Mashreq's IDRs, SR and SRF reflect an extremely high probability of support available to the bank from the UAE authorities if needed.
Fitch's view of support factors in the sovereign's strong capacity to support the banking system, sustained by sovereign wealth funds and recurring revenue mostly from hydrocarbon production. Fitch also expects high willingness from the authorities to support the banking sector. This has been demonstrated by the UAE authorities' long track record of supporting domestic banks, as well as close ties with and part government ownership links to a number of banks.
Mashreq's SRF is at the UAE Domestic Systemically Important Banks's (D-SIB) Support Rating Floor of 'A', reflecting the bank's D-SIB status in the UAE and, in particular Dubai. Mashreq is the fifth largest bank in the UAE, with a 5% market share of total system assets at end-2018.
The VR reflects Mashreq's sound asset quality and risk appetite, resilient franchise, strong capitalisation, comfortable liquidity position and healthy but declining profitability metrics. The VR also considers increasing single-borrower concentrations, increasing funding costs and concentrations in the deposit base, and is somewhat constrained by the bank's more limited market share and size than some domestic peers.
Mashreq's asset quality remains sound. The bank has been successful in cleaning up its large portfolio of small and medium-sized corporates and its credit card book, and the total impaired loans ratio has stabilised around 3.8%. Our assessment also considers Mashreq's sizeable amount of restructured loans (3.2% of loans at end-2018), notably from Dubai government related exposures. The bank's potential problem loans ratio (which includes stage 2 and stage 3 loans) was 11.2% at end-2018. Loan loss coverage of impaired loans was high at 130% and loan loss coverage of problem loans was satisfactory. The bank's loan book remains concentrated, albeit less than peer average, with the 20 largest loans accounting for 29% of the total (end-2017: 26%) and 1x equity at end-2018.
Mashreq has a broad UAE-wide franchise comprising four main business groups: retail, corporate and investment banking, treasury and capital markets, and international banking. Its market share has been stable on the back of conservative growth and strong balance sheet clean up in the last few years. While Mashreq's franchise is well established in the UAE, the bank lags behind its larger UAE peers in terms of market shares and size.
Mashreq's capital position remains sound. At end-2018 the bank's Tier 1 regulatory capital ratio was 15.3% (the Fitch core capital (FCC) ratio stood at a lower 15.1%, due to the deduction of insurance net assets) and the total capital adequacy ratio was 16.5%. Capital ratios at end-2018 were slightly lower compared with end-2017 but remained broadly in line with the peer average. The decline is a combination of higher than average loan growth (10.6% in 2018) and IFRS 9 implementation. The bank's loss absorption capacity is acceptable. If excess capital above the minimum regulatory requirement is added to loan loss reserves, coverage of gross loans increases to 12% (from a current 5%), which is higher than the bank's 11.2% potential problem loans ratio.
Mashreq's profitability has been declining in recent years but remains adequate given the bank's cautious approach to lending. The net interest margin (3.6% in 2018) has declined due to an increase in funding costs, in particular on customer deposits. Mashreq's operating profitability is broadly in line with peers' and pre-impairment operating profit (4.5% of gross loans in 2018) provides a comfortable buffer against asset quality deterioration before capital gets impacted.
Mashreq's liquidity position is adequate, with net liquid assets equivalent to 20% of total assets and covering around a third of customer deposits. Its loans-to-deposits ratio of 87.6% is among the lowest in the UAE and underpins the bank's strong liquidity position. Our assessment also considers a significant increase in concentrations, with the top 20 deposits representing 35% of end-2018 total deposits (end-2017: 24%). The bank's funding costs have been increasing in recent years; the spike in 2018 is due to a migration of deposits from current and savings account (CASA) to term deposits. At end-2018, CASA deposits represented half of the bank's total customer deposits, down from 63% at end-2017.
IDRS, SR, and SRF
Mashreq's IDRs, SR and SRF are sensitive to a change in Fitch's view of the creditworthiness of the UAE authorities and on their propensity to support the banking system or the bank.
Mashreq's VR is sensitive to weakening asset quality affecting the bank's capital ratios. An upgrade would require a stronger franchise and further improvement in asset quality.
The rating actions are as follows:
Mashreq Bank PSC
Long-term IDR affirmed at 'A'; Outlook Stable
Short-term IDR affirmed at 'F1'
Viability Rating affirmed at 'bbb-'
Support Rating affirmed at '1'
Support Rating Floor affirmed at 'A'
Senior unsecured debt affirmed at 'A'/'F1'
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Bank Rating Criteria (pub. 12 Oct 2018)
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