Mashreqbank PSC and The National Bank of Ras Al-Khaimah (PSC)'s paid-up capital levels fell below the new minimum requirement set by the central bank of the United Arab Emirates in the first quarter, according to S&P Global Market Intelligence data.

Of the nine largest banks in the UAE, they are the only two that presently fail to meet the capitalization benchmark of having fully paid-up capital of at least 2.00 billion dirhams as of the first quarter of 2021. Banks must maintain the minimum level of paid-up capital at all times, the regulator said when it published the rules in February. They will have three years to comply.

Mashreq and The National Bank of Ras Al-Khaimah, which trades as Rakbank, did not respond to requests to comment.

First Abu Dhabi Bank PJSC and Abu Dhabi Commercial Bank PJSC had the highest paid-up capital levels at 64.5 billion dirhams and 24.9 billion dirhams, respectively, the first-quarter data shows.

Rakbank had paid-up capital amounting to 1.7 billion dirhams, according to the data. Mashreq, the fifth-largest local lender in the UAE, had 1.8 billion dirhams in paid-up capital at the end of the quarter. The lender is largely privately held, unlike the other large banks in the UAE.

"This minimum level of capital set is carefully balanced, taking into account the objective to ensure banks operating within the sector are strong and resilient [and], at the same time, ensure new entrants can enter the market and enhance competition in the sector," the central bank told S&P Global Market Intelligence. "In developing this new regulation, we carried out a comprehensive regulatory impact assessment on the sector and the individual banks."

Two new digital banks, Al Maryah Community Bank and Zand, are set to enter the UAE market, having received licenses.

Mashreq asset quality under pressure

As of March-end, Mashreq's capital adequacy ratio stood at 14.4%, above the central bank's regulatory requirement of 13%. The bank's risk-adjusted capitalization ratio stood at 10.8% at end of 2020 and it expects it will remain at 10.5% to 11.0% over the next 12 to 24 months, according to S&P Global Ratings.

Mashreq was hard-hit by the economic impact of COVID-19 in 2020, reporting a net loss of 1.3 billion dirhams, compared with a profit of 2.1 billion dirhams in 2019. It booked credit impairment provisions of 3.4 billion dirhams in 2020 from 1.2 billion dirhams in 2019.

As of end-2020, the bank's nonperforming loans increased to 5.1% of gross loans from 3.6% in 2019. With "more than 50% of Mashreq's loan book exposed to Dubai's economy, which has been severely hit by the pandemic," the rating agency warned of "further asset-quality deterioration in 2021."

As of June 4, US$1 was equivalent to 3.67 United Arab Emirates dirhams.