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Fitch Affirms 4 Large Privately-Owned Turkish Banks
June 8, 2017 / 4:40 PM / 6 months ago

Fitch Affirms 4 Large Privately-Owned Turkish Banks

(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Large Privately Owned Turkish Banks - Rating Action Report here LONDON, June 08 (Fitch) Fitch Ratings has affirmed the ratings of Akbank T.A.S. (Akbank), Turkiye Is Bankasi (Isbank), Turkiye Garanti Bankasi (Garanti) and Yapi ve Kredi Bankasi (YKB). The Outlooks on all four banks are Stable. Isbank's and Akbank's 'BB+' Long-Term Issuer Default Ratings (IDRs) are driven by the respective banks' standalone creditworthiness, as captured by their respective 'bb+' Viability Ratings. Garanti's and YKB's 'BBB-' Long-Term IDRs are driven by potential support from the banks' controlling shareholders, Banco Bilbao Vizcaya Argentaria (A-/Stable) and Unicredit (BBB/Stable), respectively. The ratings of all four banks' domestic subsidiaries and of Akbank A.G. are equalised with those of their parent institutions and have been affirmed with Stable Outlooks. A full list of rating actions is at the end of this rating action commentary. KEY RATING DRIVERS VRS OF ALL FOUR BANKS; IDRS, NATIONAL RATINGS AND SENIOR DEBT RATINGS OF AKBANK AND ISBANK The four banks' 'bb+' VRs ' - in line with the sovereign Long-Term Foreign Currency IDR - reflect their solid franchises (the banks had market shares of between around 9% and 12% of sector assets at end-Q117) and generally reasonable financial metrics in terms of performance and capitalisation, notwithstanding a challenging operating environment. However, the banks' credit profiles are under moderate pressure from the weaker growth outlook in Turkey and the potential impact of this on their asset quality, performance and sufficiency of capital and liquidity buffers. The four banks reported reasonable headline asset quality ratios with non-performing loan (NPL) ratios (defined as loans overdue by 90 days/gross loans) ranging from a low 2.2% (Isbank) to a moderate 4.3% (YKB) of gross loans at end-1Q17 (sector average: 3.2%). This ratio does not take into account significant regulatory group 2 "watch-list" loans, however, which ranged from 2.6% (Akbank) to 4.8% (Garanti) of gross loans at end-1Q17 and could result in NPL growth as loans season, in Fitch's view. A significant portion of "watch-list" loans - the most high-risk part of banks' performing loans - had also been restructured. In addition, headline NPL ratios do not reflect annual NPL sales, without which NPL ratios would have been moderately higher. Specific reserves coverage of NPLs was reasonable at end-1Q17, ranging from 76%-78% at Isbank, Garanti and YKB, broadly in line with the sector average of 78%, to a solid 97% in the case of Akbank. This resulted in generally low net NPLs-to-equity in all four banks. However, reserves coverage is weaker after adjusting for watch-list loans. At end-1Q17, including both specific and general reserves (held on the liabilities side of the balance sheet in accordance with local accounting standards) total reserve coverage of NPLs and group 2 watch list loans across the banks ranged from a fairly low 48% (Garanti) to a reasonable 76% (Akbank). Furthermore, the banks' asset quality ratios are likely to remain under pressure, as for the sector, given the weaker growth outlook and the banks' exposure, to varying degrees, to SMEs (which have proven among the most sensitive to a weakening operating environment). High foreign currency (FC) lending also increases credit risk given the recent rapid depreciation of the Turkish lira; FC lending ranged from 38% to 43% of the banks' gross loans at end-1Q17 and reflected exposure to some high-risk sectors such as energy-related project finance and construction/real estate lending. In addition, single-name concentration risk could bring volatility to the banks' asset quality ratios in the event that large exposures become non-performing. Nevertheless, the banks saw a decline in their NPL origination rates (defined as new NPLs-to- average performing loans) in 1Q17 (annualised basis) versus 2016 to between 0.9% (Akbank) and 1.7% (YKB). Net of loan recoveries, NPL generation rates were lower, at between 0.5% and 0.9% of average performing loans in 1Q17, reflecting increased collections and loan recovery efforts. The banks' performance has held up to date, despite the challenging operating environment, underpinned by solid franchises, economies of scale, a focus on cost control and generally above-sector-average margins. Reported returns on equity (ROEs) ranged from 15.1% (YKB) to 17.2% (Akbank, Garanti) in 1Q17 (sector average: 18.3%), supported by margin expansion, generally improving cost efficiency ratios and loan growth. Lending picked up in 1Q17 (nominal growth ranged from 4% to 8% at the four banks), primarily reflecting SME loans disbursed under the Credit Guarantee Fund, but to a lower extent at YKB. As a result of the latter, the banks could exceed their 2017 loan growth targets of 10%-13%. Nevertheless, performance ratios could weaken due to the weaker growth outlook and ongoing asset-quality weakness, which could drive up loan impairments as loans season. Reported ROEs should also be considered in light of the inflationary environment in Turkey. The banks' margins are tighter after adjusting for costs related to FC swaps; banks make opportunistic use of these according to need and pricing, and they can be significant at times. Fitch views the banks' capitalisation generally as sufficient to absorb moderate shocks to performance and asset quality and potential further local currency depreciation. However, the quality of the banks' capital is sound (primarily Tier 1); Fitch Core Capital (FCC) ratios stood at a reasonable 11.8% (Isbank), 12.9% (Garanti) and 13.4% (Akbank) at end-Q117, but an only adequate 10.3% at YKB. Capitalisation is supported by reasonable internal capital generation - which improved in 2016 at all four banks - and generally low net NPLs-to-FCC. Pre-impairment profit provides a significant buffer to absorb losses, ranging from 24% to 29% of the banks' average equity in 2016. The banks have broad deposit franchises, which accounted on average for 66% of non-equity funding (excluding derivatives) at end-1Q17. However, the banks report generally high loans/deposits ratios as a result of significant FC wholesale funding attracted mainly on international markets. These stood at 115% (Akbank), 125% (Garanti), 130% (YKB) and 139% (Isbank) at end-1Q17 versus the sector average of 125%. However, the four banks' loans/deposits ratios were below sector average on an unconsolidated basis. FC wholesale funding comprised between around 21% and 27% of the banks' non-equity funding at end-1Q17. This has risen significantly since 2011 and a sizable component is short term, heightening refinancing risks. However, in general the banks are endeavouring to extend the tenor of FC wholesale funding and fund loan growth with customer deposits. Their long-term local currency funding is limited, as it is for the sector. Fitch regards the FC liquidity positions of the four banks as adequate. Available FC liquidity - consisting primarily of placements with the Turkish Central Bank under the reserve option mechanism and maturing FC swaps - were broadly sufficient to cover short-term maturing liabilities at all four banks at end-2016. Nevertheless, liquidity profiles could come under pressure from a prolonged market stress. The presence of foreign shareholders provides additional comfort in this respect in the case of YKB and Garanti. KEY RATING DRIVERS: YKB's AND GARANTI's IDRS, NATIONAL RATINGS, SUPPORT RATINGS AND SENIOR DEBT RATINGS YKB's and Garanti's IDRs and senior debt ratings are driven by potential support from Unicredit, (BBB/Stable), and BBVA (A-/Stable), respectively. Unicredit owns a 50% stake in YKB's holding company (which in turn holds an 82% stake in YKB). BBVA holds a 49.85% stake in Garanti but has full management control, a majority of seats on the board of directors and Garanti is fully consolidated into its financial statements. Fitch views Garanti and YKB as strategically important subsidiaries for their parent banks, as reflected in their '2' Support Ratings. Garanti's Long-Term FC IDR is constrained by Turkey's 'BBB-' Country Ceiling. SUPPORT RATINGS AND SUPPORT RATING FLOORS OF AKBANK AND ISBANK The 'B+' SRFs of Akbank and Isbank reflect the sovereign's modest ability to provide support in FC, considering the sovereign's moderate level of FC reserves. The banks' '4' SRs take into account their systemic importance and solid market shares, which stood at 9% (Akbank) and 12% of sector assets (Isbank), respectively, at end-1Q17. SUBORDINATED DEBT The 'BB+' subordinated notes ratings of YKB and Garanti are notched down once from their support-driven IDRs, while the 'BB' subordinated notes ratings of Isbank and Akbank are notched down once from their VRs. The notching includes one notch for loss severity and zero notches for non-performance risk in the case of all four banks. SUBSIDIARIES The ratings of Akbank AG, Ak Finansal Kiralama A.S., Ak Yatirim Menkul Degerler A.S., Is Finansal Kiralama A.S., Is Faktoring A.S., Is Yatirim Menkul Degerler A.S., Garanti Faktoring A.S., Garanti Finansal Kiralama A.S., Yapi Kredi Finansal Kiralama A.O., Yapi Kredi Yatirim Menkul Degerler A.S. and Yapi Kredi Faktoring A.S. are equalised with those of their respective parents, on the basis of support. Fitch believes all these entities are core, highly integrated subsidiaries and that support from parent banks should be forthcoming in times of need. Akbank AG's Deposit Ratings are aligned with the bank's IDR. In Fitch's opinion, debt buffers do not afford any obvious incremental probability of default benefit over and above the support benefit factored into the bank's IDR. Given the limited standalone profiles of all subsidiaries, Fitch has not assigned them any VRs. In all cases, the subsidiaries are majority-owned (above 75% stakes in most cases) by their respective parents, or group companies. The subsidiaries offer core products and services (including leasing, factoring and investment banking/brokerage) in core markets (all in Turkey, with the exception of Akbank AG, which is domiciled in Germany) reflecting their key roles in the groups. Akbank AG has strong synergies with its parent and serves a primarily Turkish customer base. All subsidiaries share the same branding as their parents, are highly integrated into their banking groups in terms of risk and IT systems, and their senior management and underwriting practices are mostly drawn from parent banks. The subsidiaries are typically small relative to their parents, meaning any required support should be immaterial to the ability of the parent to provide it. The only entity to exceed 5% of its group's total assets at end-2016 was Akbank AG (7%). RATING SENSITIVITIES IDRS, NATIONAL RATINGS, SUPPORT RATINGS AND SENIOR DEBT RATINGS OF YKB AND GARANTI Garanti's and YKB's IDRs are sensitive to a downgrade of Turkey's 'BBB-' Country Ceiling. A downgrade of Unicredit would also likely result in a downgrade of YKB. Garanti's ratings would also likely be downgraded if there is a more than two-notch downgrade of BBVA. A sharp reduction in either of the parent banks' propensity to support their subsidiaries (not Fitch's base case) would also result in a downgrade of the subsidiary banks. Garanti's ratings could be upgraded in case of an upgrade of Turkey's Country Ceiling. VRS OF ALL FOUR BANKS; IDRS, NATIONAL RATINGS AND SENIOR DEBT RATINGS OF ISBANK AND AKBANK The VRs of all four banks remain sensitive to a further weakening of the operating environment and the potential negative impact of this on their asset quality and performance and the sufficiency of their capital and liquidity positions. Likewise, if Turkish banks' access to wholesale funding markets becomes significantly restricted for a prolonged period, resulting in a deterioration of the four banks' FX liquidity positions, this could also result in VR downgrades. Upside for the banks' VRs is limited in the near term, given the challenging operating environment and that VRs are already at the level of the sovereign FC rating. Isbank's and Akbank's IDRs, National ratings and debt ratings are primarily sensitive to a change in their VRs. SUPPORT RATINGS AND SUPPORT RATING FLOORS OF ISBANK AND AKBANK The SRFs of Isbank and Akbank could be revised down if either (i) the Turkish sovereign is downgraded; (ii) the FC positions of the banks, or more generally Turkey's external finances, deteriorate considerably, or (iii) Fitch believes the sovereign's propensity to support the banks has reduced. The introduction of bank resolution legislation in Turkey aimed at limiting sovereign support for failed banks could also negatively impact Fitch's view of support propensity, and hence the banks' SRs and SRFs, but Fitch does not expect this in the short term. Upward revisions of the banks' SRFs are unlikely unless there is a marked strengthening of the sovereign's ability to support the banks in FC. SUBORDINATED DEBT RATINGS The notes' ratings are primarily sensitive to changes in their anchor ratings, namely the VRs of Isbank and Akbank and the IDRs of YKB and Garanti. The ratings are also sensitive to a change in respective notching due to a revision in Fitch's assessment of the probability of the notes' non-performance risk or in its assessment of loss severity in case of non-performance. SUBSIDIARY AND AFFILIATED COMPANIES The subsidiaries' ratings are sensitive to changes in (i) the parents' IDRs and National Ratings; and (ii) Fitch's view of the ability and propensity of the parents to provide support in case of need. The ratings could be notched from their respective parents' if i) the subsidiaries become materially larger relative to the respective parents' ability to provide support or ii) the subsidiaries' strategic importance is materially reduced through, for example, a substantial reduction in business referrals or integration. However, these considerations do not form part of Fitch's base case given the subsidiaries' small sizes relative to their parents and key roles within their respective groups. A full list of rating actions is available on or by clicking the link above. Contact: Primary Analysts Lindsey Liddell (Garanti, Akbank, Akbank AG) Director +44 20 3530 1008 Fitch Ratings Limited 30 North Colonnade London E14 5GN Aslan Tavitov (YKB, Isbank, Ak Finansal, Ak Yatirim), Director +44 20 3530 1788 Fitch Ratings Limited 30 North Colonnade London E14 5GN Ahmet Kilinc (Is Finansal, YK Finansal, YK Faktoring, YK Yatirim), Associate Director +44 20 3530 1272 Fitch Ratings Limited 30 North Colonnade London E14 5GN Huseyin Sevinc (Is Faktoring, Is Yatirim, Garanti Faktoring, Garanti Leasing) Associate Director +44 20 3530 1027 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analysts Lindsey Liddell (YKB, Isbank) Director +44 20 3530 1008 Ahmet Kilinc (Akbank, Akbank AG, Ak Finansal, AK Yatirim) Associate Director +44 20 3530 1272 Aslan Tavitov (Garanti) Director +44 20 3530 1788 Aurelien Mourgues (Yapi Faktoring, Yapi Yatirim, Yapi Leasing, Is Leasing, Is Faktoring, Is Yatirim. Garanti Faktoring, Garanti Leasing) Analyst +44 20 3530 1855 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Global Non-Bank Financial Institutions Rating Criteria (pub. 10 Mar 2017) here National Scale Ratings Criteria (pub. 07 Mar 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. 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Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. 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