Fitch Ratings has affirmed UAE-based Mashreqbank’s (Mashreq) long-term issuer default rating (IDR) at A with a stable outlook, and viability rating (VR) at bb+.
Mashreq’s IDRs, Support Rating and Support Rating Floor 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.
The VR reflects Mashreq’s strong and resilient franchise and its capacity to absorb higher losses through recurring earnings and capital. The VR is also underpinned by a comfortable liquidity position primarily due to its large and stable deposit base. The main constraints on the rating are the bank’s high NPL ratio and its vulnerability to event risk through sizeable loan concentrations and significant corporate restructurings.
Mashreq’s 6M12 and 2011 results were satisfactory mainly due to a continuing fall in loan impairment charges. Revenue generation remains under pressure, due to the bank’s past focus on de-risking and deleveraging. Following the working through of some of its large problem loans combined with a change in strategy, Fitch expects core earnings to pick up from current levels, particularly as the operating environment is slightly improving.
Asset quality remains a concern due to a high NPL ratio, low reserve coverage and high concentrations in lending. Mashreq had an NPL ratio of 12.2% at end-June 2012 due to major corporate defaults in Saudi Arabia and the debt restructuring by Dubai government related entities (GRE). NPLs have probably peaked. Several of the largest GRE-related NPLs have either been restructured or being restructured as part of a wide debt-restructuring programme, which should eventually lead to a fall in absolute NPLs, most likely in 2013. More positively, new NPL formation has stabilised primarily due to improving operating conditions and a cautious approach to loan expansion.
With operations UAE-wide, Mashreq benefits from a large and stable deposit base, including a large proportion of retail deposits. Although its Fitch calculated loans/deposit ratio has risen recently, due to loan growth, it remains comfortable compared to peers (97% at end-June 2012).