RPT-Fitch affirms Mashreqbank at 'A'; outlook stable
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Sept 12 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings have affirmed UAE-based Mashreqbank's (Mashreq) Long-term Issuer Default Rating (IDR) at 'A' with a Stable Outlook, and Viability Rating (VR) at 'bb+'. A full list of rating actions is at the end of this rating action commentary.
KEY RATING DRIVERS - IDRS, SUPPORT RATING, SUPPORT RATING FLOOR, SENIOR DEBT AND SUBORDINATED DEBT
Mashreq's IDRs, Support Rating, Support Rating Floor and senior debt reflect the extremely high probability of support available to the bank from the UAE authorities if needed. Fitch's opinion of support is based on the ability and willingness of the UAE Federal Authorities to support Mashreq given its UAE-wide franchise and systemic importance. Fitch has also considered the authorities' strong track record of support for the domestic banking system particularly since the global credit crisis, including the provision of significant liquidity support.
In Fitch's view, the high probability of support from the UAE would extend to subordinated debt. Therefore, the subordinated debt rating is notched off Mashreq's Long-term IDR rather than the typical notching from the VR applied in countries outside the region.
RATING SENSITIVITIES - IDRS, SUPPORT RATING, SUPPORT RATING FLOOR, SENIOR DEBT AND SUBORDINATED DEBT
The bank's IDRs, Support Rating, Support Rating Floor and senior debt are sensitive to a change in Fitch's view of the propensity or ability of the UAE authorities to provide timely support. The subordinated debt is sensitive to any rating action on Mashreq's Long-term IDR and any potential change regarding Fitch's assumptions relating to support in the Gulf Cooperation Council (GCC) for bank subordinated debt.
KEY RATING DRIVERS - VR
Mashreq's VR reflects the bank's underlying weak asset quality, and consequent vulnerability to event risk and potentially high losses, through sizeable loan concentrations and renegotiated loan book, particularly to Dubai government-related entity (GRE) exposures. It also reflects corporate governance concerns regarding the board composition.
The rating continues to be underpinned by the bank's strong and resilient franchise, its capacity to absorb higher losses, through diversified recurring earnings and capital, and comfortable liquidity position primarily due to its large and stable deposit base. It also captures the bank's current repositioning of the book towards higher quality lending.
Mashreq's H113 and 2012 results showed continual improvement mainly due to a continuing fall in loan impairment charges, renewed growth and a slight improvement in the operating environment. Mashreq has one of the strongest pre-impairment operating profits/total assets ratios in the UAE, which gives the bank a large cushion to absorb any future losses.
Mashreq's non-performing loan (NPL) ratio improved to a moderate 6.5% and reserve coverage to a solid 82.3% at end-H113. However this is mainly due to further reclassification of Dubai government-related exposures as performing.
Fitch expects asset quality to continue to improve in 2013 albeit at a slow pace in line with the recovery in the UAE economy. However concerns remain about high borrower concentrations and the future performance of its renegotiated loan book, particularly to Dubai GREs. More positively, new NPL formation has stabilised primarily due to improving operating conditions and a more prudent risk appetite.
Mashreq's strong UAE-wide franchise is a rating positive. Stable customer deposits form the bulk of the bank's funding requirements, and its large share of low-cost retail deposits support its relatively low cost of funding. Other funding includes interbank funding, repos and medium-term debt. Deposits are nevertheless short-term and highly concentrated but have proven to be behaviourally stable.
Mashreq has a shorter loan maturity profile than many other UAE banks leading to better matched assets and liabilities. Mashreq's Fitch-calculated gross loans/deposits ratio is lower than immediate Dubai peers, despite having risen recently (end-H113: 98%). Balance sheet liquidity is supported by sizeable liquid assets, including cash, interbank placements and debt securities.
Mashreq reported a high - but decreasing - Fitch Core Capital ratio of 15.1% at end-H113. Fitch believes that such levels are appropriate given the bank's sensitivity to concentration risk.
RATING SENSITIVITIES - VR
Fitch believes that the VR remains sensitive to any deterioration in asset quality, particularly regarding the repayment of the large Dubai GRE loans, which have the potential to result in a sharp increase in impairment charges and affect the bank's capitalisation. The effect of continued high loan growth (H113: 14.6%) is a potential concern for capital levels. Given the high, albeit decreasing, loan concentrations and legal cases following the defaults by troubled Saudi corporates, the VR is also sensitive to event risk.
An upgrade would require further improvement in asset quality and a track record of repayment of restructured loans.
Mashreq is a leading retail and corporate bank in the UAE, holding around 4% of system assets. The bank is 87% owned by the prominent Al Ghurair family. The domestic franchise is complemented by a wide network of regional and international branches and offices.
The rating actions are as follows:
Long-term IDR affirmed at 'A'; Outlook Stable
Short-term IDR affirmed at 'F1'
VR affirmed at 'bb+'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A'
Senior unsecured debt affirmed at 'A'/'F1'
Subordinated debt affirmed at 'A-'
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