Fitch Ratings has downgraded UAE-based Mashreqbank PSC's (Mashreq) Viability Rating (VR) to 'bb+' from 'bbb-' and removed it from Rating Watch Negative (RWN).

Fitch placed Mashreq's VR on RWN in August 2021 following a sharp and sudden drop in its common equity Tier 1 (CET1) regulatory capital ratio, Fitch's core metric in the assessment of banks' capitalisation. The downgrade reflects our view that the bank's CET1 capital ratio, is unlikely to be restored to levels that are close to its historical averages of around 14%-15%, within the rating horizon. This view is underpinned by Mashreq's high current and expected lending growth (1Q22: 5%, non-annualised; 2021:14%). At end-1Q22, the bank's CET1 capital ratio was 12.9%, down from 13.4% at end-2021, and we expect it to remain around that level over the next two years.

Key Rating Drivers

Mashreq's IDRs (A/F1) and GSR (a) reflect an extremely high probability of support available to the bank from the UAE authorities (AA-/Stable), if needed. The bank's IDRs and GSR are not affected by this rating action.

Unless noted below, the key rating drivers for Mashreq are those outlined in our Rating Action Commentary published on 17 November 2021 ('Fitch Affirms Mashreqbank at 'A'; Outlook Stable; Maintains VR on Rating Watch Negative'). All else being equal, we expect Mashreq's CET1 capital ratio to be maintained at around 12.5%-13.0% over the medium term, which balances high expected growth with strong internal capital generation. Mashreq's total capital adequacy ratio was 14% at end-1Q22 and we expect it to increase slightly by end-2022 with a potential issuance of Tier 1 capital.

Rating Sensitivities

Factors that could, individually or collectively, lead to negative rating action/downgrade:

A sharp deterioration in asset quality impacting profitability and capital could trigger a downgrade of the VR. Evidence of an increased risk profile, including continued high lending growth that is consistently above the market, or recurrent mark-to market losses would also pressure the VR.

Factors that could, individually or collectively, lead to positive rating action/upgrade:

An upgrade of the VR would require a sustained improvement in the bank's capitalisation with the CET1 capital ratio returning to around 14%-15%, and without material deterioration in the bank's risk profile, asset quality and profitability.

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 are linked to the UAE sovereign's

ESG Considerations

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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