December 2, 2016 / 2:37 PM / 8 months ago

Fitch Affirms Arap Turk at 'BB-'; Outlook Stable

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(The following statement was released by the rating agency) LONDON, December 02 (Fitch) Fitch Ratings has affirmed Arap Turk Bankasi A.S.'s (ATB) Long-Term Local and Foreign Currency Issuer Default Ratings (IDRs) at 'BB-' with a Stable Outlook. A full list of rating actions is available at the end of this rating action commentary. KEY RATING DRIVERS IDRS, VR AND NATIONAL RATING The IDRs and National Rating are driven by ATB's standalone strength, as measured by the 'bb-' Viability Rating (VR). The VR reflects ATB's reliance on substantial deposit funding from majority shareholder, Libyan Foreign Bank (LFB), and on trade flows between Libya and Turkey. The ratings also reflect ATB's limited franchise within the Turkish banking sector, the bank's specialist focus on the higher-risk Middle East and North Africa (MENA) region and high credit concentrations on- and off-balance sheet. The VR benefits from ATB's track record of consistently healthy financial performance. ATB has developed significant expertise in trade financing between Turkey and MENA countries, in particular Libya. Other activities include correspondent banking with regional counterparties including Libyan banks, as well as cash loans to major Turkish corporates. Transactions with Libya, while higher-risk, have performed well over time. Consequently, ATB's asset quality metrics compare well with Turkish commercial banks and trade finance bank peers as impaired exposures represented a low 0.2% of total business volume (taking total assets and total off-balance sheet activities) at end-3Q16. The main risk to asset quality is from high borrower and geographic concentrations given the bank's small size, customer base and focus. Deposits from LFB represented 53% of ATB's non-equity funding at end-3Q16, presenting significant funding concentration. However, this has been fairly stable over the years and has supported ATB's operations within the region. Other sources of funding consist of bank borrowings (31%), of which a high proportion is from related LFB affiliates, and customer deposits (13%). Management intends to diversify sources of funding to reduce concentrations. ATB's capital adequacy ratios are adequate (Fitch Core Capital/risk-weighted assets of 18.3% at end-9M16), but capital is small in absolute size, especially given ATB's high credit concentrations. Capitalisation is supported by reasonable internal capital generation. However, capital adequacy ratios are vulnerable to an increase in risk-weighted assets from lira depreciation, given ATB's large proportion of foreign currency (FC) assets and, more significantly, a Turkey sovereign downgrade. Performance ratios are satisfactory, despite tough operating conditions. Margins are healthy (net interest margin: 5.1% in 9M16), but are expected to come under pressure as funding costs increase due to the focus on diversification. Integration with LFB group banks and a small branch network of seven help keep cost efficiency stable (cost/income: 39% in 9M16). KEY RATING DRIVERS SUPPORT RATING AND SUPPORT RATING FLOOR The bank's '5' Support Rating and 'No Floor' Support Rating Floor reflect Fitch's view that support cannot be relied upon either from the Turkish authorities or from the shareholders. Fitch believes that support cannot be relied upon from the Turkish authorities, given ATB's limited systemic importance. Given the uncertain economic and political environment in Libya, LFB's ability to provide support cannot be relied upon despite a track record of past support for the Turkish bank's operations. LFB has over time shown a high propensity to support ATB, underlining the importance of the bank to the former's international strategy. As well as providing low-cost funding, LFB appoints key senior management (including the General Manager) and plays a vital role in introducing business to its Turkish subsidiary. RATING SENSITIVITIES IDRS, VR AND NATIONAL RATING The bank's IDRs and National Rating are sensitive to a change in the VR. The bank's VR could be downgraded if ATB's strategic importance to LFB is reduced, through a substantial loss or withdrawal of funding or business, which could happen, for example, as a result of a change in the regime in Libya. An increase in funding or lending concentrations could also result in a downgrade of ratings. However, these scenarios do not represent Fitch's base case. Upside for the ratings is limited given the bank's niche franchise, high reliance on parent funding and exposure to the Libyan market. However, diversification of ATB's funding profile and business model or significant improvements in Libya's operating environment could bring upside. SUPPORT RATING The Support Rating could be upgraded if Fitch considers LFB is able to provide extraordinary support to ATB in case of need. This would be contingent on a more stable regime in Libya while maintaining the importance of ATB to LFB. The rating actions are as follows: Long-Term Foreign and Local Currency IDRs affirmed at 'BB-'; Stable Outlook Short-Term Foreign and Local Currency IDRs affirmed at 'B' Viability Rating affirmed at 'bb-' Support Rating affirmed at '5' Support Rating Floor affirmed at 'No Floor' National Long-Term Rating affirmed at 'A+(tur)'; Stable Outlook Contact: Primary Analyst Mahin Dissanayake Director +44 203 530 1618 Fitch Ratings Limited 30 North Colonnade London, E14 5GN Secondary Analyst Huseyin Sevinc Analyst +44 203 530 1027 Committee Chairperson Bridget Gandy Managing Director +44 20 3530 1095 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@fitchratings.com. 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