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COMMENTS

EMEA Financial Institutions Monitor 4Q2020: Banks Prepare As Winter Is Coming

COMMENTS

Despite Declining Loss Provisions, U.S. Banks Still Face Asset Quality Risks And Low Interest Rates

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EMEA Financial Institutions Monitor 4Q2020: Banks Prepare As Winter Is Coming

S&P Global Ratings considers that weaker asset quality and revenue pressure associated with the COVID-19 pandemic will continue to weigh on the profitability of many financial institutions operating in Europe, the Middle East, and Africa (EMEA).

Supported by various stimulus measures, EMEA economies that have reopened after the lockdown related to the first wave of the pandemic now face a new challenge. As authorities apply the health lessons learned over the past six months--such as track and trace, limiting nonessential social interactions, and shielding the vulnerable--they are also trying to avoid national lockdowns that triggered the economic meltdowns in the second quarter.

Key risks for EMEA economies persist, namely:

  • A resurgence in the virus as winter approaches without a vaccine;
  • The ongoing threat to solvency for companies with weak credit fundamentals;
  • Increasing global trade tensions;
  • Extended uncertainty inhibiting consumer demand; and
  • Increasing doubts about whether a U.K.-EU trade deal can be concluded before year-end.

Against this backdrop, the authorities have been extending various support programs to protect employment and businesses, particularly targeting the hardest-hit hospitality, arts, leisure, and travel sectors. The concern is that many businesses in these sectors may no longer be commercially viable in a post-pandemic world where gradual structural changes in consumer behavior and business models have been accelerated by the disruption the pandemic has caused. What's more, although robust policy responses have averted a liquidity crisis, this comes at a cost to credit quality for the companies that take on additional debt amid weak and highly uncertain business prospects. This increases risk to the banking sector's asset quality.

While loan loss provisioning has substantially increased for banks in EMEA in 2020, we don't see liquidity and funding as a key risk for the sector given the ample injection of funds through open market operations. Indeed, there are signs that excess liquidity is creating other pockets of risk in primary bond markets pricing through fair value. In addition, European banks increased their exposure to European sovereign debt by a significant 15%, or €210 billion, between February and end-June 2020.

We consider the following the top risks for the EMEA banking sectors:

  • A harsher macroeconomic environment leading to a slower, longer recovery, and/or limited effectiveness of governments' and banks' measures in containing the stress on companies and households, ultimately resulting in larger asset quality problems.
  • Banks' lack of decisive responses to their profitability challenge, reinforcing low profitability as a structural, long-term problem that will weaken their ability to generate capital internally and externally, and ultimately to act as an effective intermediator of savings and credit in the economy.
  • A lack of agreement between the U.K. and the EU on their future trade relationship. This could further weaken the growth outlook for the U.K. and, to a lesser extent, other open European economies, such as Ireland, The Netherlands, Belgium, or Norway, impinging further on banks' asset quality. However, we do not envisage major near-term disruption for the financial market infrastructure sector, as the desire to preserve financial stability in the U.K. and the EU will likely prevail.

S&P Global Ratings acknowledges a high degree of uncertainty about the evolution of the coronavirus pandemic. The current consensus among health experts is that COVID-19 will remain a threat until a vaccine or effective treatment becomes widely available, which could be around mid-2021. We are using this assumption in assessing the economic and credit implications associated with the pandemic (see our research here: www.spglobal.com/ratings). As the situation evolves, we will update our assumptions and estimates accordingly.

We continue to expect that bank downgrades resulting from the COVID-19 pandemic will be limited this year, although the rating outlook bias has turned markedly negative.  The net rating bias for financial institutions in EMEA has been markedly negative since April this year. This mainly reflects the downward revision of our central economic forecasts since the beginning of the year due to the effects of the pandemic and low oil prices, and the potential longer-term impact on banks' profitability. Nevertheless, we continue to anticipate that bank ratings will be largely resilient in the near term, due to governments' significant direct support to the corporate and household sectors and extraordinary support measures and flexibility from governments and regulators to ensure that banks continue lending. This also reflects our expectation of a 6.1% rebound in eurozone GDP in 2021, after a contraction by 7.4% this year.

Despite substantial provisions already created by EMEA banks in 2020, we expect further material provisioning in 2021.   Despite increases in provisioning, EMEA banks' half-year results have not revealed many new insights into asset quality, in part due to the cushioning effect of ongoing fiscal support to economies and banks' forbearance measures. As these factors wind down, underlying loan quality and the adequacy of banks' provisioning strategies will become clearer, likely once banks publish full-year 2020 results early next year. At the same time, banks' discretion in estimating expected credit losses under IFRS 9, the lack of comparable bank disclosures, and the variation in support measures and their efficiency largely explains the wide disparity in provisioning levels reported.

European banks are better equipped to fight this economic shock than that in 2008, thanks to 10 years of accumulated capital buffers.  As the data on the top 50 European Banks illustrate, risk-adjusted capital (RAC) ratios continued to increase in 2019 to 10.4% on average, up 50 basis points (bps), broadly in line with the trends observed over the past decade. However, we think that years of capital increases are likely to cease in 2020, reflecting likely asset quality and revenue deterioration associated with the COVID-19 pandemic along with the prolonged low-for-longer interest rate environment. We now expect our RAC ratio, on average, to decrease in the next two years by about 30 bps cumulatively--a moderate amount that largely doesn't affect our view of European banks' capital strength. At the same time, risks to our projections persist.

Historical virtues do not shield European cooperative banking groups from disruption.  We consider that European cooperatives tend to share one goal: prioritizing long-term stability over short-term returns, often resulting in strong capitalization. However, failures at many cooperative institutions in 2008-2011 demonstrated that they are not immune to the industry's irrational exuberance, associated profitability pressure, and excessive risk taking. At the same time, groups with weak or narrow franchises may not be able to withstand tighter competition, even if they have the capacity and mindset to invest in digital transformation. In addition, groups with high decentralization or very low profitability may be exposed to franchise erosion due to their lack of agility or capacity to invest. The proximity of many cooperative groups to their clients and their focus on social aspects remain assets in the digital age, providing many with a competitive edge amid high product commoditization. We expect most cooperative groups to sustain their competitive position, as long as they continue to evolve and their core customers remain sufficiently committed to them.

Russian banks' asset quality is likely to deteriorate in 2020-2021, but recovery might be faster than in previous crises.  We expect credit losses in Russia to increase to around 300 bps in 2020, gradually declining toward normalized losses of around 150 bps beyond 2022. These projections assume that Russia's real GDP will return to 2019 levels by early 2022. We consider that banks face the current stress in better shape than the previous crises over the past 11 years and will therefore likely show greater resilience and faster recovery, provided economic growth prospects are supportive overall, as we assume in our base-case scenario. The funding base of the Russian banking sector has proved to be stable overall, supported by a predominant reliance on domestic deposits, the availability of liquidity support from the central bank, and limited exposure to external funding.

We think that the COVID-19 pandemic--and the associated containment measures--will give the banking sector an additional push to increase customers' adoption of innovative financial technologies, thereby accelerating its digital transformation.

GCC banks' profitability will likely continue to fall over the next two years.  A protracted economic recovery in the Gulf Cooperation Council (GCC) countries means that lending growth will remain muted for the next 12-24 months at least, with the exception of Saudi Arabia, where mortgages have been expanding rapidly on the back of a government support initiative to increase home ownership in the country. The cost of risk will continue to increase, as problematic asset recognition is accelerating in the absence of additional support measures. Therefore, GCC banks' profitability will continue to fall, with a few reporting losses because of their exposure to high-risk asset classes or under-provisioning. This will push banks' management teams to look more carefully at costs, try to leverage opportunities related to fintech, and reduce the number of physical branches.

On the positive side, most GCC banks have good funding profiles and strong capitalization that should support their creditworthiness in 2020-2021. Funding remains dominated by core and stable deposits, with a limited contribution from external funding. Qatar is the exception to this, but the Qatari government's strong willingness and capacity to inject foreign-currency liquidity when necessary largely mitigate the risks. Capital is strong, both quantitatively and qualitatively, and protects the banks from stronger-than-expected shocks.

Risks include a lower oil price than we expect, an escalation of geopolitical risks, and lack of control over the pandemic. If such risks materialize, the impact on GCC banks could be much greater than we currently forecast.

Key Banking Sector Risks In EMEA

The table below presents S&P Global Ratings' views about the key risks and risk trends for banking sectors in EMEA where we rate banks. For more detailed information, please refer to the latest Banking Industry Country Risk Assessment (BICRA) on a given country. According to our methodology, BICRAs fall into groups from '1' to '10', ranging from what we view as the lowest-risk banking systems (group '1') to the highest-risk (group '10').

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Selected Research

We have recently published a number of articles highlighting our views on EMEA banking sectors:

The Future Of Banking

Technological disruption leads to new customer expectations and new forms of competition, but also offers new opportunities for banks. All these trends may ultimately influence the credit profiles of banking industries across the globe. We have published a number of articles highlighting our views on the readiness of various banking sectors to face the challenges and opportunities arising from the development of financial technology and digital transformation:

Economic, Sovereign, And Other Research

Rating Methodology News Research

BICRA Changes

Since we last published this report on July 24, 2020, we have not revised our Banking Industry Country Risk Assessments (BICRAs), economic risk score, economic risk trend, industry risk score, industry risk trend, or government support assessment for any of the banking systems in EMEA.

Chart 1

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About 55% of all outlooks on bank ratings in EMEA are stable, only 3% are positive, and 41% are now negative. In Western Europe, almost 47% of ratings have stable outlooks, with negative outlooks accounting for almost 49% of ratings, and positive outlooks accounting for nearly 4% of all ratings. For emerging market banks in EMEA, about 71% of ratings have stable outlooks, with negative outlooks accounting for nearly 25% of ratings, and positive outlooks accounting for nearly 3% of all ratings.

Chart 2

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Table 2

Ratings Component Scores: Top 50 European Banks
Institution Operating company long-term ICR/outlook Anchor Business position Capital and earnings Risk position Funding and liquidity SACP/ GCP Type of support Number of notches support Additional factor adjustment
Austria
Erste Group Bank AG A/Stable bbb+ Strong Adequate Adequate Above Avg/Strong a None 0 0
Raiffeisen Bank International AG A-/Negative bbb+ Adequate Adequate Adequate Above Avg/Strong a- None 0 0
Belgium
Belfius Bank SA/NV A-/Stable a- Adequate Strong Moderate Avg/Adequate a- None 0 0
KBC Bank N.V. A+/Stable bbb+ Strong Strong Adequate Avg/Adequate a ALAC 1 0
Denmark
Danske Bank A/S A/Stable bbb+ Strong Strong Moderate Avg/Adequate a- ALAC 2 -1
Nykredit Realkredit A/S A+/Stable bbb+ Adequate Strong Adequate Avg/Adequate a- ALAC 2 0
Finland
Nordea Bank Abp AA-/Negative a- Strong Strong Adequate Avg/Adequate a+ ALAC 1 0
OP Corporate Bank PLC AA-/Negative a- Strong Very strong Moderate Avg/Adequate a+ ALAC 1 0
France
BNP Paribas S.A. A+/Negative bbb+ Very Strong Adequate Adequate Avg/Adequate a ALAC 1 0
BPCE S.A. A+/Negative bbb+ Strong Strong Adequate Avg/Adequate a ALAC 1 0
Credit Mutuel Group A/Negative bbb+ Strong Strong Adequate Avg/Adequate a None 0 0
Credit Agricole S.A. A+/Negative bbb+ Strong Adequate Strong Avg/Adequate a ALAC 1 0
La Banque Postale A/Stable bbb+ Adequate Adequate Moderate Above Avg/Strong bbb+ Group 2 0
Societe Generale A/Negative bbb+ Adequate Adequate Adequate Avg/Adequate bbb+ ALAC 2 0
Germany
Commerzbank AG BBB+/Negative a- Moderate Adequate Moderate Avg/Adequate bbb ALAC 1 0
Cooperative Banking Sector Germany AA-/Negative a- Strong Strong Adequate Above Avg/Strong aa- None 0 0
Deutsche Bank AG BBB+/Negative bbb+ Adequate Adequate Moderate Avg/Adequate bbb ALAC 2 -1
Hamburg Commercial Bank AG BBB/Watch Neg a- Weak Strong Moderate Below Avg/Adequate bbb- ALAC 2 -1
Sparkassen-Finanzgruppe Hessen-Thueringen A/Negative a- Adequate Strong Adequate Avg/Adequate a None 0 0
Volkswagen Bank GmbH A-/Negative a- Weak Very strong Adequate Avg/Adequate a- None 0 0
Greece
Alpha Bank A.E. B/Stable b+ Adequate Moderate Adequate Avg/Moderate b None 0 0
National Bank of Greece S.A. B/Stable b+ Adequate Weak Adequate Avg/Moderate b None 0 0
Piraeus Bank S.A. B-/Stable b+ Adequate Weak Moderate Avg/Moderate b- None 0 0
Ireland
AIB Group§ BBB+/Negative bbb Adequate Strong Moderate Avg/Adequate bbb ALAC 1 0
Bank of Ireland Group PLC§ A-/Negative bbb Adequate Strong Moderate Avg/Adequate bbb ALAC 2 0
Italy
Intesa Sanpaolo SpA BBB/Negative bbb- Strong Moderate Strong Avg/Adequate bbb None 0 0
Mediobanca SpA BBB/Negative bbb- Adequate Adequate Strong Avg/Adequate bbb None 0 0
UBI Banca SpA BBB/Negative bbb- Strong Moderate Adequate Avg/Adequate bbb- Group 1 0
UniCredit SpA BBB/Negative bbb Strong Adequate Moderate Avg/Adequate bbb None 0 0
Netherlands
ABN AMRO Bank N.V. A/Negative bbb+ Adequate Strong Adequate Avg/Adequate a- ALAC 1 0
Cooperatieve Rabobank U.A. A+/Negative bbb+ Strong Strong Adequate Avg/Adequate a ALAC 1 0
ING Bank N.V. A+/Stable bbb+ Strong Strong Adequate Avg/Adequate a ALAC 1 0
Norway
DNB Bank ASA AA-/Stable a- Strong Strong Adequate Avg/Adequate a+ ALAC 1 0
Spain
Banco Bilbao Vizcaya Argentaria S.A. A-/Negative bbb Strong Adequate Strong Avg/Adequate a- None 0 0
Banco de Sabadell S.A. BBB/Negative bbb Adequate Adequate Adequate Avg/Adequate bbb None 0 0
Banco Santander S.A. A/Negative bbb Very Strong Adequate Strong Avg/Adequate a None 0 0
Bankia S.A. BBB/Watch Positive bbb Adequate Adequate Adequate Avg/Adequate bbb None 0 0
CaixaBank S.A. BBB+/Stable bbb Strong Adequate Adequate Avg/Adequate bbb+ None 0 0
Sweden
Skandinaviska Enskilda Banken AB A+/Stable a- Adequate Strong Adequate Avg/Adequate a ALAC 1 0
Svenska Handelsbanken AB AA-/Stable a- Strong Strong Adequate Avg/Adequate a+ ALAC 1 0
Swedbank AB A+/Stable a- Strong Strong Moderate Avg/Adequate a ALAC 1 0
Switzerland
Credit Suisse Group AG§ A+/Stable a- Adequate Strong Moderate Avg/Adequate a- ALAC 2 0
UBS Group AG§ A+/Stable a- Strong Strong Moderate Avg/Adequate a ALAC 1 0
Zuercher Kantonalbank AAA/Stable a- Strong Very Strong Adequate Avg/Strong aa- GRE 3 0
U.K.
Barclays PLC§ A/Negative bbb+ Adequate Strong Moderate Avg/Adequate bbb+ ALAC 2 0
HSBC Holdings PLC§ A+/Stable bbb+ Strong Adequate Strong Above Avg/Adequate a ALAC 1 0
Lloyds Banking Group PLC§ A+/Negative bbb+ Strong Adequate Adequate Avg/Adequate a- ALAC 2 0
Nationwide Building Society A/Stable bbb+ Adequate Strong Adequate Avg/Adequate a- ALAC 2 -1
The Royal Bank of Scotland Group PLC§ A/Negative bbb+ Adequate Adequate Adequate Avg/Adequate bbb+ ALAC 2 0
Standard Chartered PLC§ A/Stable bbb+ Adequate Strong Moderate Above Avg/Strong a- ALAC 1 0
Source: S&P Global Ratings; data as of Oct. 20, 2020. In the "Type of Support" column, "None" includes some banks where ratings uplift because of support factors may be possible but none is currently included. For example, this column includes some systemically important banks where systemic importance results in no rating uplift. §Holding company; the rating reflects that on the main operating company. ICR--Issuer credit rating. GRE--Government-related entity. SACP--Stand-alone credit profile. Sys. Imp.--Systemically important. ALAC--Additional loss-absorbing capacity. GCP--Group credit profile. N/A--Not applicable. Sov—government support.

Table 3

Ratings Component Scores: Top 25 CEEMEA Banks
Institution Operating company long-term ICR/outlook Anchor Business position Capital and earnings Risk position Funding and liquidity SACP/ GCP Type of support Number of notches support Additional factor adjustment
Bahrain

Ahli United Bank B.S.C.

BBB/Positive bb+ Strong Adequate Adequate Above Avg/Strong bbb None 0 0

Arab Banking Corp. B.S.C.

BBB-/Stable bbb- Adequate Strong Adequate Below Avg/Adequate bbb- None 0 0
Israel

Bank Hapoalim B.M.

A/Stable bbb+ Strong Strong Moderate Avg/Adequate a- Sov 1 0

Bank Leumi le-Israel B.M.

A/Stable bbb+ Strong Strong Moderate Avg/Adequate a- Sov 1 0

Israel Discount Bank Ltd.

BBB+/Stable bbb+ Adequate Adequate Moderate Avg/Adequate bbb Sov 1 0
Jordan

Arab Bank PLC

B+/Stable bb Strong Adequate Moderate Above Avg/Strong bb+ None 0 -3
Kuwait

National Bank of Kuwait S.A.K.

A/Stable bbb Strong Strong Adequate Avg/Adequate a- Sov 1 0
Qatar

Qatar National Bank (Q.P.S.C.)

A/Stable bbb- Strong Adequate Adequate Avg/Adequate bbb GRE 3 0

Qatar Islamic Bank (Q.P.S.C.)

A-/Stable bbb- Adequate Strong Moderate Avg/Adequate bbb- Sov 3 0

The Commercial Bank (P.S.Q.C.)

BBB+/Stable bbb- Adequate Strong Weak Avg/Adequate bb+ Sov 3 0
Russia

VTB Bank JSC

BBB-/Stable bb- Strong Weak Adequate Avg/Adequate bb- GRE 3 0

Gazprombank JSC

BB+/Stable bb- Strong Weak Adequate Avg/Adequate bb- GRE 2 0

Alfa-Bank JSC

BB+/Stable bb- Strong Adequate Strong Avg/Adequate bb+ None 0 0
Oman

BankMuscat S.A.O.G.

B+/Stable bb Strong Adequate Moderate Avg/Adequate bb None 0 -2
Saudi Arabia

The National Commercial Bank

BBB+/Positive bbb Strong Strong Moderate Avg/Adequate bbb+ None 0 0

Al Rajhi Bank

BBB+/Stable bbb Adequate Strong Adequate Avg/Adequate bbb+ None 0 0

Samba Financial Group

BBB+/Positive bbb Adequate Strong Adequate Avg/Adequate bbb+ None 0 0

Riyad Bank

BBB+/Stable bbb Adequate Strong Adequate Avg/Adequate bbb+ None 0 0

Banque Saudi Fransi

BBB+/Stable bbb Adequate Strong Moderate Avg/Adequate bbb Sov 1 0

Arab National Bank

BBB+/Stable bbb Adequate Strong Moderate Avg/Adequate bbb Sov 1 0

The Saudi Investment Bank

BBB/Stable bbb Moderate Strong Moderate Avg/Adequate bbb- Sov 1 0
Turkey

Turkiye Is Bankasi AS

B+/Negative b+ Adequate Weak Adequate Avg/Adequate b+ None 0 0
United Arab Emirates

Mashreqbank

A-/Negative bbb- Adequate Strong Adequate Avg/Adequate bbb Sov 2 0

First Abu Dhabi Bank P.J.S.C.

AA-/Negative bbb- Strong Strong Strong Avg/Strong a- GRE 2 1

Abu Dhabi Commercial Bank PJSC

A/Negative bbb- Strong Strong Adequate Avg/Adequate bbb+ GRE 2 0
Source: S&P Global Ratings; data as of Oct. 20, 2020. In the "Type of Support" column, "None" includes some banks where ratings uplift because of support factors may be possible but none is currently included. For example, this column includes some systemically important banks where systemic importance results in no rating uplift. ICR--Issuer credit rating. GRE--Government-related entity. SACP--Stand-alone credit profile. Sys. Imp.--Systemically important. ALAC--Additional loss-absorbing capacity. GCP--Group credit profile. N/A--Not applicable. Sov— government support.

Recent Rating Actions: EMEA Banks

Table 4

Recent Rating Actions: EMEA Banks
Date of action Bank Country To From
19/10/2020

Bank Cler AG

Switzerland A-/Stable/--
19/10/2020 BankMuscat S.A.O.G Oman B+/Stable/B BB-/Negative/B
16/10/2020

The National Commercial Bank

Saudi Arabia BBB+/Positive/A-2 BBB+/Stable/A-2
16/10/2020

Samba Financial Group

Saudi Arabia BBB+/Positive/A-2 BBB+/Stable/A-2
09/10/2020

Opel Bank S.A. Niederlassung Deutschland

Germany BBB+/Negative/A-2
24/09/2020 Promsvyazbank Public Joint-Stock Company Russia BB/Stable/B BB-/Positive/B
23/09/2020

Bankia S.A.

Spain BBB/Watch Pos/A-2 BBB/Stable/A-2
23/09/2020

BFA Tenedora de Acciones, S.A.U.

Spain BBB-/Watch Pos/A-3 BBB-/Stable/A-3
21/09/2020 Raiffeisen Schweiz Genossenschaft (RCH) Switzerland A+/Stable/A-1
17/09/2020

Grenke AG

Germany BBB+/Watch Neg/A-2 BBB+/Negative/A-2
15/09/2020 Pfandbriefbank AG Germany A-/Watch Neg/A-2 A-/Negative/A-2
11/09/2020

Belarusbank

Belarus B/Watch Neg/B B/Stable/B
11/09/2020

Belagroprombank JSC

Belarus B/Watch Neg/B B/Stable/B
11/09/2020

Bank BelVEB OJSC

Belarus B/Watch Neg/B B/Stable/B
07/09/2020 AO Raiffeisenbank Russia BBB-/Stable/A-3
31/08/2020 Banque J. Safra Sarasin (Luxembourg) SA. Luxembourg NR A/Stable/A-1
27/08/2020 Hamburg Commercial Bank Germany BBB/Watch Neg/A-2 BBB/Negative/A-2
17/08/2020

Landeskreditbank Baden-Wuerttemberg - Foerderbank - (L-Bank)

Germany AA+/Stable/A-1+ AAA/Stable/A-1+
11/08/2020

FCE Bank PLC

United Kingdom BBB-/Negative/-- BBB-/Watch Negative/--
03/08/2020

UBI Banca SpA

Italy BBB/Negative/A-2 BBB-/Watch Pos/A-3
31/07/2020 S-Bank Ltd Finland BBB/Negative/A-2
28/07/2020

Migros Bank

Switzerland A-/Stable/A-2 A/Stable/A-1
27/07/2020

DEPFA Bank PLC

Ireland BBB+/Negative/A-2 A-/Negative/A-2
27/07/2020 Banca IMI SpA. Italy NR BBB/Negative/A-2
24/07/2020 DVB Bank Germany BBB/Positive/A-2 BBB/Negative/A-2
22/07/2020 KCB Bank Kenya Ltd. Kenya NR B+/Negative/B
22/07/2020 KCB Bank Kenya Ltd. Kenya B+/Negative/B B+/Stable/B
17/07/2020

Gulf Bank

Kuwait A-/Negative/A-2 A-/Stable/A-2
17/07/2020

VP Bank AG

Liechtenstein A/Negative/A-1 A/Stable/A-1
16/07/2020

Ahli United Bank B.S.C.

Bahrain BBB/Positive/A-2 BBB/Watch Pos/A-2
02/07/2020 Bank RBK JSC Kazakhstan NR B-/Stable/B

This report does not constitute a rating action.

Primary Credit Analyst:Natalia Yalovskaya, London (44) 20-7176-3407;
natalia.yalovskaya@spglobal.com
Secondary Contacts:Elena Iparraguirre, Madrid (34) 91-389-6963;
elena.iparraguirre@spglobal.com
Mohamed Damak, Dubai (971) 4-372-7153;
mohamed.damak@spglobal.com

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