Fitch Rates Mashreqbank's Subordinated Tier 2 Notes Final 'BBB+'

Fitch Ratings has assigned Mashreqbank PSC's (Mashreq; A/Stable/bb+) USD500 million 10.25-year subordinated Tier 2 notes a final 'BBB+' long-term rating.

The assignment of the final rating follows the receipt of documents conforming to information already received. The final rating is the same as the expected rating assigned to the issue on 14 November 2022 (see ' Fitch Rates Mashreqbank's Upcoming Subordinated Tier 2 Notes 'BBB+(EXP)' at www.fitchratings.com).

The notes constitute direct, unsecured, conditional and subordinated obligations of Mashreq. They rank pari passu among themselves, subordinate and junior to all senior obligations and in priority only to all junior obligations, subject to solvency conditions.

Key Rating Drivers

The Tier 2 notes' rating is notched off twice from Mashreq's 'A' Long-Term Foreign-Currency Issuer Default Rating (IDR; anchor rating), rather than the typical notching from the Viability Rating, as allowed in Fitch's bank rating criteria for issuers in highly supportive jurisdictions, such as the UAE.

The notching down from Mashreq's Long-Term IDR reflects Fitch's view that potential extraordinary sovereign support for the bank is likely to flow through to its subordinated notes' holders, if needed. Mashreq's Long-Term IDR is driven by an extremely high probability of support being provided by the UAE authorities as reflected in the bank's 'a' Government Support Rating (GSR).

The notching reflects the notes' higher loss severity relative to senior debt in light of their subordinated status and Fitch's view of a heightened likelihood of poor recoveries in the event of default rather than timely payments. Fitch is also not aware of any precedent of the UAE authorities' approach to resolution or restructuring mitigating losses for Tier 2 debt. As the notes do not have any going-concern loss absorption (e.g. interest deferral) features, no additional notches for incremental non-performance risk have been applied.

According to the transaction documents, noteholders' rights to payment of any amounts under or in respect of the subordinated notes may be cancelled or written-down (in whole or in part) upon the occurrence of a non-viability event. A non-viability event means that the regulator has notified the bank in writing that it has determined that it has, or will become, non-viable without a write-down or a public injection of capital or equivalent extraordinary support.

Rating Sensitivities

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

The Tier 2 notes' rating is sensitive to negative changes in Mashreq's Long-Term IDR. The Tier 2 notes' rating is also sensitive to an adverse change in notching should Fitch change its assessment of loss severity and/or relative non-performance risk.

Mashreq's IDRs and GSR are sensitive to an unfavourable change in Fitch's view of the creditworthiness of the UAE authorities and on their propensity to support the banking system or the bank. However, this is not currently anticipated given the Stable Outlook on the UAE sovereign rating.

A higher loss severity reflected in poorer recovery in the event of default and or higher non-performance risk would lead to a downgrade of the Tier 2 subordinated notes.

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

An upgrade of Mashreq's Long-Term IDR would result in an upgrade of its Tier 2 note's rating. An upgrade of Mashreq's Long-Term IDR could come from an upgrade of its GSR. However, the latter is unlikely in the near term given its already high level.

Above-average recovery mitigating loss severity could lead to an upgrade but this is unlikely in the near term without any precedent being set by the UAE authorities' through resolution or restructuring resulting in the mitigation of losses for Tier 2 debt.

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

Date of Relevant Committee

04 November 2022

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 and GSR reflect an extremely high probability of support from the UAE authorities if needed.

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