Fitch Affirms Turkey's Leading Private Sector Banks and Subsidiaries; Upgrades TSKB

Garanti Faktoring

31/10/2013 16:45

(The following statement was released by the rating agency)

LONDON, October 31 (Fitch) Fitch Ratings has affirmed Turkey's leading private 
sector banks, namely Turkiye Is Bankasi A.S. (Isbank), Turkiye Garanti Bankasi 
A.S. (Garanti), Akbank T.A.S. (Akbank) and Yapi ve Kredi Bankasi A.S. (YKB), 
Long-term Issuer Default Ratings (IDRs) at 'BBB' with Stable Outlooks. The 
banks' factoring, leasing and securities subsidiaries' ratings have also been 
affirmed.  

A change of rating rationale for Turkiye Sinai Kalkinma Bankasi A.S. (TSKB), 
50.1% owned by Isbank, resulted in an upgrade of the bank's Long-term local 
currency (LC) IDR to 'BBB' from 'BBB-'.  

A full list of rating actions is at the end of this rating action commentary.

 

KEY RATING DRIVERS - ISBANK, GARANTI, AKBANK AND YKB's IDRS, VRS, NATIONAL 
RATINGS, SENIOR AND SUBORDINATED DEBT RATINGS 

The affirmation of the four banks' ratings with Stable Outlooks reflects their 
still sound financial metrics, and Fitch's base case expectation that they will 
suffer only moderate asset quality deterioration as loan books season following 
recent rapid credit growth.

The banks' VRs and Long-term IDRs remain one notch higher than Turkey's 
Long-term foreign currency IDR of 'BBB-'. This reflects their strong all-round 
credit profiles, and in particular the depth and stability of their deposit 
franchises. In light of these strengths, Fitch believes the banks would likely 
retain the capacity to service their obligations even during a period of 
considerable macroeconomic stress, including a potential sovereign default. At 
the same time, the gradual increase in the banks' risk weighted assets during 
recent years while the sovereign's own balance sheet has strengthened, combined 
with risks resulting from the banks' rapid growth, mean that tolerance for 
rating the banks above the sovereign has reduced. Further sustained strong loan 
growth and continued moderation of capital and funding ratios could therefore 
result in the banks being downgraded by one notch to the level of the Turkish 
sovereign.

Loan growth at Akbank, Garanti and Isbank remained rapid in H113 and was broadly 
in line with the sector average of 16%, while YKB grew by a more moderate 8%. 
This followed several years of strong growth which has resulted in the four 
banks' loan books increasing several times.

In Fitch's view, the four banks are likely to suffer only moderate asset quality 
deterioration as loan books season due to (i) still positive GDP growth (Fitch 
forecasts 3.7% in 2013 and 3.2% in 2014), notwithstanding a marked slowdown in 
2012 (2.2%) after 2011; (ii) the relatively broad-based nature of the economy 
and the banks' lending, with real estate and construction exposures not 
comprising an excessive proportion of portfolios; (iii) still moderate corporate 
and household leverage; and (iv) the absence of foreign currency retail lending.

At the same time, as in any banking system which has experienced rapid loan 
growth for a sustained period, the risks of a more marked deterioration in asset 
quality are significant. Fitch views risks as being greatest in (i) small 
business lending and unsecured consumer finance, including credit card lending, 
each of which has grown particularly rapidly in recent years, and combined 
represented an average of 40% of the portfolios of the four banks at end-H113; 
and (ii) foreign currency largely corporate lending, which comprised one-third 
of the banks' total books, and to a significant degree represents exposures to 
unhedged companies. A further weakening of the Turkish lira, higher interest 
rates and/or weaker economic growth could put greater pressure on asset quality 
and would be negative for the banks' credit profiles.

Reported loan arrears have so far remained moderate with Akbank and Isbank's 
impaired ratios in the 1% range at end-H113, Garanti's higher at 2.3% and YKB's 
at 3.4%, reflecting its greater focus on credit card lending and recent rapid 
SME loan growth. Reported restructured and watch loans are also limited at the 
four banks, and impairment charges have so far been manageable, representing 
around 18%-25% of pre-impairment operating profit in H113. However, in Fitch's 
view these ratios are not necessarily indicative of underlying asset quality, 
given that portfolios are yet to season.

Capital and funding ratios have gradually weakened from previously strong 
levels, but still remain sound, in Fitch's view. The Fitch Core Capital/weighted 
risks ratios range from a comfortable 14.5% at Akbank and 14% at Garanti to 
12.3% at Isbank and a lower, but still adequate, 11% at YKB. Capitalisation is 
supported by generally strong reserve coverage of impaired loans and solid 
internal capital generation. 

Funding structures are reasonably balanced, in Fitch's view, with around 60% of 
non-equity liabilities represented by stable deposits, and wholesale funding 
being quite diversified by sources and tenors. Loans/deposits ratios have 
increased significantly in recent years and ranged from 126% at Akbank to 113% 
at Garanti at end-H113. In Fitch's view, these levels are still reasonable, in 
particular given the banks' large equity bases, while liquidity is comfortable 
and refinancing risk low. However, any further marked increase in dependence on 
foreign wholesale funding could be negative for the banks' credit profiles.

Reported profitability has remained high, with operating ROAA and ROAE in H113 
averaging 2.7% and 22%, respectively, at the four banks. However, revaluations 
of government debt portfolios result in considerably greater volatility in 
banks' comprehensive income, with large negative revaluations booked in Q213. 
Net interest margins at the four banks remained wide in H113, ranging from 4.9% 
(Garanti) to 4.3% (Akbank), but will tighten significantly in H213 and into 2014 
as deposits reprice quicker than loans in a rising interest rate environment.

RATING SENSITIVITIES - ISBANK, GARANTI, AKBANK AND YKB's IDRS, VRS, NATIONAL 
RATINGS, SENIOR AND SUBORDINATED DEBT RATINGS

The banks could be downgraded by one notch, to the level of the Turkish 
sovereign, if they continue to report rapid loan growth, and capital and funding 
ratios continue to moderate. Greater than expected asset quality deterioration 
as loan books season could also result in downgrades. The banks' ratings would 
also likely be lowered in case of a downgrade of the Turkish sovereign.

YKB's ratings may be at somewhat greater risk than peers of a downgrade to the 
sovereign level due to somewhat higher impaired loans (which are no longer 
offset by above-peer margins) and slightly narrower franchise. Capital ratios 
have traditionally been below peers' but the disposal of the insurance business 
in Q313 is expected to boost these. 

Upside potential for the banks' ratings is currently  limited, given that they 
are already rated above the sovereign. However, a moderation of growth rates, 
preservation of sound financial metrics and limited deterioration of asset 
quality would support the ratings being maintained at their current levels.  

KEY RATING DRIVERS AND RATING SENSITIVITIES - YKB, AKBANK, GARANTI AND ISBANK's 
SUPPORT RATINGS AND SUPPORT RATING FLOORS 

YKB's '2' Support Rating is driven by potential support from UniCredit S.p.A. 
(UC; 'BBB+'/Negative), one of its two strategic shareholders, and underpins 
YKB's Long-term IDRs at the 'BBB-' level. The Central and Eastern European 
region, which includes Turkey, remains strategically important for UC and Fitch 
believes that it would provide support to YKB, if required. The Support Rating 
could be downgraded in case of a downgrade of UC.

Akbank, Garanti and Isbank's '3' Support Ratings and 'BB+' Support Rating Floors 
are based on potential support from the Turkish sovereign, given the banks' 
systemic importance. These ratings are sensitive to a change in the sovereign 
ratings, or to the development of a bank resolution framework in Turkey that 
would reduce the likelihood of sovereign support for failed institutions.

KEY RATING DRIVERS AND SENSITIVITIES: TSKB

Fitch has altered the rating rationale applied to TSKB. TSKB, majority owned by 
Isbank, performs a public mission role as a development and investment bank. As 
such, a VR has not been assigned to the bank. Although privately owned, a high 
proportion of its funding, obtained from supranationals, has been guaranteed by 
the Turkish Treasury. Considering this, and its role, Fitch believes the Turkish 
state would have a high incentive to support TSKB, should this be required. 
TSKB's IDRs h