* Improved bottom line depends on economic recovery
* Non-performing loans rise; mainly property risks
By Suleiman al-Khalidi
AMMAN, Dec 15 (Reuters) - Jordanian banks are hoping for strong economic growth in Gulf Arab states next year to help turn around a struggling domestic economy and curb their vulnerability to non-performing loans. The country's 23 banks, which hold $31 billion of deposits, saw their pre-tax profits fall 23 percent last year to 695.5 million dinars. Nine-month results for this year were mixed, suggesting the banks were unlikely to bounce back quickly.
Bankers say prospects for 2011 hinge on stepped-up economic growth in Gulf Arab states which are a main source of remittances and foreign direct investment, particularly into the real estate sector which has been hit hard by the slowdown.
"The speed of recovery in the sector will depend on the Gulf economies recovering fully by reviving inflows, remittances and improving business climate," said Marwan Awad, CEO of Ahli Bank and chairman of Jordan's banking association.
Jordan emerged at the start of 2010 from the worst economic contraction in decades that halved growth to 3.2 percent.
It followed years of boom during which banks saw loan growth outpacing that of deposits, as the country's free market reforms attracted billions of dollars of investments from both local and foreign investors.
The sharp slowdown was primarily caused by the global finance crisis, but Jordanian banks have also faced a challenge from more aggressive regional competitors such as Lebanon's Bank Audi, which set up operations in Jordan to attract depositors from neighbouring Iraq.
NON-PERFORMING LOANS
Prospects for an improved bottom line in 2011 depend on whether the worst is over in terms of banks' provisions for non-performing loans which rose to almost 8 percent of the total $19.7 billion loans this year from 6 percent last year.
Much of the lending has been channelled to commercial and residential real estate projects, where bankers say the biggest risks remain.
"Banks are a mirror of the economy and if there is a pickup this will help clients to service their debts and this will allow us to control the growth in non-performing loans we have seen in the last few years," Awad said.
Jordan's two largest lenders Arab Bank and Housing Bank, which account for almost 40 percent of the total assets of the banking sector, have already put aside hefty provisions, which bankers say will cushion them.
Many banks were also able to re-negotiate quickly company debt with top clients such as Jordan's largest real estate firm Taameer, to prevent defaults as falling share prices and lower real estate collateral exacerbated a sense of crisis.
STRONG LIQUIDITY
Awad said non-performing loans were still lower than the peak of 16 percent in 2001, and the banks have been shielded by generally prudent lending, minimal exposure to Western markets and a strong supervisory system by the Central Bank of Jordan.
Although business has plummeted, most banks have proved resilient and high profile bankruptcies have so far been averted, bankers say.
In a positive sign, risk averse banks flush with over 3.9 billion dinars ($5.5 billion) of liquidity in the domestic money market were now again looking to lend rather than sit on idle cash after a period of market uncertainty.
"Banks have liquidity. They have the ability to lend and they have been looking for credible businesses and products to finance," said Haethum Battikhi, assistant general manager of Jordan-Kuwait Bank which has expanded its financing of cash-short local firms to ease a liquidity crunch.
With corporate business sharply lower, both conventional and Islamic banks were turning their attention to growth potential in retail, which had helped cushion banks such as Cairo-Amman Bank and Islamic lender Jordan Islamic Bank both with strong retail franchises.
But even with a pick-up in Gulf money and capital inflows next year, competition is likely to intensify next year.
Many banks will continue to rely on wide interest rate margin between deposit and lending rates and fee-based income to improve banks' bottom line and average profitability.
The downturn could push much needed consolidation as family-dominated smaller banks that avoided mergers and acquisitions during the boom years for fear of diluting their ownership, bankers say.
Those pressures would mount if the Central Bank of Jordan (CBJ) moved to raise capital requirements beyond a 100 million dinars minimum in a sector witnessing global players like HBSC and regional banks such as Dubai Islamic Bank capturing a bigger share in the retail sector.
"Consolidation of the sector will gather momentum ... but we have ego problems within the banking sector that need to be surmounted. A lot will on the Central Bank and its policy," said Bassem Khalil Al-Salem, chairman of Capital Bank. (Editing by Dominic Evans and Samia Nakhoul) ($1 = 0.709 dinar)