ֳ

Rating Action Commentary

ֳ Affirms 3 Small Turkish Banks

Wed 31 Jan, 2018 - 11:53 AM ET

ֳ-London/Moscow-31 January 2018: ֳ has affirmed the Long-Term Issuer Default Ratings (IDRs) of Anadolubank A.S. and Fibabanka A.S. (Fiba) at 'BB-' and Sekerbank T.A.S. (Seker) at 'B+'. The Outlooks are Stable.

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

KEY RATING DRIVERS
IDRS, VRs, NATIONAL RATINGS, SENIOR DEBT
The IDRs and National Ratings of Anadolubank, Fiba and Seker, and the senior debt rating of Fiba, are driven by the banks' standalone creditworthiness, as reflected in their respective Viability Ratings (VR).

The VRs reflect the small absolute size of the three banks (combined assets amounted to about 2% of sector assets at end-3Q17) and their ensuing limited franchises and lack of competitive advantages. The banks provide a mix of services to corporate and commercial customers, and small and medium-sized companies (SMEs, which are most sensitive to swings in the economy). They generally have limited retail loan books. Seker has an established niche as a regional bank providing services to agro customers, including in the micro segment.

Loan growth at Anadolubank (21% in 9M17) and Fiba (25%) has been fairly rapid, exceeding the sector average of 15% in 9M17. Seker's loan growth (11%) has been more moderate as the bank has been focusing on the clean-up of its loan book and due to asset quality and capital pressures.

All three banks made use of the Credit Guarantee Fund (CGF) stimulus in 9M17, which accounted for a significant share of their overall loan growth; this facility primarily consists of short-term working capital loans to SME customers.

The banks have typically reported below-sector-average performance metrics, reflecting a lack of economies of scale, limited pricing power, high funding costs and, with the exception of Anadolubank, fairly high loan impairment charges relative to pre-impairment operating profit.

In addition, margins have come under pressure from rising funding costs, due to tighter sector lira liquidity in 9M17. Further increases could weigh on earnings and constrain the banks' growth. To some extent, the banks are working to offset margin pressure through the disbursement of floating-rate loans and funding diversification.

The asset quality metrics of all three banks remained under pressure in 2017, reflecting a challenging operating environment and loan seasoning. Non-performing loan (NPL) ratios increased to 3.1% at Anadolubank at end-3Q17 (end-2016: 2.8%) and 2.6% at Fiba (2016: 1.8%) but fell at Seker albeit to a still high 5.3% (end-2016: 5.7%). Watchlist loans, a high proportion of which are restructured, were a fairly high 5.6% at Anadolubank, 7% at Fiba and 10.8% at Seker, and could result in new NPL growth. The banks have also grown rapidly in recent years, and have exposure, to varying degrees, to some high-risk sectors including agro, construction, tourism and energy.

Immediate risks to asset quality metrics have moderated, in ֳ's view, given a supportive economic backdrop (estimated GDP growth: 5.5% for 2017). However, risks remain for Seker given the bank's still high, albeit lower, NPL origination and generation ratios and high share of watchlist and restructured loans. Nevertheless, Seker has focused on the clean-up of its loan portfolio and tightening of underwriting standards, which explains its more cautious approach to loan growth since end-2015.

Foreign currency (FC) lending (including FC-indexed loans) at the banks is below that of foreign-owned peers and the sector average but is nevertheless significant. FC lending amounted to 25% (Anadolubank), 31% (Seker) and 32% (Fibabanka) of the respective banks' performing loans at end-3Q17. ֳ believes FC loans could bring loan losses as the loans season, particularly given the depreciation of the Turkish lira in recent years and borrowers not being fully hedged. This risk is mitigated by some FC borrowers being large Turkish corporates with diversified operations. In addition, FC loans are typically long-term, albeit amortising, meaning any asset-quality problems should feed through gradually.

The banks' ֳ Core Capital (FCC)/risk-weighted assets ratios stood at 13% (Anadolubank) 9% (Fiba) and 12% (Seker), respectively at end-3Q17, which is only adequate for their risk profiles given their generally moderate internal capital generation and modest NPL reserve coverage. However, pre-impairment profit - equal to between 2% (Anadolubank) and 2.8% (Fiba and Seker) of average loans in 9M17 - provides an additional buffer to absorb unexpected losses. In addition, Fiba and Seker have issued USD300 million and USD85 million of FC subordinated debt, respectively, qualifying as Tier 2 capital and providing a partial hedge against FC risk-weighted assets.

The banks' funding and liquidity profiles are generally reasonable. Seker has a solid regional deposit franchise. Anadolubank sources about 10% of customer deposits from its subsidiary bank in the Netherlands, providing a fairly cheap source of stable funding (average one-year maturity). Fiba has a growing deposit franchise and has diversified its funding profile by tapping international funding markets, the latest being a senior bond issue in January 2018. Anadolubank's loans-to-deposits ratio (end-3Q17: 103%) outperforms most peers but it is higher at Fiba and Seker, albeit not out of line with the sector average, reflecting their greater wholesale funding reliance.

FC wholesale funding accounted for 11% of non-equity funding at Anadolubank but was higher at Fiba at Seker (23% and 18%, respectively, at end-3Q17) exposing the banks to changes in investor sentiment. However, market access has been good to date and the banks' available FC liquidity should mean they are well-placed to cope with a short-lived market closure.

SUPPORT RATING AND SUPPORT RATING FLOOR
The '5' Support ratings and 'No Floor' Support Rating Floors of all three banks reflect ֳ's view that support cannot be relied upon from the Turkish authorities, due to their small size and limited systemic importance, or from shareholders.

SUBORDINATED DEBT
The subordinated notes of Fiba and Seker are rated one notch below their respective VRs. The notching includes zero notches for incremental non-performance risk and one notch for loss severity.

RATING SENSITIVITIES
IDRS, VRs, NATIONAL RATINGS AND SENIOR DEBT
The banks' Long-Term IDRs and National Ratings and Fiba's senior debt rating are sensitive to changes in their respective VRs. VRs are sensitive to a material weakening in the operating environment or in asset quality, profitability and the sufficiency of the banks' capital and liquidity buffers. Upside for the banks' VRs is limited in the near term, given operating environment pressures and the banks' limited franchises.

SUBORDINATED DEBT
As the notes of Fiba and Seker are notched down from their respective VRs, their ratings are sensitive to a change in the latter. The ratings are also sensitive to a change in notching due to a revision in ֳ's assessment of the probability of the notes' non-performance risk relative to the risk captured in the banks' respective VRs, or in our assessment of loss severity in case of non-performance.

The rating actions are as follows:

Anadolubank A.S.
Long-Term Foreign and Local Currency IDRs affirmed at 'BB-'; Outlook Stable
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 'AA-(tur)'; Stable Outlook

Sekerbank T.A.S.
Long-Term Foreign and Local Currency IDRs affirmed at 'B+'; Outlook Stable
Short-Term Foreign and Local Currency IDRs affirmed at 'B'
Viability Rating affirmed at 'b+'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'
National Long-term Rating affirmed at 'A(tur)'; Stable Outlook
Subordinated debt rating: affirmed at 'B'/'RR5'

Fibabanka A.S.
Long-Term Foreign and Local Currency IDRs: affirmed at 'BB-'; Outlook Stable
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)'; Outlook Stable
Senior unsecured debt: affirmed at 'BB-'
Subordinated debt rating: affirmed at 'B+'

Contact:

Primary Analysts
Lindsey Liddell (Seker, Anadolubank)
Director
+44 20 3530 1008
ֳ Limited
30 North Colonnade
London E14 5GN

Aslan Tavitov (Fiba)
Director
+44 20 3530 1788
ֳ Limited
30 North Colonnade
London E14 5GN

Secondary Analysts
Ahmet Kilinc (Seker, Anadolubank)
Associate Director
+44 20 3530 1272
Huseyin Sevinc (Fiba)
Associate Director
+44 20 3530 1027

Committee Chairperson
James Watson
Managing Director
+7 495 956 9901

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com

Additional information is available on

Applicable Criteria
Global Bank Rating Criteria (pub. 25 Nov 2016)

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