Al Masraf – Ratings Affirmed with a Stable Outlook

(MENAFN- Capital Intelligence Ltd) 28 August 2026

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). The high ESL is firmly anchored in the 60% ownership by Emirates Investment Authority (EIA), the Sovereign Wealth Fund of the Federal Government of the UAE, which rose from 42.3% in December 2025, alongside the government’s strong track record of supporting the UAE 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 capital and leverage ratios, good operating profitability and net interest margin (NIM) with an improving, though still below sector average, ROAA, sound liquidity supported by substantial government deposits and liquid asset buffers, and an improving NPL coverage ratio. Q1 26 results reinforce the CFS rating drivers: capital ratios held steady at strong levels, asset quality improved further, and net profit nearly tripled y-o-y on materially lower impairment charges. The Bank’s EMTN debut in January 2026, listed on the Dubai Nasdaq and London, marks a significant step in funding diversification.

Credit challenges include a still elevated, though declining, level of NPLs (6.4% of gross loans in Q1 26) and Stage 2 loans (10.3%) and sizeable customer concentration in loans and deposits, as well as sector concentration in real estate, in common with peer banks. The principal challenge facing the Bank remains the volatile geopolitical situation in the Gulf region, including the closure of the Strait of Hormuz, which has clouded the outlook and elevated credit risk. However, given the strong performance of the UAE’s non-oil sector prior to the conflict and the government’s readiness to provide liquidity support, the banking sector and economy are seen as resilient. Additionally, the central bank announced a series of measures in mid-March 2026 aimed at strengthening liquidity and encouraging banks to support customers wherever necessary.

The OPERA for the UAE indicates modest risk and reflects the relative dependence of the economy on hydrocarbons, moderate institutional strength and limited monetary policy flexibility, since the AED is pegged to the USD. We note that the economic risk is partially mitigated by the support of the wealthy emirate of Abu Dhabi to the federation, and the availability of a very large buffer of external assets under the management of sovereign wealth funds in the country. The UAE banking sector remained resilient in 2025, with good financial fundamentals, driven by a strong macroeconomic environment. The OPERA also considers the negative effects of significant regional geopolitical uncertainties on the Emirati economy and the banking sector.

The Bank’s new business model emphasises large-scale wholesale banking, the diversification of funding through capital markets activities, and the strengthening of trade corridors between the UAE and North Africa. Given the strong support from its majority shareholder, this recent pivot augurs well for Al Masraf’s future profitability and growth. However, growth projections are being tempered following the onset of the regional conflict, which has introduced significant headwinds to the operating environment.

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. The substantial increase in lending in 2025 was driven by exposures to banks, government and public sector entities. This has contributed to the growth in related party exposures over the past two years. Given the good quality of the new book, the rapid growth in risk assets is not a concern. Q1 26 lending activity was more measured, with only modest growth in gross loans, and credit growth in 2026 is likely to be slower than in 2025. Real estate concentration stood at 17% of gross loans in 2025, and is in line with the sector. Borrower concentration level is high, but many of the names on the list are government-related entities (GREs). We expect concentration metrics to moderate gradually as the diversification strategy plays through over 2026 and 2027, although the pace will depend on the macro situation.

The reduction in NPLs (to 6.4% of gross loans in Q1 26) and improved coverage (118%) demonstrate a positive trend in asset quality, however, a moderately high level of Stage 2 loans (10.3% of gross loans) suggests persistent underlying stress. Sizeable write-offs in 2025 and Q1 26 reflect ongoing balance sheet clean-up of legacy exposures. The build-up of NPLs dates back to the Covid era, when the Bank was under different management.

The Bank’s credit loss absorption capacity is adequate for standard provisioning, however, it remains vulnerable to severe external shocks. Although economic volatility stemming from the regional conflict may hinder loan growth and recovery efforts this year, internal stress tests indicate that the impact on capital and asset quality should remain within manageable limits, assuming economic growth resumes by year-end. The Bank recalibrated its ECL in Q1 26 by applying more conservative weighting together with a judgmental overlay, which was comfortably absorbed during the quarter.

Despite a decline in operating income in 2025 and Q1 26, the Bank’s overall income-generating ability remains robust. The fall in operating income was mainly due to a significant reduction in the NIM, which is linked to lower benchmark interest rates, and the fact that top-line growth was primarily driven by increased lending to top-tier companies, banks, and governments, which offer low yields. However, the focus on high-quality lending is expected to lead to lower risk charges in the future. The Bank’s NIM also benefits from its low funding cost ratio and high capital base. Income growth this year is likely to slow, given the economic turmoil in the region caused by the regional conflict, and much will depend on how long these issues persist and when normalcy returns. The Bank maintains a reasonably strong non-interest income base, supported by healthy levels of fees and commissions. Its operating profitability ratio remains moderately good, despite a decline last year and in Q1 26, caused by reduced income and increased operating costs, the latter due to ongoing investments in staff, new products, channels, and technology. A lower net risk charge contributed to a significant rise in net profit and ROAA in both 2025 and Q1 26.

NIM may decline further unless interest rates remain stable throughout this year. The benefit from a higher CASA ratio (39% in Q1 26 vs. 32% in 2025) is partially offset by higher interest expenses arising from the USD500mn EMTN issued in January 26. ROAA remains below the median for CI-rated banks in the UAE, and with provisioning costs likely to stay high (Stage 3 specific provision cover was 60% in Q1 26), reaching the peer-group average could take several years.

The UAE central bank’s early implementation of the financial resilience package, which includes backstop facilities for banks in both AED and USD and the ability to borrow against cash reserves, has ensured that banking sector liquidity remained relatively unaffected by the regional conflict. The government and GREs remain major funding sources for the Bank, and although the funds can vary y-o-y, a high core amount is considered stable. Deposit sourcing strategies are evolving, with a focus on building relationships with corporate customers and using digital platforms to attract retail funds. This is expected to diversify the deposit base and lower the high levels of customer concentration. The modest growth in customer deposits last year was due to management’s decision to reduce high-cost term deposits. Although liquidity parameters tightened as a result, they still remain satisfactory. The Bank’s five-year note under its EMTN programme was very well received in January this year, replacing short-term interbank liabilities, which declined, strengthening the net loans to stable funds ratio in Q1 26.

The Bank’s capital adequacy ratios are currently sufficient to cushion any short-term credit losses resulting from a macroeconomic downturn caused by the regional conflict. The UAE central bank has increased the available buffers above the regulatory thresholds by reducing both the capital conservation buffer and the countercyclical buffer until end-June 26. Q1 26 ratios were flat with CET 1 at a good 18.8%. Capital ratios could come under some pressure in 2026 if a prolonged macroeconomic downturn leads to significant deterioration in asset quality and negative FVOCI movements, potentially affecting Tier 1 capital. Despite these challenges, the Bank’s credit profile remains supported by a strong likelihood of shareholder intervention if necessary.

Rating Outlook

The Stable Outlook reflects our expectation that the ratings are unlikely to change in the next 12 months. Q1 2026 results with stable capital, improving asset quality, and a successful capital markets debut validate this stance. EIA’s majority stake and the strengthening operating model are expected to offset the economic pressures associated with the regional conflict through 2026 and into 2027.

Rating Dynamics: Upside Scenario

An upgrade in the LT FCR and BSR or a positive change in outlook over the next 12 months appears unlikely at this stage. Current improvements in asset quality and earnings are largely consistent with the trajectory needed to align the Bank’s fundamentals with its pre-2020 financial profile. An upgrade would require ROAA at, or above, the CI-rated UAE peer median, a marked reduction in single-name concentration, and clear evidence that the new business model is delivering earnings resilience that can withstand economic life cycles.

Rating Dynamics: Downside Scenario

A one-notch downgrade of the LT FCR and BSR, or a revision of the Outlook to Negative within the next 12 months, would require a deterioration in the Bank’s credit profile, which could come from a prolonged closure of the Strait of Hormuz that materially impairs asset quality and weakens earnings into 2027, a reversal in the recent Stage 3 improvement trend, sharp erosion of capital buffers or any indication of weakening shareholder support, which we see as a remote risk.

Contact

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

About the Ratings

The credit ratings have been issued by Capital Intelligence Ratings Ltd, P.O. Box 53585, Limassol 3303, Cyprus.

The following information sources were used to prepare the credit ratings: public information and information provided by the rated entity. Financial data and metrics have been derived by CI from the rated entity’s audited financial statements for FY 2022-25 and unaudited Q1 26 results. CI may also have relied upon non-public financial information provided by the rated entity and may also have used financial information from credible, independent third-party data providers. CI considers the quality of information available on the rated entity to be satisfactory for the purposes of assigning and maintaining credit ratings. CI does not audit or independently verify information received during the rating process.

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