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).
Mashreq is well capitalised, reporting a Fitch core capital ratio of 16.2% at end-June 2012, although such levels are prudent given its exposure to concentration risk, the bank's issues surrounding asset quality and the uncertain economic outlook in Dubai.
Rating SensitivitiesThe bank's IDRs, Support Rating and Support Rating Floor are sensitive to a change in Fitch's view of the propensity or ability of the UAE authorities to provide timely support.
Downside pressure on the VR could result from a delay in the work-through of Mashreq's largest GRE-related NPLs leading to a sharp increase in impairment charges. Given its high loan concentrations and legal cases following the defaults by troubled Saudi corporates, the VR is also sensitive to event risk. If current profit trends continue and asset quality improves significantly then there is some upside potential to the VR in the longer term.
Mashreq is a leading retail and corporate bank in the UAE, holding around 5% of system assets. The bank is 87% owned by the prominent Al Ghurair family. The domestic franchise is complemented by a wide network of regional and international branches and offices.
The rating actions are as follows:
MashreqLong-term IDR affirmed at 'A'; Outlook Stable
Short-term IDR affirmed at 'F1'
VR affirmed at 'bb+'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A'
Senior unsecured debt affirmed at 'A'
Subordinated debt affirmed at 'A-'
In Fitch's view, the high probability of support from the UAE would extend to subordinated debt. Therefore, the subordinated debt rating is notched off Mahreq's Long-term IDR rather than the typical notching from the VR applied in countries outside the region.