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Rating Action:

Moody's affirms the ratings of eight United Arab Emirates banks, changes outlooks to negative from stable

18 Jun 2020

Limassol, June 18, 2020 -- Moody's Investors Service ("Moody's") has today affirmed the long-term ratings of eight United Arab Emirates (UAE)-based banks: Emirates NBD PJSC (ENBD), Abu Dhabi Commercial Bank (ADCB), Dubai Islamic Bank PJSC (DIB), MashreqBank psc (Mashreq), HSBC Bank Middle East Limited (HBME), Abu Dhabi Islamic Bank (ADIB), The National Bank of Ras-Al-Khaimah (P.S.C.) (RAK) and National Bank of Fujairah PJSC (NBF). Moody's has also affirmed the Baseline Credit Assessments (BCA) and Adjusted BCAs of the eight banks.

At the same time, Moody's has changed the outlook to negative from stable on the long-term ratings of the eight banks. The change of outlook to negative from stable reflects the potential material weakening in their standalone credit profiles, amid a challenging operating environment in the UAE due to the coronavirus outbreak, low oil prices and pre-existing economic challenges.

Moody's regards the coronavirus outbreak as a social risk under its ESG framework, given the substantial implications for public health and safety.

Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL426101 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

-- AFFIRMATION OF RATINGS REFLECTS SOLID STANDALONE CREDIT PROFILES, COMBINED WITH HIGH OR VERY HIGH LIKELIHOOD OF GOVERNMENT SUPPORT IN CASE OF NEED AT SOME BANKS

Moody's affirmation of the long-term deposit ratings, despite the potential negative effects of the challenging environment on the banks' financial fundamentals , reflects the banks' still solid capitalisation, funding and liquidity. UAE banks' strong capital provide sizeable loss-absorption potential, with system-wide tangible common equity to risk-weighted-assets ratio at 14.9% as of December 2019. Funding and liquidity are also solid, with market funds accounting for just 18.9% of tangible banking assets and liquid banking assets representing 33.5% of tangible banking assets as of December 2019. Bank specific details of the rationales underlying the affirmations are provided later in the press release.

The $70 billion support scheme (17% of GDP) provided by the UAE central bank will soften the blow to the economy and to the banks caused by the coronavirus outbreak and help to mitigate part of the expected loan quality deterioration. Although we still expect UAE banks' asset quality to materially deteriorate, the support scheme (including $13.6 billion in zero cost collateralised funding) will mitigate the extent of the deterioration by keeping liquidity issues from becoming solvency issues for some borrowers . The central bank's relaxation of minimum regulatory buffers (including a $43 billion liquidity injection through reduced cash reserve requirement and lower liquidity buffer requirements) will support banks' liquidity and ease potential funding challenges.

The affirmation also takes into account the 'very high' likelihood of support from UAE authorities in case of need, in line with UAE's strong record of supporting banks in time of stress.

-- NEGATIVE OUTLOOK REFLECTS POTENTIAL WEAKENING IN STANDALONE CREDIT PROFILES

The change of outlook to negative from stable on the banks' long-term ratings reflects the potential material weakening in their standalone credit profiles, amid a challenging operating environment in the UAE due to the coronavirus outbreak, low oil prices and pre-existing economic challenges.

The coronavirus outbreak represents a significant shock to the UAE's open economy and coincides with a significant drop in oil prices that also weighs on growth. The policies enacted to contain the outbreak, combined with the impact of the pandemic on global growth and trade, will negatively affect the UAE's growth. We also expect low oil prices to negatively affect spending trends in the oil-producing Gulf Cooperation Council region, which also weighs on the country's open economy. Brent oil prices, which fell to low of $19 a barrel in April 2020, averaged around $40 a barrel during the first five months of 2020 compared to a $64 average for 2019.

Macroeconomic conditions were already challenging for the UAE banks prior to the outbreak, as a confluence of structural and cyclical factors weighed on the country's economy in 2019. Slower global trade, a strong currency, geopolitical tensions, as well as the impact of moderate oil prices on business and consumer confidence, together weighed on the UAE's non-hydrocarbon economic growth. At the same time, cuts in oil production have constrained hydrocarbon economic growth.

We expect the overall real GDP of the UAE to contract by 5% in 2020, compared with an estimated growth of 1.7% in 2019. We expect non-hydrocarbon GDP to contract by 4.0% in 2020, compared with growth of 0.8% in 2019. At the same time, we expect the hydrocarbon economy to contract by 7.2% in 2020 (compared with growth of 3.4% in 2019) owing to cuts in oil production in line with the OPEC agreement.

Details of how these drivers affect the banks ratings are given in the bank specific sections below.

-- BANK-BY-BANK SUMMARY OF ACTIONS

- Emirates NBD PJSC (ENBD)

Moody's affirmed ENBD's long-term deposit rating at A3 and its BCA and Adjusted BCA at ba1. At the same time, the rating agency has changed the outlook on the bank's long-term deposit ratings to negative from stable.

The affirmation of the BCA at ba1 reflects the bank's solid capitalisation (14.8% tangible common equity/risk weighted assets as of March), high problem loans coverage at 121% as of March and resilient profitability, together supported by strong ties with the Dubai government and large Dubai-based corporates, combined with a large retail franchise. The bank's stable funding and liquidity, reflecting an established domestic franchise combined with strong capital markets access, also supports its standalone profile. However, the economic slowdown, combined with the bank's sector credit concentrations and high related party credit concentration, together moderate these strengths.

The negative outlook on the bank's long-term ratings reflects the potential weakening of the bank's standalone credit profile as a result of the current challenging operating environment.

- Abu Dhabi Commercial Bank (ADCB)

Moody's affirmed ADCB's long-term deposit rating at A1 and its BCA and Adjusted BCA at baa3. At the same time, the rating agency has changed the outlook on the bank's long-term deposit ratings to negative from stable.

The affirmation of the BCA at baa3 reflects the bank's sound capitalisation (11.9% tangible common equity/ risk weighted assets ratio as of March 2020), combined with strong funding and liquidity. The bank's liquid banking assets/tangible banking assets ratio was 30.3%. These strengths are moderated by the bank's asset quality and lower profitability. Problem loans to gross loans (Moody's ratio, excluding loans to banks) increased to 4.9% as of March 2020 from 3.3% as of December 2019. When including loans to banks, the bank's problem loans to gross loans ratio was 4.7% as of March 2020 and 3.2% as of December 2019. The bank's net income to tangible assets (Moody's ratio, adjusted for the dividend on hybrid securities) stood at 0.1% during Q1 2020 compared to 1.1% during the full year 2019. The reported net income to tangible assets ratio (excluding the adjustment for the dividend on hybrid securities) was 0.2% during Q1 2020 compared to 1.2% during the full year 2019.

The negative outlook on the bank's long-term ratings reflects the potential weakening of the bank's standalone credit profile as a result of the current challenging operating environment.

- Dubai Islamic Bank PJSC (DIB)

Moody's affirmed DIB's long-term issuer rating at A3 and its BCA and Adjusted BCA at ba2. At the same time, the rating agency has changed the outlook on the bank's long-term issuer ratings to negative from stable.

The affirmation of the BCA at ba2 reflects the bank's strong retail franchise which underpins its sound profitability with net income to tangible assets of 1.4% as of March 2020, and stable asset risk with nonperforming financings at 4.4%. The established retail franchise also supports the bank's strong and granular funding profile with modest reliance on market funding (10% as at March 2020). DIB's BCA also captures the bank's ample liquidity buffers with liquid assets making 23% of tangible banking assets. These strengths are moderated by DIB's high borrower and sector concentrations, fast financing growth and the acquisition of Noor Bank which has a weaker financial profile.

The negative outlook on the bank's long-term ratings reflects the potential weakening of the bank's standalone credit profile as a result of the current challenging operating environment.

- MashreqBank psc (Mashreq)

Moody's affirmed Mashreq's long-term deposit rating at Baa1, and its BCA and Adjusted BCA at baa3. At the same time, the rating agency has changed the outlook on the bank's long-term deposit ratings to negative from stable.

The affirmation of the BCA at baa3 reflects the bank's established franchise in the UAE and is supported by its strong capitalisation with tangible common equity to risk weighted assets as of 15.2% as of March 2020. Mashreq's ample liquidity buffers with liquid assets making 30% of its total tangible banking assets moderates its increase reliance on market funding which stood at 27% as at March 2020. The BCA also captures the bank's solid albeit pressured profitability with net income at 1.2% of tangible banking assets as of March 2020, as well as large borrower and sector concentration risks.

The negative outlook on the bank's long-term ratings reflects the potential weakening of the bank's standalone credit profile as a result of the current challenging operating environment.

- HSBC Bank Middle East Limited (HBME)

Moody's affirmed HBME's long-term deposit rating at A3, and its BCA at baa2 and its Adjusted BCA at a3. At the same time, the rating agency has changed the outlook on the bank's long-term deposit ratings to negative from stable.

The affirmation of the BCA at baa2 reflects the bank's (1) strong and diversified franchise supporting core profitability, (2) strong core capital buffer (tangible common equity/risk-weighted assets at 15.7% as of December 2019) as well as (3) robust funding benefiting from a low-cost, granular and sticky deposit franchise and strong liquidity with a liquid banking assets/tangible banking assets ratio at 44% as of December 2019. These strengths are moderated by the bank's relatively weak asset quality (problem loans/gross loans at 5.8% as of December 2019), underpinned by high levels of credit concentrations, which is putting pressure on bottom-line profitability.

The affirmation of the Adjusted BCA at a3 reflects Moody's continued view of a very high probability of support from the bank's parent, HSBC Holdings plc (A2 long-term senior unsecured, negative) in case of need, which translates into a two-notch affiliate support uplift from HBME's baa2 BCA. This considers the strategic importance of HBME as the main operating vehicle for the Middle East operations of the HSBC group.

The negative outlook on the bank's long-term ratings reflects both (1) the potential weakening of the bank's standalone credit profile as a result of the current challenging operating environment, together with, (2) the potential downgrade of HBME's parent ratings as captured by their current negative outlook.

- Abu Dhabi Islamic Bank (ADIB)

Moody's affirmed ADIB's long-term issuer rating at A2, and its BCA and Adjusted BCA at ba1. At the same time, the rating agency has changed the outlook on the bank's long-term issuer ratings to negative from stable.

The affirmation of the BCA at ba1 captures primarily the bank's (1) sound core profitability, supported by a strong domestic Islamic retail franchise however the bottom-line is challenged by higher provisioning needs, with an annualised net income/tangible assets at 0.9% as of March 2020 down from a reported 2.1% in 2019; (2) strong funding, with net financings/customer deposits at 80% as of March 2020, with a granular deposit base (current and savings accounts at around 72% over the same period); (3) sound capitalisation with the bank's tangible common equity/risk-weighted assets at 12.7% as of March 2020; and (4) weakening asset quality (problem loans/gross loans at 7.9% as of March 2020) with high borrower concentrations.

The negative outlook on the bank's long-term ratings reflects the potential further weakening of the bank's standalone credit profile as a result of the current challenging operating environment.

- The National Bank of Ras Al-Khaimah (P.S.C.) (RAK)

Moody's affirmed RAK's long-term deposit rating at Baa1, and its BCA and Adjusted BCA at baa3. At the same time, the rating agency has changed the outlook on the bank's long-term deposit ratings to negative from stable.

The affirmation of the BCA at baa3 reflects the bank's strong capitalization, evidenced by a tangible common equity/ risk weighted assets ratio of 14.7% as at March 2020, combined with solid funding (current, savings and call account represented 62% of total deposits as of end-2019) and liquidity, with a 32.9% liquid banking assets/tangible banking assets ratio. In addition, RAK's established franchise in retail and business banking drives solid profitability, with a 1.0% net income to tangible assets ratio during the first quarter the year. The bank's exposure to the high-risk retail and business banking segments, its rapid growth in wholesale banking, as well as its limited (though gradually improving) business diversification moderate these strengths.

The negative outlook on the bank's long-term ratings reflects the potential weakening of the bank's standalone credit profile as a result of the current challenging operating environment.

- National Bank of Fujairah PJSC (NBF)

Moody's affirmed NBF's long-term deposit rating at Baa1, and its BCA and Adjusted BCA at ba1. At the same time, the rating agency has changed the outlook on the bank's long-term deposit ratings to negative from stable.

The affirmation of the BCA at ba1 reflects the bank's solid core profitability through an established corporate and business banking franchise, adequate capital buffers with a tangible common equity/risk-weighted assets at 13.8% as of March 2020. NBF's also has stable funding, with a low market funding ratio at around 10% of tangible banking assets as of March 2020, and strong liquidity, with around 28% of the balance sheet in the form of liquid assets as of the same period. These strengths are moderated by the bank's relatively weak asset quality (problem loans/gross loans at 6.7% as of March 2020), which is putting pressure on bottom-line profitability, with a reported net income/tangible assets at 0.7% as of March 2020, and limited business diversification.

The negative outlook on the bank's long-term ratings reflects the potential weakening of the bank's standalone credit profile as a result of the current challenging operating environment.

RATING OUTLOOKS

The banks' long-term ratings are on negative outlook, reflecting the potential material weakening in their standalone credit profiles, amid a challenging operating environment in the UAE due to the coronavirus outbreak, low oil prices and pre-existing economic challenges. For HBME, this also reflects the potential downgrade of the bank's parent ratings in line with their current negative outlook.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

Upwards pressure on the banks' long-term ratings is limited given the negative outlooks. The emergence of resilience of the banks' asset quality, profitability and capitalisation could lead to a stabilisation of outlooks on the banks' ratings.

Downwards pressure on the banks' long-term ratings could materialise owing to a material deterioration in the banks' asset quality, profitability and/or capitalisation. For HBME, this could materialise in the case of a downgrade of both the bank's BCA together with its parent's ratings.

PRINCIPAL METHODOLOGY

The principal methodology used in these ratings was Banks Methodology published in November 2019 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1147865. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

The local market analyst for Emirates NBD PJSC, EIB Sukuk Company Ltd., Emirates NBD Global Funding Limited, Abu Dhabi Commercial Bank, ADCB Finance (Cayman) Limited, The National Bank of Ras Al-Khaimah (P.S.C.), Rakfunding Cayman LTD and AHB Sukuk Company Ltd. ratings is Mik Kabeya, +971 (423) 795-90.

The local market analyst for DIB Tier 1 Sukuk (3) Ltd., DIB Sukuk Limited, MashreqBank psc, Mashreqbank psc, Hong Kong Branch, Mashreqbank psc, London Branch and Dubai Islamic Bank PJSC ratings is Ashraf Madani, +971 (423) 795-42.

The local market analyst for HSBC Bank Middle East Limited, HSBC Bank Middle East Limited (UAE Branch), Abu Dhabi Islamic Bank, ADIB Capital Invest 2 Ltd., National Bank of Fujairah PJSC ratings is Badis Shubailat, +971 (423) 795-05.

REGULATORY DISCLOSURES

The List of Affected Credit Ratings announced here are a mix of solicited and unsolicited credit ratings. Additionally, the List of Affected Credit Ratings includes additional disclosures that vary with regard to some of the ratings. Please click on this link https://www.moodys.com/viewresearchdoc.aspx?docid=PBC_ARFTL426101 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

• Rating Solicitation

• Issuer Participation

• Participation: Access to Management

• Participation: Access to Internal Documents

• Disclosure to Rated Entity

• Endorsement

• Lead Analyst

• Releasing Office

For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security 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.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

At least one ESG consideration was material to the credit rating action(s) announced and described above.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead rating analyst and the Moody's legal entity that has issued the ratings.

Items color coded in purple in this Press Release relate to unsolicited ratings for a rated entity which is non-participating.

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
Client Service: 44 20 7772 5454

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

No Related Data.
© 2020 Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND/OR ITS CREDIT RATINGS AFFILIATES ARE MOODY'S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY'S (COLLECTIVELY, "PUBLICATIONS") MAY INCLUDE SUCH  CURRENT OPINIONS. MOODY'S INVESTORS SERVICE DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE MOODY'S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY'S INVESTORS SERVICE CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS ("ASSESSMENTS"), AND  OTHER OPINIONS INCLUDED IN MOODY'S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY'S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY'S ANALYTICS, INC. AND/OR ITS AFFILIATES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY'S CREDIT RATINGS, ASSESSMENTS, OTHER OPINIONS AND  PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY'S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES  ITS PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.

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Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY'S affiliate, Moody's Investors Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody's Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended to be provided only to "wholesale clients" within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you represent to MOODY'S that you are, or are accessing the document as a representative of, a "wholesale client" and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to "retail clients" within the meaning of section 761G of the Corporations Act 2001. MOODY'S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.

Additional terms for Japan only: Moody's Japan K.K. ("MJKK") is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody's Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody's SF Japan K.K. ("MSFJ") is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ("NRSRO"). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.

MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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