Al Masraf – Ratings Affirmed with a Stable Outlook

(MENAFN- Capital Intelligence Ltd) Capital Intelligence Ratings (CI Ratings or CI) today announced that it has affirmed the Long-Term Foreign Currency Rating (LT FCR) and Short-Term Foreign Currency Rating (ST FCR) of Al Masraf (or the Bank) at ‘A’ and ‘A1’, respectively. At the same time, CI Ratings has affirmed Al Masraf’s Bank Standalone Rating (BSR) of ‘bbb’, Core Financial Strength (CFS) rating of ‘bbb-’ and Extraordinary Support Level (ESL) of High. The Outlook for the LT FCR and BSR is Stable.

The LT FCR is set three notches above the BSR to reflect our assessment of the high extraordinary support available to the Bank from the UAE government (sovereign ratings: ‘AA ’/‘A1+’/Stable), a major shareholder. The government also has a strong track record of supporting the banking system.

The Bank’s BSR is derived from a CFS rating of ‘bbb-’ and an Operating Environment Risk Anchor (OPERA) of ‘bbb’. The CFS reflects the Bank’s solid operating profitability, strong liquidity supported by substantial government deposits, and sound CAR and leverage. Key challenges include high NPLs, along with sizeable customer concentration in loans and deposits, as well as sector concentration in real estate, in common with peer institutions.

The OPERA for the UAE indicates modest risk and reflects the economy’s reliance on hydrocarbons, moderate institutional strength, and limited monetary policy flexibility. Additionally, economic risk is partly offset by the support from the wealthy emirate of Abu Dhabi to the federation, and the presence of a substantial buffer of external assets managed by sovereign wealth funds in the country. The UAE banking sector stayed resilient in 2024 and the first quarter of 2025, maintaining high capital levels and relatively low NPLs. A global slowdown caused by US tariffs poses a risk to international trade, while ongoing regional conflicts could affect the UAE’s appeal as an investment destination. Despite heightened regional geopolitical risks, the UAE economy, especially its non-oil sectors, continues to demonstrate resilience.

Al Masraf primarily functions as a corporate banking institution, with a relatively small and less diversified customer base compared to larger banks in the country. In recent years, the Bank has bolstered its core operations, expanded its product offerings, enhanced credit risk management standards, and made significant investments in digitalisation and technological upgrades. Remedial activities remain a focus, and credit growth has been subdued over the past four years due to management’s conservative risk appetite. Similar to peers, the Bank has customer concentrations in loans and deposits, partly due to its relatively small customer base and the UAE’s limited economic diversification. While these concentration levels may reduce as the business grows in the medium term, they are expected to remain elevated. There is also some sector concentration in real estate, which is declining y-o-y and remains within regulatory and internal caps. The sector is currently performing well, and presents a lower risk than in the past.

NPLs declined by nearly a third in 2024 due to enhanced focus on recoveries, proactive restructuring and write-offs; however, the NPL ratio remains high and well above the sector median ratio. The Bank also has a high Stage 2 loans to gross loans ratio (12% in 2024); however, nearly two-thirds of Stage 2 loans have been restructured and are expected to be upgraded in the next 12 months. That said, we note that there was an AED1bn transfer to Stage 2 from Stage 1 in 2024, and more than a quarter of the loan portfolio is in Stages 2 and 3, an indication of ongoing stress in the credit book. Nevertheless, over the intermediate term, with the implementation of growth-oriented strategies and the expansion of the customer base, we expect the NPL ratio to decline steadily. The improving real estate market could help in the enforcement of collateral and speed up NPL recovery.

We observe that the loan-loss reserve coverage ratio has improved over the past four years and is currently at a reasonably good level. A further increase in coverage is likely due to the new central bank risk management standard, which requires collateral against NPLs to be discounted over five years. Risk charges have been high over the last five years, and although good operating profits have absorbed these, it has resulted in low net earnings, especially in comparison with peers. Capital, however, provides only a limited buffer.

The Bank’s income remains solid due to a good net interest margin (NIM) and a moderate non-interest income (non-II) base, along with a relatively high level of fee and commission income supported by a well-managed cost structure. The operating profitability ratio dipped last year after increasing steadily over the previous three years. This was partly because of a narrower NIM, which was an industry-wide trend caused by falling benchmark interest rates. Additionally, credit growth at Al Masraf was slow last year, reflecting management’s cautious approach and its focus on building HQLAs. Despite this, the operating profitability ratio was similar to the average for small- and medium-sized CI-rated banks in the country. An advantage for the Bank is its low cost of funds due to a high CASA ratio and strong capital base.

ROAA has improved over the past four years but remains below the sector median ratio. This is mainly due to ongoing high provisions, which have to be deducted from operating profits each year. We expect operating income to increase this year on the back of higher business volumes and non-II. However, NIM could decrease further if interest rates fall and the Bank continues to expand liquid assets rather than extend more credit. The provision charge is likely to remain high, partly due to the central bank’s new risk standard, and it could take several years for ROAA to reach a peer group average level.

Loan-based liquidity ratios continued to improve in 2024, supported by the significant growth in customer deposits, with key parameters aligning with the sector average. Customer deposits increased sharply last year, mainly due to placements by government and public sector entities; however, corporate and individual deposits also rose. The government of Abu Dhabi, public sector companies, and related parties remain major funding sources for the Bank, and although the funds can vary y-o-y, a core amount is considered stable. The growth in deposits last year was primarily led by time deposits, while the CASA ratio declined, but was still slightly above the average ratio for small and medium-sized banks rated by CI. The Bank has also accumulated a strong stock of liquid assets, and both the liquid asset and net broad liquid asset ratios are satisfactory.

Capital ratios are better than the sector median and well above the regulatory minima. CET1 capital accounts for the bulk of regulatory capital, and the Bank’s balance sheet leverage ratio is also high. Key ratios are well above the regulatory minima and above the sector median ratios for 2024. No dividends have been paid for 2024 and 2023, underscoring the board’s conservative stance. Although the internal capital generation rate improved last year, reflecting better earnings, it remains moderately low. The Bank is adequately capitalised for future growth in risk assets, and it can supplement its equity base via Tier 1 and Tier 2 capital bonds.

Rating Outlook

The Stable Outlook indicates that we do not expect the ratings to change in the next 12 months. This expectation is primarily supported by the UAE government’s shareholding in the Bank, positive management changes, and improved risk management practices. Additionally, the strengthening of the local economy is seen as a positive development.

Rating Dynamics: Upside Scenario

An upgrade in the LT FCR and BSR or a favourable change in the outlook over the next 12 months appears remote at this stage. Any improvements that arise over the coming year in asset quality and profitability would essentially bring the Bank’s key financial fundamentals in line with its pre-Covid-19 pandemic position. A significant improvement beyond this seems unlikely at this stage.

Rating Dynamics: Downside Scenario

A lowering of the LT FCR and BSR by one notch or a revision of the Outlook to Negative over the next 12 months would be possible should the Bank’s credit profile deteriorate, capital buffers fall or income generation capabilities decline.

Contact

Primary Analyst: Karti Inamdar, Senior Credit Analyst; E-mail: ...
Secondary Analyst: Darren Stubing, Senior Credit Analyst
Committee Chairperson: Morris Helal, Senior Credit Analyst

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