boosted the gains from available for sale financial assets from JD 514,121 up to JD 1,356,605.
Net income recorded steady growth rates as the average growth rate of net income was % 42.67 for the years 2004, 2005 and 2006. These high growth rates are indicative of actual enhancement in the bank’s operations as revenue attained from bank’s core business activities represented by net interest income and net commissions has shown accelerated augmentation. In 2006, net interest income registered large increase that amounted to 59%. Nevertheless, the Bank’s net income recorded a lower growth rate in 2007 which reached 13%. This decrease in the growth rate has occurred due to the considerable increase in the total operating expenses which grew by
39.3% to become JD 33,105,835.
2005 has witnessed the highest growth in assets which amounted to 59%. In that year, most current assets grew significantly and in specific Trading Financial Assets which increased by 177.26% and Balances at Banks and Financial Institutions which augmented by 171.39%. Deposits at Banks and Financial Institutions represented the only current asset item that showed a decline with a rate of 56.24% taking up total current assets by 53%. In 2006 and 2007, the total assets increased by 17% and 22% respectively.
It is worth noting that the Bank enhanced its capital gradually to finally reach JD100, 000,000 in 2008. Total liquid assets grow from JD1, 527,749,159 to reach JD 1,903,837,022 in 2007, which represents a rise of 24.6%.
Deposits at Banks and Financial Institutions showed improvement in 2004 and increased by 34.64% then started to record significant decrease rates of 56.24% and 63.32% in 2005, 2006 respectively. 2007 also witnessed a decrease of these assets but at a lower rate which amounted to 5.05%.
Direct Credit Facilities showed enhancement through the last three years but at a declining rate that ranged between 17.55% and 54.90%.
Customers’ Deposits recorded considerable growth rates. In 2005, the Bank registered the highest increase rate in customers’ deposits which amounted to 47.08%. In 2007, all deposits categories boosted especially Current Accounts and Demand Deposits which grew by 30.59% followed by Time and notice deposits which raised by 26.25%. Total deposits reached JD 1,092,957,018 in 2007.
Trading Indicators
The highest closing price that the Bank’s share recorded in 2007 was JD 8.4, while the lowest was JD 6.4 and the average share price stood at JD 6.99. Value traded of JKB shares amounted to JD 51,950,218 and the volume of shares traded reached 7,433,636 shares.
Financial Highlights
JKB has recorded an average ROA of 2.16% for the past five years. In 2005, the Bank has witnessed the highest ROC ratio which amounted 70% with an achieved increase of 44% in its net profits and a rise of 28% in its capital.
The Bank has recorded high EPS ratio due to its excellent performance and continuously growing earnings. The average EPS of JKB for the past five years was 0.53. The highest EPS was recorded in 2005 when it reached 0.64. In 2007, EPS reached 0.592.
Valuation & Recommendation
JOKB
We have used a peer group multiples comparison in our valuation, including the price-to-book value (P/BV) and price-to-earnings (P/E) multiples.
Price to earning ratio which was given a weight of 40% gave a value of JD 7.80 as the forward average Price to Earnings ratio for the Bank’s peers group is approximately 15 times.
Price to book multiple for the Bank’s peers is estimated to be 2.96 times. Thus, book value for JKB share price is JD 2.25 which generates a final value of JD 6.66 for the stock using this valuation method with a weight of 60% allocated to it.
Based on multiples valuation the fair value of JOKB is 7.11JDs. So, we recommend holding this stock on current market price 7.30JDs.
BOP
We have used a peer group multiples comparison in our valuation, including the price-to-book value (P/BV) and price-to-earnings (P/E) multiples.
Price to earning ratio which was given a weight of 40% gave a value of $ 4.50 as the forward average Price to Earnings ratio for the Bank’s peers group is approximately 15 times.
Price to book multiple for the Bank’s peer is estimated to be 2.96 times. Thus, book value for BOP share price is $ 1.16 which generates a final value of $ 3.43 for the stock using this valuation method with a weight of 60% allocated to it.
Based on multiples valuation the fair value of BOP is $ 3.86. So, we recommend holding this stock on current market price $ 3.80.
Bibliography List
- "Palestine In Figures 2007" Issued by Palestinian Central Bureau of Statistics May ,2008.
- "Banking Indicator " No.1 March,2008 Issued by Association of Banks In Palestine.
- "Financial position of banks in Palestine 2007 " May,2008 Issued by Association of Banks In Palestine.
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Central Bank of Jordan, Research Dept. Monthly Report April 2008.
- IMF , Country Report- Jordan ,August 2007.
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Amman Stock Exchange, web site,
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Jordan Kuwaiti Bank , web site ,
