KEY RATING DRIVERS
Unless noted below, the key rating drivers for Mashreq are those outlined in our Rating Action Commentary published on 9 December 2020 ("Fitch Affirms Mashreqbank at 'A'; Outlook Stable").
We have placed Mashreq's 'bbb-' capitalisation & leverage factor score on negative outlook, signalling that a further decline or inability to sustainably restore the CET1 capital ratio to levels commensurate with historical averages and the bank's risk profile will likely result in a downgrade of the VR.
The decline in capitalisation at end-1H21 primarily resulted from increased RWAs (up 12% compared with end-2020). The increase was due to balance-sheet growth (9% in 1H21) that contributed 81bp to the CAR reduction, and changes related to the Basel III framework implementation, which shaved another 70bp off the CAR at end-1H21.
Other factors driving the trend in capitalisation are a reduction in the IFRS 9 capital relief due to write-offs in 2Q21, as well as the impact of unrealised losses in OCI, which together contributed another 41bp to the CAR decline.
All else being equal, we expect Mashreq's core capitalisation to be supported by improved internal capital generation with a potential suspension of dividend payments on 2021 net income, RWAs optimisation, and the reversal of marked-to market losses on OCI suffered in 1H21.
Fitch will resolve the RWN on Mashreq's VR after its assessment of the bank's financial profile, in particular its capitalisation and leverage, in light of its 2021 accounts.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Failure to restore the CET1 capital ratio, in a sustainable way, close to levels that are commensurate with Mashreq's historical averages and appropriate for the bank's risk profile, within the next 12 months, will likely trigger a downgrade of the VR.
Factors that could, individually or collectively, lead to positive rating action/upgrade
The VR could be removed from the RWN and affirmed at the current level if, within the next 12 months, the bank restores its CET1 capital ratio to levels that are close to its historical averages and appropriate for its risk profile, and if we believe it is able to maintain it at that level over the rating horizon. Fitch will therefore assess the bank's capitalisation and leverage in conjunction with other factors, including asset quality and profitability, in assessing the likelihood of it being sustained over the rating horizon.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
Mashreq's IDRs reflect an extremely high probability of support available to the bank from the UAE authorities.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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© Press Release 2021