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Rating Action:

Moody's upgrades MashreqBank's long-term deposit ratings to Baa1 from Baa2: outlook stable

01 Jun 2017

Limassol, June 01, 2017 -- Moody's Investors Service, ("Moody's") has today upgraded Mashreqbank PSC's (Mashreq) long-term deposit ratings to Baa1 from Baa2 and also raised the baseline credit assessment (BCA) and adjusted BCA to baa3 from ba1. The outlook on the bank's long term ratings is stable.

According to Moody's, the upgrade of Mashreq's ratings reflects: (1) significantly improved asset quality and coverage despite challenges in the operating environment, (2) strong profitability supported by an established and diverse franchise (3) solid capital and liquidity buffers which will be maintained and (4) continued high support from the UAE government (Aa2, stable outlook).

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

RATINGS RATIONALE

-- SIGNIFICANTLY IMPROVED ASSET QUALITY AND COVERAGE DESPITE CHALLENGES IN THE OPERATING ENVIORNMENT

The primary driver for the upgrade is view that the bank has significantly improved asset quality and coverage, which Moody's expects will remain stable despite challenges in the operating environment owing to lower oil prices. This is based on bank's non-performing loan (NPL) ratio which stood at 3.1% as of December 2016, significantly lower than the peak of around 13% as of December 2011. This compares favorably to the 5% UAE average. Although the NPL metric is higher than the 2% median for banks' with baa3 BCA, this is mitigated by high reserve coverage at around 140%. Consistent with other UAE banks' the improvements in the NPL ratio reflects settlements, recoveries and re-classifications of legacy restructured exposures after a sustainable period of improved performance combined with solid loan growth (denominator effect).

While Moody's expect the challenges in the operating environment in the UAE to create modest asset quality pressure for the UAE banks', for Mashreq, the NPL ratio is expected to remain broadly stable owing to their diversified loan book and improvements in risk management.

-- IMPROVED PROFITABILITY DRIVEN BY ESTABLISHED FRANCHISE

The upgrade also captures the bank's strong and improved profitability, with return on assets (ROA) at 1.8% during the first three months of 2017, up from 1.6% for 2016. Mashreq's profitability metrics compare favorably to the 1.5% UAE average and 0.8% median of banks' with the higher BCA of baa3. 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 fee and commission income contributing around 26% of its operating income (amongst the highest in the UAE). Going forward, Moody's expects net profitability to remain stable around current levels as the bank will maintain strong yields and grow margins in a competitive market.

-- SOLID CAPITAL AND LIQUIDITY BUFFERS WILL BE MAINTAINED

The bank maintains solid and stable capitalisation, as exhibited by the tangible common equity to risk weighted assets (TCE/RWAs) at around 16% as of March 2017.Mashreq's capitalisation metrics are higher than the 14.6% TCE/RWA local average and the 13% median for global peers with baa3 BCAs. Additionally, the bank has maintained high liquidity buffers as measured by the bank's liquid banking assets to tangible banking asset ratio which stood at around 31% as of December 2016.

-- CONTINUED HIGH GOVERNMENT SUPPORT

Mashreq's long term deposit rating has been upgraded to Baa1 from Baa2 driven by the upgrade of the BCA to baa3 and Moody's continuing to maintain two notches of uplift from government support. This is based on Moody's assessment of a high probability of support from UAE authorities in case of need, although lower than for banks with some level of government ownership. The support assumptions reflect the (1) 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.

-- RATING OUTLOOK

The stable outlook on the long term senior unsecured debt and deposit ratings reflects Moody's view that the bank's asset quality and profitability are expected to remain stable at their current levels.

WHAT COULD CHANGE THE RATING UP/DOWN

Upward pressure on Mashreq's ratings could develop from a combination of the following (1) further improvement in asset quality (2) reduction in concentrations risks on lending and deposits (3) material increase in profitability without significantly changing the risk profile of the bank.

Downward pressures on Mashreq's ratings could develop from the following: (1) deterioration of asset quality resulting in significantly lower profitability or coverage levels and (2) a weakening of the bank's capital and liquidity position.

LIST OF AFFECTED RATINGS:

Issuer: MashreqBank psc

....Long-term deposit ratings (local & foreign currency): Upgraded to Baa1 from Baa2; outlook changed to stable from positive

....Short term deposit ratings (local and foreign currency): Affirmed at P-2

....Senior Unsecured Regular Bond/Debenture (Foreign Currency): Upgraded to Baa1 from Baa2, outlook changed to stable from positive

....Senior Unsecured MTN (Foreign Currency): Upgraded to (P)Baa1 from (P)Baa2

....Subordinate MTN (Foreign Currency): Upgraded to (P)Ba1 from (P)Ba2

....Adjusted Baseline Credit Assessment: Upgraded to baa3 from ba1

....Baseline Credit Assessment: Upgraded to baa3 from ba1

....LT Counterparty Risk Assessment: Upgraded to A3(cr) from Baa1(cr)

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

....Outlook, changed to stable from positive

Issuer: Mashreqbank psc, London Branch

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

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 AED121 billion (approximately US$ 32.8 billion) as of 31 March 2017.

The Local Market analyst for these ratings is Nitish Bhojnagarwala, +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: 852 3758 1350
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: 852 3758 1350
Client Service: 44 20 7772 5454

No Related Data.
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