Capital Intelligence affirms Al Masraf's ratings

The financial strength rating is maintained at BBB with the bank's good profitability and strong capital base being major supporting factors while tighter liquidity and relatively weak asset quality are constraints. Although the current downturn could strain asset quality and earnings in the future, Al Masraf's relatively low exposures to the most severely affected sectors underpin the 'Stable' outlook assigned to all the ratings.

Al Masraf has diversified its balance sheet over the last two years by increasing its commercial lending book. This has led to wider interest spreads and strong net interest income growth. Profitability continues to be partly underpinned by good fees and commissions from its long-standing off-balance sheet relationships with banks (mainly Libyan and Algerian). Although net profit fell last year due to mark-to-market losses on investments and lower recoveries of loans previously written off, the bank's return on average assets ratio was still strong.

Liquidity ratios tightened owing to the global financial crisis in Q4 2008. However, this was partly mitigated by the timely liquidity support received from Libyan and Algerian banks. Al Masraf also receives substantial deposits from the federal government, a major shareholder. Although the net loans to stable funds ratio tightened last year, the bank continues to maintain a reasonably high level of liquid assets. Moreover, deposits placed by Libyan and Algerian correspondent banks tend to be fairly stable.

Asset quality ratios have improved owing to recoveries and fewer non-performing loan (NPL) classifications. But NPLs are still at a high level and the loan-loss reserve to NPLs ratio is lower than the industry average. The sizeable growth in lending over the last two years and significant customer concentrations are areas of concern, but the bulk of new loans represented short-term exposures to the trading sector, which is relatively less affected by the current downturn. Real estate loans are at a moderate level with most of the exposures primarily to developers in Abu Dhabi who are relatively less stressed than Dubai-based developers. Retail credit exposures are very low and construction loans are mainly to contractors working on government projects. The bank's solid capital base is also a major mitigant.

Although balance sheet growth is not being stressed this year, Al Masraf's earnings are expected to stay moderately high. The bank's asset quality ratios were not adversely impacted in Q1 2009, but NPLs could rise over the next few quarters. At present new financing is being extended only to projects linked to the infrastructure sector.

Al Masraf was set up in 1976 as the Arab Bank for Investment and Foreign Trade (ARBIFT). In 2007, the bank formally changed its name to Al Masraf, increased its capital and adopted new strategies focusing on expanding the corporate banking business. It is owned by the federal government of the UAE (42.28%), the Libyan Arab Foreign Bank (42.28%) and Banque Exterieure D'Algerie (15.44%). It is a small bank with total assets of $3.4bn at end 2008. It is primarily a corporate bank although it offers a wide range of retail banking products and services.