Tuesday 26, September 2017 by Georgina Enzer

Al Masraf’s Financial Strength Rating raised; other ratings affirmed

Capital Intelligence Ratings (CI Ratings or CI), the international credit rating agency, today announced that it has raised the Financial Strength Rating (FSR) of UAE’s Al Masraf to ‘BBB+’ from ‘BBB’.

The upgrade reflects the improvements in asset quality in recent periods, which CI Ratings believes are sustainable over the medium-term, as well as the moderately low non-performing loan (NPL) ratio and high loan-loss reserve (LLR) coverage, and effective NPL coverage ratios. Other factors supporting the upgrade are the Bank’s continuing solid capital adequacy ratio (CAR), large capital base, high operating profitability ratio and return on average assets (ROAA), and its overall satisfactory liquidity position. The principal constraining factors are the high – though improving – customer concentrations in deposits and loans, the small balance sheet size, and the challenging credit environment in the country.

The Bank’s Long-Term Foreign Currency Rating (FCR) is affirmed at ‘A-’. The rating reflects the considerable support the Bank receives from the UAE government, which is a major shareholder. The government’s 42 per cent ownership of the Bank significantly underpins the one-notch uplift from the FSR. The Short-Term FCR is maintained at ‘A2’. The Support Rating is affirmed at ‘2’ based on CI’s view that the UAE government is very likely to provide support in case of need. The Outlook for all the ratings is ‘Stable’.

Al Masraf’s asset quality ratios have strengthened over the last few years due to recoveries and low NPL accretions. The NPL ratio was a moderately low 4.89 per cent at end 2016, which was close to the peer group average, while the LLR coverage ratio was a strong 151 per cent and well above the average for the sector. The Bank’s high capital base also provides substantial additional cover. With the good growth in lending projected for this year, Al Masraf’s NPL ratio is likely to improve further provided there are no major impairments in the loan portfolio. Management expects the coverage ratio to be maintained at a high level. The Bank does not expect the adoption of IFRS 9 this year to impact either earnings or capital given its sizeable LLRs.

The Bank’s large capital base is also a major supporting factor. Capital has accounted for more than a fifth of the Bank’s balance sheet total over the last several years and its CAR has been maintained at a solid level. The high capital partly mitigates vulnerabilities that may exist due to the high customer concentrations in deposits and loans. Although high customer concentrations are a major constraining factor, CI notes that there have been improvements in recent years and management remains committed to reducing these levels. Despite a possible negative adjustment to capital after the adoption of IFRS 9 this year and the impact from the implementation of Basel III norms (mandated from this year-end by the UAE central bank) the Bank’s CAR is likely to remain solid.

Al Masraf’s satisfactory liquidity position is a supporting factor. By and large, customer deposit growth has funded the expansion of the credit book. The Bank is looking to grow its retail liabilities base, but for the moment deposits are mainly wholesale in nature. However, a noteworthy feature of the deposit base is that maturities are spread across a wide spectrum (unlike in the case of most peers) and asset/liability maturity mismatches in the very short term are consequently low. The Bank’s large capital base provides additional liquidity support and key loan-based liquidity ratios continue to be at acceptable levels. Given the strong customer deposit growth this year, CI expects the Bank’s liquidity ratios to be maintained at least at their current levels.

Al Masraf’s strong profitability, which is underpinned by good income generation, moderately low operating costs and low provisioning expenses, is a supporting factor for the ratings. Moreover, both operating profitability and the ROAA have been better than the peer group average for many years. The strong growth in credit volumes and a low funding cost (despite increases) have led to reasonably good income generation in recent periods. Al Masraf’s large demand balances and capital contribute to its better than peer group average funding cost. Although non-interest income declined in 2016 it remains moderately high. Operating costs are at acceptable levels and the net provisioning charges have been low in recent periods owing to high recoveries of NPLs written off in previous years. Over time CI expects recoveries to lessen and the Bank’s provisioning expenses to rise, but to acceptable levels.

Al Masraf ranks among the smaller commercial banks in the country. Its small balance sheet size (USD4.9 billion at end June 2017) and the continuing elevated risks in the credit environment in the country are constraining factors for the ratings. Over the last few years the Bank has strengthened its management team, technology base, and internal systems and controls. CI notes that significant improvements have been made to the Bank’s credit underwriting standards and risk procedures, which augur well for future asset quality. Al Masraf has undergone an organisational transformation in recent years. It is now a corporate bank providing all modern banking conveniences to mainly medium-sized UAE companies and high net worth individuals. While the Libyan and Algerian shareholders continue to channel business into the Bank (though Libyan business has reduced), the current expansion is led by its UAE-based initiatives.

Al Masraf was set up in 1976 as the Arab Bank for Investment and Foreign Trade. Its principal shareholders are the UAE government (42.28 per cent), the Libyan Arab Foreign Bank (42.28 per cent), and Banque Exterieure D'Algerie (15.44 per cent). In 2007 the Bank adopted Al Masraf as its brand name.

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