July 13, 2017 / 4:29 PM / 4 months ago

Fitch Affirms Mashreqbank PSC at 'A'; Upgrades VR to 'bbb-'

(The following statement was released by the rating agency) PARIS, July 13 (Fitch) Fitch Ratings has affirmed Mashreqbank PSC's (Mashreq) Long-Term Issuer Default Rating (IDR) at 'A', Short-Term IDR at 'F1', Support Rating (SR) at '1' and Support Rating Floor (SRF) at 'A'. Its Viability Rating (VR) has been upgraded to 'bbb-' from 'bb+'. A full list of rating actions is at the end of this rating action commentary. The upgrade of the Viability Rating reflects a lower risk appetite and improved asset quality. The latter follows a reduction of the bank's SME lending book to around AED1 billion from AED5.4 billion since early 2016, in addition to a significant improvement in the bank's asset quality metrics (which factor in both impaired loans and restructured loans) in the last four years. The upgrade also takes into account downwardly revised targets of loan growth and low single-borrower concentration compared with peers. KEY RATING DRIVERS IDRS, SUPPORT RATING, SUPPORT RATING FLOOR AND DEBT Mashreq's IDRs, Support Rating and Support Rating Floor reflect the extremely high probability of support available to the bank from the UAE and Abu Dhabi authorities if needed. Fitch's view of support factors in the sovereign's strong capacity to support the banking system, sustained by sovereign wealth funds and recurring revenue, mostly from hydrocarbon production, despite lower oil prices, and the moderate size of the UAE banking sector in relation to the country's GDP. Fitch also expects high willingness from the authorities to support the banking sector, which has been demonstrated by the UAE authorities' long track record of supporting domestic banks, as well as close ties with and part government ownership links to a number of banks. Mashreq's Support Rating Floor is at the UAE Domestic Systemically Important Banks's (D-SIB) Support Rating Floor of 'A', reflecting the bank's D-SIB status in the UAE and, in particular Dubai. VR The VR reflects Mashreq's improved asset quality and reduced risk appetite, resilient franchise, solid capitalisation, comfortable liquidity position, strong profitability and lower single-borrower concentration compared with peers. It also reflects sizeable concentrations in the deposit base. Mashreq's VR has historically been constrained by the bank's asset quality, with large stocks of impaired or restructured loans dating back to the financial crisis. The bank has successfully reduced these, both in absolute terms and as a percentage of gross loans. The bank's impaired loans ratio declined to 3.5% at end-2016 from 12.6% at end-2011. Over the same period, the bank's problem loans ratio (which includes impaired loans + restructured loans + 90 days past due but not impaired loans) fell to 9.7% from 28.4%. In absolute terms, impaired loans declined 55% while problem loans fell 45%. At end-2016 impaired loans were 1.4x covered by loan loss reserves, while coverage of problem loans was 53%. At the same time, given the asset quality problems encountered by the bank and the overall banking sector with SMEs, the bank has cleaned up its balance sheet from this poorly performing asset class since early 2016 and has set aside around AED0.5 billion in provisions in 2016. As a result, the SME book has been reduced to about AED1 billion and any additional losses should be minimal. New business with SME is small and has to be fully secured. Reduced risk appetite and increasing funding costs have translated into lower margins and revenue for the bank. This was supplemented in 2016 by higher loan impairment charges as the bank wrote off large amounts of SME loans. Nevertheless, Mashreq's profitability remains solid and in line with peers. Pre-provision operating profits (5.7% of gross loans) provide significant loss absorption capacity before capital gets impacted. The bank's loan book remains concentrated, albeit less than peer average, with the 20 largest names accounting for 24% of gross loans and 0.9x Fitch Core Capital (FCC) at end-2016. Concentration in customer deposits is reasonable for the region, with the top 20 deposits representing 23% of the total. At end-2016 the Tier 1 regulatory capital ratio was 16% (the FCC ratio stood at a lower 15.3%, due to the deduction of insurance net assets). The total regulatory capital ratio was 16.9%. If capital above the minimum regulatory requirement is added to loan loss reserves, then the loan loss reserve/gross loans ratio increases to 15.3% from 5.1%, which is higher than the 9.7% problem loans ratio. Mashreq has a large stock of liquid assets (cash and equivalents, short-term interbank placements and liquid securities) equivalent to 30% of assets and half of customer deposits, providing a good liquidity cushion. Mashreq's loans-to-deposits ratio is among the lowest in the UAE. Mashreq has a broad UAE-wide franchise, comprising four main business groups: retail, corporate and investment banking, treasury and capital markets, and international banking. Its market share in loans (4% at end-2016) has declined slightly due to competition from Islamic banks in Dubai and to competition in Abu Dhabi. RATING SENSITIVITIES IDRS, SUPPORT RATING, SUPPORT RATING FLOOR AND DEBT Mashreq's IDRs, Support Rating and Support Rating Floor are sensitive to a change in Fitch's view of the creditworthiness of the UAE and Abu Dhabi authorities and on their propensity to support the banking system or the bank. The senior unsecured notes issued directly by the bank are subject to the same sensitivities as the bank's IDRs. VR Mashreq's VR is sensitive to weakening asset quality affecting the bank's capital ratios. A further upgrade is unlikely given the current operating environment. The rating actions are as follows: Mashreqbank PSC Long-term IDR affirmed at 'A'; Outlook Stable Short-term IDR affirmed at 'F1' Support Rating affirmed at '1' Support Rating Floor affirmed at 'A' Viability Rating upgraded to 'bbb-' from 'bb+' Senior unsecured debt affirmed at 'A'/'F1' Contact: Primary Analyst Eric Dupont Senior Director +33 1 4429 9131 Fitch France S.A.S. 60 rue de Monceau 75008 Paris Secondary Analyst Nicolas Charreyron Analyst +971 4 424 1208 Committee Chairperson Alexander Danilov Senior Director +7 495 956 24 08 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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