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Rating Action:

Moody's affirms Mashreqbank PSC's Baa2 long-term deposit ratings: changed outlook to positive

20 Oct 2016

Limassol, October 20, 2016 -- Moody's Investors Service has today affirmed Mashreqbank PSC's (Mashreq) Baa2/Prime-2 long and short term local and foreign currency deposit ratings and ba1 baseline credit assessment (BCA) and adjusted BCA. At the same time, Moody's changed the outlook on the bank's long term deposit and senior unsecured debt ratings to positive from stable.

Moody's affirmation reflects Mashreq's (1) consistently strong capital levels combined with solid funding and liquidity profile despite tightening regional liquidity and (2) solid profitability driven by established franchise. These strengths are moderated by high concentration risks albeit lower than its UAE peers and high growth.

The change in outlook to positive from stable reflects Moody's view that Mashreq will sustain the improvements in asset quality and coverage levels despite the low oil-price operating environment. Further supporting our views is our expectation that Dubai's economy and overall operating environment, where Mashreq has significant operations, will remain broadly resilient.

A full list of the ratings is provided towards the end of this press release.

RATINGS RATIONALE

RATIONALE FOR CHANGING OUTLOOK TO POSITIVE

-- IMPROVEMENTS IN ASSET QUALITY AND COVERAGE

The primary driver for the change in outlook is Moody's view that the bank will sustain the improvements in asset quality and coverage despite challenges in the operating environment as a result of lower oil prices. With the non-performing loan (NPL) ratio falling to 4% as of June 2016 from the peak levels of 13.3% as of December 2011 the bank has materially improved its asset quality performance. Such NPL metrics also compares favorably to the 5.1% local average, although remain relatively weaker than around the 3% median of global banks with ba1 BCAs.

The peak NPL ratio during 2011 was primarily due to the large, Dubai government-related legacy exposures and the de-leveraging of its loan book (denominator effect) during the crisis period. Consistent with other UAE banks' the improvements in the NPL ratio reflected settlements, recoveries and re-classifications of legacy restructured exposures after a sustainable period of performance combined with solid loan growth (denominator effect).

While we expect the pressures in the small and medium (SME) companies and retail (loans to individuals) segment to create modest asset quality pressure for the UAE banks' and for Mashreq, nevertheless we expect Mashreq's asset quality to remain solid.

Moody's also expects that the Dubai operating environment will remain resilient over the outlook horizon, despite the reduction in oil prices and property market softening. Moody's expects UAE's non-oil real GDP to grow by more than 2% in 2016 and 2017, which will continue supporting the credit conditions and consequently the financial performance of Mashreq.

RATIONALE FOR AFFIRMATION

-- CONSISTENTLY STRONG CORE CAPITAL LEVELS COMBINED WITH SOLID FUNDING AND LIQUIDITY PROFILE

Today's affirmation is driven by the bank's solid capitalization metrics as exhibited by the tangible common equity to risk weighted assets (TCE/RWAs) and equity to total assets ratio both stable at around 16% as of June 2016. At these levels, Mashreq's capitalization metrics are higher than the 13.8% TCE/RWA local average and the around 12% median for global peers with ba1 BCAs. Such strong capitalization levels are supported by the bank's solid profitability and associated retention rates.

The bank's standalone assessment is also supported by the bank's solid liquidity and funding profile, which despite strong growth between 2012-2014 remains stable with a liquid assets to total asset ratio at around 27% as of June 2016. Additionally, Mashreq's net loans to deposits ratio at 84% as of June 2016 also compares favorably to the 94% UAE average. Such solid metrics, particularly in a tightening liquidity environment driven by low prices, underpinned by the bank's strong franchise on both corporate and retail segment, has driven strong deposit growth of an average 16% since 2013 vs UAE average deposits growth of 8%.

-- SOLID PROFITABILITY DRIVEN BY ESTABLISHED FRANCHISE

Our affirmation on Mashreq's ratings is also driven by its solid profitability with return of assets (ROA) at 2.1% for the year 2015 up from 1% for the year 2011. Despite declining to 1.9% for the first six months of 2016, such profitability metrics compare favorably to the 1.7% UAE average and 0.9% global median of ba1 peers. The bank's strong core profitability is anchored by its established franchise (incorporated in 1967), which supports (a) stable net interest margins (NIMs) despite a declining trend for the system and (b) strong fees and commission income contributing around 30% of its operating income (amongst the highest in the GCC). Going forward, we expect the bank's net profitability to broadly remain stable around the 1.9% levels as we expect the bank core operations will continue to generate healthy pre-provision income.

GOVERNMENT SUPPORT

Mashreq's long term deposit rating at Baa2 has been affirmed and continues to incorporate two notches of uplift from the bank's ba1 BCA. This is based on our assessment of a high probability of systemic support in case of need, although lower than for banks with some level of government ownership. The support assumptions reflect (1) the bank's well-established franchise and importance to the banking system, and (2) UAE authorities track record of supporting banks in the event of stress.

WHAT COULD CHANGE THE RATING UP/DOWN

As indicated by the positive outlook, upward pressure on Mashreq's ratings could develop as a result of maintenance of it strong financial performance in the near term as exhibited by the bank's profitability, asset quality and capitalization levels in the face of challenging operating conditions.

Although not expected in the near term, downward pressure on Mashreq's ratings could develop from any of the following: (1) weakening of franchise, (2) deterioration of asset quality or coverage levels and (3) a weakening of the bank's capital and liquidity position.

LIST OF AFFECTED RATINGS:

Issuer: MashreqBank psc

Affirmations:

....LT Bank Deposits (Local & Foreign Currency), Affirmed Baa2, Outlook Changed To Positive From Stable

....ST Bank Deposits (Local & Foreign Currency), Affirmed P-2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency), Affirmed Baa2, Outlook Changed To Positive From Stable

....Subordinate (Foreign Currency), Affirmed Ba2

....Senior Unsecured MTN (Foreign Currency), Affirmed (P)Baa2

....Subordinate MTN (Foreign Currency), Affirmed (P)Ba2

....Adjusted Baseline Credit Assessment, Affirmed ba1

....Baseline Credit Assessment, Affirmed ba1

....LT Counterparty Risk Assessment, Affirmed Baa1(cr)

....ST Counterparty Risk Assessment, Affirmed P-2(cr)

Outlook Actions:

....Outlook, Changed To Positive From Stable

Issuer: Mashreqbank psc, London Branch

Affirmations:

....ST Deposit Note/CD Program (Local & Foreign Currency), Affirmed P-2

Outlook Actions:

....No Outlook Assigned

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks published in January 2016. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

Headquartered in Dubai, Mashreq has total assets of AED115 billion (approximately US$ 31.2 billion) as of 30 June 2016.

The Local Market analyst for these ratings is Nitish Bhojnagarwala, AVP-Analyst, Financial Institutions Group, Tel: +971.4.237.9563.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Nondas Nicolaides
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Sean Marion
MD - Financial Institutions
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Cyprus Ltd.
Porto Bello Building
1, Siafi Street, 3042 Limassol
PO Box 53205
Limassol CY 3301
Cyprus
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

No Related Data.
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