US embassy cable - 05AMMAN2050

C O N F I D E N T I A L SECTION 01 OF 02 AMMAN 002050 
 
SIPDIS 
 
TREASURY FOR GLASER/ZARATE 
 
E.O. 12958: DECL: 01/24/2015 
TAGS: EFIN, ECON, PGOV, JO 
SUBJECT: A STEP FORWARD AND A SHUFFLING OF FEET: BANKING 
SECTOR CONSOLIDATION CONTINUES ITS ERRATIC PATH 
 
REF: A. AMMAN 538 
 
     B. 2004 AMMAN 8133 
     C. AMMAN 2044 
 
Classified By: Charge d'Affaires David Hale for reason 1.4 (b) and (d) 
 
1. (C) SUMMARY: The excellent recent profitability of banks 
is continuing to drive change in the Jordanian banking 
sector.  A successful medium-sized bank is looking for a 
partner in what would be the first merger not driven by a 
bank failure in well over a decade and the last remnants of 
the 2002 Shemaileh scandal may have been tidied up as part of 
a previously reported merger between JNB and PIB.  While 
indicative of the sector,s current vibrancy, however, these 
deals are only the beginning of the consolidation that the 
Central Bank of Jordan wishes to see.  And each deal has 
features that indicate actual or potential problems in the 
sector.  END SUMMARY. 
 
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CONSOLIDATION... 
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2. (C) Jordan Kuwait Bank (JKB), whose profitability in 2004 
was the highest in the banking sector, has been looking hard 
for a potential acquisition.  It is currently zeroing in on a 
merger with the substantially smaller Jordan Investment and 
Finance Bank (JIFB).  The acquisition would give Jordan 
Kuwait Bank a stronger investment banking wing and position 
it to capitalize on the substantial IPO-related business that 
appears likely over the upcoming year (septel).  If JKB is 
indeed able to acquire JIFB, it will be the first merger 
between solvent banks in over a decade - a victory for the 
CBJ's centralization strategy. 
 
3. (C) JKB's interest in JIFB, however, comes primarily as a 
result of the disappointment of its earlier hopes to acquire 
Cairo-Amman Bank (CAB).  CAB is controlled by Sabih and Munib 
al-Masri and their family interests - also major investors in 
Jordan's tourism sector and in Palestinian Telecommunications 
Co. (PALTEL) and Palestinian Development and Investment Co. 
(PADICO) - and is approximately the same size in terms of 
assets (though not in terms of profits) as is JKB.  Its much 
more extensive branch network, however, dovetails nicely with 
JKB's long-term goals in focusing on retail operation.  JKB 
had been in talks with the al-Masri family to purchase that 
family's stake as part of a larger buyout of the bank.  The 
Masris, in turn, had been quietly increasing the size of 
their stake in the much larger Arab Bank.  All told, the 
Masri holdings now amount to approximately 13% of Arab Bank's 
equity (vs. 11% for the Shoman family, the Arab Bank's 
founders and managers for three generations, and 14% for the 
Hariri family, the largest individual shareholders).  Market 
speculation held that the Masri sellout from CAB was intended 
to provide the family with the capital to substantially 
increase its stake in Arab Bank.  After leaks reporting an 
impending OCC action against Arab Bank's New York City 
branch, however, the al-Masri family appears to have 
reconsidered its strategy and will not be exiting CAB for the 
foreseeable future. 
 
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...AND A COVER-UP? 
------------------ 
 
4. (C) Meanwhile, the terms of the recently-announced Jordan 
National Bank (JNB) acquisition of Philadelphia Investment 
Bank (PIB) (ref A) are becoming more clear.  JNB, which 
incurred serious losses in the 2002 Shemaileh banking 
scandal, appears to have agreed to acquire PIB, which was 
bankrupted by the Shemaileh scandal, as part of a CBJ wind-up 
of the last remains of the scandal (ref B).  JNB will absorb 
PIB, whose portfolio is almost entirely composed of 
liabilities and nonperforming loans (NPLs); in return, the 
CBJ will cover PIB's liabilities, put pressure on some of the 
solvent NPL holders (such as Khalid Shahin - septel) to pay 
their debts, and deposit JD 150 million ($211.5 million) in a 
non-interest-bearing account in JNB.  One JNB source claims 
that the generous terms offered by the CBJ stem from the 
CBJ's desire to avoid drawing publicity to some of the events 
surrounding the Shemaileh scandal itself.  According to the 
source, even after the CBJ discovered what was going on, its 
fear of the General Intelligence Directorate (whose former 
chief was eventually implicated in the scandal and is now 
under house arrest) led it to move very carefully.  The CBJ 
did not notify the private banks of its findings until it 
felt it had sufficient political cover to do so - after JNB 
had transferred tens of millions of dollars to al-Shemaileh 
in the belief that the transactions were legitimate and 
secured. 
 
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CBJ LOOKS DOWN THE ROAD 
----------------------- 
 
5. (C) The CBJ requirement that banks increase their paid-up 
capital to JD 40 million ($56.4 million) by the beginning of 
2006 has not produced significant consolidation; in the 
current bull market on banking stocks, most Jordanian banks 
have found it easy to increase their paid-up capital to the 
required amounts by simply issuing more stock.  The CBJ has 
not yet given up on this strategy, however; in recent public 
announcements, the CBJ Governor has put banks on notice that 
the CBJ will require that Jordanian banks have paid-up 
capital of JD 100 million ($141 million) by 2010. 
 
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COMMENT 
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6. (C) 2004's windfall profits are driving change in the 
banking sector, both by creating new pools of capital for 
particularly successful banks to look to acquire others and 
by stimulating outside interest in the sector.  A merger 
involving JKB would be the first in memory to occur without 
significant CBJ prodding - a good sign for the health and 
maturity of the banking sector.  The apparent reluctance of 
the Masris to get more deeply involved in Arab Bank, however, 
is not a good sign for that bank.  For a family with such 
unabashed zeal for Palestinian institution-building as the 
Masris to pass up the chance to acquire a controlling 
interest in the largest and most respected Palestinian 
business in the world, they must be deeply uncomfortable with 
the potential for action against the bank - and the family's 
reported discomfort is already beginning to unsettle market 
insiders.  Despite the market rumors of Saad al-Hariri's 
enthusiasm for Arab Bank's prospects, there is some concern 
that the Hariri family could move to dump some or all of its 
interest in the Bank if ongoing events in Lebanon led the 
Hariris to need more liquidity; if the Masris are not ready 
to take such shares off the Hariris' hands, it is difficult 
to imagine who would. 
 
7. (C) The CBJ also appears vulnerable in its role in 
sweetening the JNB-PIB merger.  If the JNB source is correct, 
the CBJ is involved in what amounts at best to a mild 
cover-up of its role in the Shemaileh scandal.  Even if the 
JNB source is incorrect, the CBJ action is a joint bailout of 
two banks that made bad decisions - at least one of which 
will face no further negative consequences.  Parliament has 
already noticed this trend and spoken out against it: one of 
the Chamber of Deputies, recommendations on the 2005 budget 
was that the GOJ not "suffer any financial burden" related to 
mergers between banks (Ref D).  A JD 150 million ($211.5 
million) non-interest bearing deposit would seem to be a 
significant burden in terms of forsaken revenue for the GOJ - 
and the GOJ will hold its breath and hope that Parliament 
does not discover or understand this fact. 
HALE