July 14, 2017 / 8:50 AM / 6 months ago

Fitch Rates Turkey's Odeabank A.S. 'BB-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, July 14 (Fitch) Fitch Ratings has assigned Turkey's Odeabank A.S. (Odea) Long-Term Issuer Default Ratings (IDRs) of 'BB-', Short-Term IDRs of 'B' and a National Long-term Rating of 'A+'. The Outlook on Odea's Long-Term ratings is Stable. A full list of ratings is available at the end of this rating action commentary. KEY RATING DRIVERS Odea's Long- and Short-Term IDRs and National Rating are driven by the bank's standalone creditworthiness, as reflected in the bank's Viability Rating (VR) of 'bb-'. The VR reflects Odea's limited franchise (ranked 11th by total assets among deposit-taking conventional banks) and heightened credit risk profile considering the bank's high share of foreign currency lending, some high-risk sectoral exposures and only moderate specific reserves coverage of non-performing loans. However, the VR also factors in Odea's generally improving financial metrics and reasonable funding profile in light of the predominance of customer deposits in the bank's funding base and limited wholesale funding reliance. Odea is rated three notches above its 74% owner, Bank Audi S.A.L. (Bank Audi, B-/Stable) whose own ratings are capped by the Lebanese sovereign rating (Bank Audi S.A.L. Group has 76.4% stake in Odea). No support is therefore factored into Odea's IDRs. At the same time, Fitch sees limited contagion risk for Odea from its parent based on i) Odea's low exposure to the Lebanese sovereign (equal to about 1% of total assets at end-1Q17) ii) limited group funding (end-1Q17: subordinated debt and interbank funding sourced from Bank Audi Group were equal to a combined total of around 3% of total funding) iii) Odea has not paid any dividends to date, while Bank Audi has contributed about USD1.2 billion in equity. Odea provides banking services to corporate, commercial, SME and retail customers in Turkey, with a majority of loans to the corporate and commercial segments. It accounted for a modest 1.5%, 1.6% and 2.1% of sector assets, loans and deposits, respectively at end-1Q17. Credit risk is heightened by above-sector-average foreign currency lending (equal to 53% of performing loans at end-1Q17 including foreign currency-indexed loans), high single-name borrower concentration and exposure to high-risk sectors such as project finance and construction. At the same time watch-list loans (end-1Q17: 7.4% of performing loans) have increased, as have watch-list restructured loans; at least some of which are likely to migrate to the non-performing loan (NPL) category as loans season in Fitch's view. However, Odea's headline NPL ratio (loans overdue 90 days) remains reasonable; it stood at 3% at end-1Q17 versus the sector average of 3.2%. Odea is endeavouring to reduce its level of foreign currency lending, which fell to 53% of gross loans at end-1Q17 from 56% at end-2016. However, it is likely to remain material considering the bank's high share of foreign currency deposits (65% of the deposit base at end-1Q17). Foreign currency lending is focused mainly on exporters, project finance and infrastructure lending. Energy sector project finance loans also relate mainly to renewable energy projects that benefit from a floor price, in US dollars, guaranteed by the government mitigating credit risk to some extent. Nevertheless, not all borrowers will be fully hedged in our view. Odea's level of specific reserves coverage of NPLs is also fairly weak and significantly below-sector-average (end-1Q17: 45% versus 78%) - albeit a moderate 71% after adjusting for available 'free provisions'. Management attributes the level of NPL reserves coverage to its lower retail loan exposure relative to the sector average and focus on collateralised commercial and corporate lending. Capitalisation is reasonable with a Fitch Core Captial (FCC) ratio of 12.6% at end-1Q17 and a total capital ratio (15.3%) comfortably above the recommended regulatory 12% threshold. Growth has been funded to date by capital injections and subordinated debt provided by shareholders following Odea's establishment in 2012. However, over the medium term the aim is to fund growth organically. It targets loan growth of a moderate 10% CAGR from 2017-2020 with return on equity (ROE) budgeted to rise to around 15% by 2020. Net NPLs relative to FCC remain manageable (13.2% at end-1Q17, or 7% adjusted for free provisions) while pre-impairment profit provides an additional buffer to absorb credit losses. Odea's performance has improved as it has scaled up its balance sheet and cost efficiency is strong. Its cost/assets ratio (end-1Q17: 1.9%) outperforms the sector average (2.1%) despite its small size, reflecting its focus on digital technology and small branch network. However, loan impairment charges remain fairly high (albeit lower relative to pre-impairment profit as the latter has increased) and funding costs are slightly above the sector average, reflecting Odea's strategy to fund loans primarily with customer deposits. Odea reported ROE of a modest 10.8% in 1Q17 (sector average: 18%), up from 7.8% in 2016. Customer deposits accounted for a high 85% of Odea's total funding at end-1Q17 and the bank's gross loans/customer deposits ratio (a low 92% end-1Q17) far outperforms the sector average (125%). Furthermore, wholesale funding (15% of total funding) relates largely to trade finance operations, accounting for much of the bank's short-term foreign currency liabilities maturing within one year. The remainder consists of long-term funding from international financial institutions. Consequently, and in light of the bank's adequate foreign currency liquidity, Fitch views refinancing risk as manageable. At end-1Q17 foreign currency liquid assets fully covered maturing liabilities due within one year. Nevertheless, foreign currency liquidity could come under pressure from a prolonged market closure. Odea's Support Rating of '5' and Support Rating Floor of 'No Floor' reflect Fitch's view that support from the Turkish state cannot be relied upon. This reflects the bank's lack of systemic importance in Turkey. Support from the bank's shareholder cannot be relied upon given the weak ability of Bank Audi to provide support based on its current rating (b-/Stable). RATING SENSITIVITIES The VR could be downgraded in case of significant deterioration in asset quality that put pressure on capital ratios and performance. A sharp tightening of liquidity could also result in pressure on the VR. Upside to the VR is limited in the near term, given the bank's rating limited record of operations, modest franchise and high credit risk profile in the challenging Turkish operating environment. In the medium term the VR could be upgraded as a result of the successful expansion of the bank's franchise without a corresponding increase in risk appetite or due to an improvement in the bank's credit risk profile resulting in better asset quality metrics. The rating actions are as follows: Odeabank A.S. Long-Term Foreign and Local Currency IDRs assigned at 'BB-'; Outlook Stable Short-Term Foreign and Local Currency IDRs assigned at 'B' Viability Rating assigned at 'bb-' Support Rating assigned at '5' Support Rating Floor assigned at 'No Floor' National Long-term Rating assigned at 'A+(tur)'; Outlook Stable Contact: Primary Analyst Ahmet Kilinc Associate Director +44 20 3530 1272 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Lindsey Liddell Director +44 20 3530 1008 Committee Chairperson Gordon Scott Managing Director +44 20 3530 1075 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. 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