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���������ֳ�-London-25 January 2019: ���������ֳ� has affirmed the Long-Term Issuer Default Ratings (IDRs) of Anadolubank A.S and Fibabanka Anonim Sirketi (Fiba) at 'B+', and Sekerbank and Odeabank at 'B'. The Outlooks are Negative. The agency has also affirmed Anadolubank's Viability Rating (VRs) at 'b+' and Fiba, Sekerbank and Odea's VRs at 'b'.

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

KEY RATING DRIVERS
IDRS AND VRs OF ALL BANKS, SENIOR DEBT RATING OF FIBA
The Long-Term IDRs of Anadolubank, Odea and Sekerbank are driven by their standalone creditworthiness, as reflected in their VRs. Fiba's Long-Term IDR is rated one notch above its VR as ���������ֳ� considers that the bank's senior creditors are offered significant protection by the buffer of qualifying junior debt. The Negative Outlooks on the banks' IDRs reflect the potential for the weaker operating environment to place greater pressure on the banks' financial metrics than already observed.

The four banks' VRs reflect their small absolute size, limited franchises and exposure to the challenging Turkish operating environment. Their market shares are very low, ranging from 0.4% (Anadolu) to 1.0% (Seker) of total assets. The banks are focused on SME, commercial and corporate customers, and have small retail portfolios. Their risk profiles are highly linked to the economic environment, which deteriorated significantly in 2018 as a result of material local currency depreciation, sharp rises in local currency interest rates (heightening pressure on margins, asset quality, capitalisation and liquidity) and weaker GDP growth. ���������ֳ� expects growth of 3.5% in 2018 and forecasts 0.6% in 2019.

Asset quality risks for all four banks have increased significantly, as for the sector, given the weaker growth outlook, high interest rates on Turkish lira loans, high foreign currency (FC) lending (given the potential impact of local currency depreciation on often weakly hedged borrowers' ability to service their debt) and the banks' exposure, to varying degrees, to risky segments and sectors, including real estate, construction, energy and agriculture.

The share of FC lending increased across all banks in 9M18, reflecting the lira depreciation (which inflates risk-weighted assets; RWA) since FC lending fell in US dollar terms. However, its share is likely to have since decreased moderately given lira appreciation and limited demand for FC loans. At end-3Q18, total FC lending (including FC-indexed loans) ranged from 29% (Anadolubank) to 39% (Seker), 42% (Fiba) and 56% (Odea) (sector average: 44%).

In addition, the banks' loan books are focused largely on mid-sized and smaller companies, which are highly sensitive to weaker GDP growth and the higher interest rate environment, and report the highest share of bad loans of all customer segments. Exposures to high risk sectors, such as agriculture (Seker; 11% of end-3Q18 loans; Anadolubank: 9%), construction and real estate (Odea; 23%; Fiba, Anadolu: 19%; Seker: 18%) are also sources of risk.

Impaired loan ratios increased across the banks in 9M18 (NPLs, loans overdue by 90+ days/gross loans) with those of Fiba and Anadolu rising to above sector average levels; those of Seker's and Odea's were already above the sector average at end-2017.. Stage 2 loans have also increased significantly, with the exception of Anadolubank, albeit partly due to the transition to IFRS9 in 1Q18. Accrued interest income rose significantly at Seker and could be indicative of underlying asset quality deterioration.

We expect further asset quality weakening in 2019 given operating environment pressures, although the loan restructuring framework in place in Turkey could affect the migration of problematic loans to the NPL category.

At end-9M18, the banks' NPL ratios ranged from 4.2% (Fiba; end-2017: 3.1%) to 4.6% (Anadolubank; end-2017: 2.5%), 5.0% (Sekerbank; end-2017: 4.7%) and 7.6% (Odea; end-2017: 4.7%), versus the sector average of 3.2% at end-9M18 (unconsolidated; end-2017: 3.0%). NPL growth at Anadolubank and Fiba was largely due to some lumpy NPLs, while Sekerbank's NPL ratio was flattered by higher-than-peers loan growth (9M18: up 13%). Odea's NPL ratio should be viewed in light of rapid loan book deleveraging since 2017 (down 14% in 2017), but it also reported the highest NPL origination and generation rates among the four banks.

Stage 2 loans ranged from a fairly high 8% (Fiba) and 9% (Anadolu) to 12% (Sekerbank) and a very high 25% (Odea) at end-9M18. Significant increases in Stage 2 loans were reported at Fiba, Sekerbank and Odea in 9M18 with restructured loans accounting for between around a fifth and a third of total Stage 2 loans in all cases.

Total reserve coverage of NPLs is moderate and remained below the sector average at Anadolu, Fiba and Odea at end-9M18 (between 76% and 88%). However, it rose significantly at Sekerbank, as a result of which the bank's reserves coverage ratio was above the sector average at end-9M18 (125%). Banks' levels of NPL reserves coverage is partly a function of collateralisation, which reflects their focus on the SME and commercial segments and ensuing relatively high level of loan book collateralisation. Nevertheless, current market illiquidity means collateral is likely to be harder to realise.

Loan growth was below the sector average at all four banks in 9M18 reflecting their more cautious approach to growth, and loan book deleveraging (notably in FC), due to the difficult operating environment and focus on capital and liquidity. Growth is likely to remain sluggish at all four banks in 2019, as for the sector, and could highlight asset quality problems more rapidly at the banks.

Profitability metrics remained generally weak in 9M18, with the exception of Anadolubank, which reported above-sector-average operating profit/RWAs, despite the challenging operating environment and its small size and limited franchise. This ratio was significantly lower at peers and ranged from 0.7% (Seker), to 1.1% (Odea) and 1.7% (Fiba).

Anadolu's stronger profitability in 9M18 reflected its lower level of impairment compared with peers - although this included a sizeable provision reversal - and the bank's wider net interest margin, whereby it was able swiftly to reprice its assets and liabilities in the rising interest rate environment due to the fairly short-term nature of its balance sheet. Fiba's operating profit included a large trading gain in 9M18, without which the bank's profitability metrics would have been moderately lower.

Return-on-equity was a weak 6% at both Seker and Odea in 9M18 and a high 17% and 19% at Anadolubank and Fiba, respectively. However, Fiba and Sekerbank both reported low equity/assets ratios at end-9M18, of about 5% and 7%, respectively.

Loan impairment charges have increased as asset quality has weakened and absorbed between 51% (Fiba), to 67% (Odea) and 78% (Sekerbank) of the banks' pre-impairment profit in 9M18; this also reflects increased reserve coverage at all banks. This ratio was significantly lower at Anadolubank (26%), net of reversals. Impairments are likely to remain elevated and be a key performance variable at all four banks in 2019, as for the sector, particularly in case of a marked weakening in asset quality. Profitability could also weaken due to slower credit growth and higher funding costs, with the impact of the latter depending on the banks' ability to reprice its assets.

Capitalisation is weak to moderate at the four banks. Fiba's ���������ֳ� Core Capital/weighted risks ratio was the lowest (7.7% at end-3Q18) and is a constraining VR factor considering the bank's high loan concentration and small absolute size. Sekerbank's FCC ratio of 8.8% is also low particularly considering the bank's asset quality pressures and very weak internal capital generation. Anadolubank (14.5%) and Odea (15.1%) reported more adequate FCC ratios at end-3Q18 but in there are significant downside risks to Odea in light of its high share of Stage 2 loans.

The banks' capital positions have come under pressure, as for the sector, from lira depreciation (which inflates FC assets) and higher interest rates (due to weaker valuations of government bond portfolios). End-3Q18 reported capital ratios included the impact of regulatory forbearance - subsequently revoked towards end-December 2018 - in respect of the fixing of the exchange rate (i.e. using end-1H18 FX rates) for the purposes of calculating FC RWAs, and the suspension of mark-to-market losses on their AFS securities. We estimate uplift to the four banks' Tier 1 and total capital ratios to vary between 100bp-250bp and 200bp-330bp, respectively, at end-3Q18, and this will be reversed when they report end-2018 ratios.

However, loan growth slowed and the exchange rate stabilised in 4Q18. At end-9M18 Fiba (20.9%), Odea (23.4%) and Anadolubank (16.5%) reported total capital adequacy ratios comfortably above the 12% BRSA target ratio (including net of forbearance impacts), while Sekerbank's capital ratios (13.4%) were much tighter. FC Tier 2 subordinated debt also provides a partial hedge against lira depreciation at Fiba, Odea and Seker. Pre-impairment profit (annualised basis) - ranging from about 3% (Sekerbank) to 6% (Fiba) of average loans at all four banks in 9M18 - provides a significant buffer to absorb losses through income statements.

Refinancing risks have also increased at the four banks as a result of the deteriorating operating environment, recent heightened market volatility and tightening global conditions (driven mainly by an increase in US dollar interest rates). However, the banks have lower wholesale funding reliance than larger bank peers. FC wholesale funding ranged from a low 9% of liabilities at Anadolubank, to a moderate 15% (Seker), 23% (Odea) and higher 31% (Fiba). However, maturities of wholesale funding liabilities at the latter three banks were largely over one year.

In addition, the banks' available FC liquidity - comprising largely cash and interbank balances (including placed with the CBRT), maturing FX swaps and government securities - should mean they are able to cope with a short-lived market closure. However, FC liquidity could come under pressure in case of a prolonged loss of market access.

The banks' loans/deposits ratios are generally reasonable - ranging from 98% (Anadolu), to 106% (Seker) and 109% (Odea) at end-9M18. This ratio increased significantly in the case of Fiba (end-9M18: a high 152%; end-2017: 131%) due to a USD300 million Eurobond issue, which enabled it to reduce customer deposits (9M18: down 25%, FX-adjusted basis). Anadolu sources about 16% of customer deposits from its subsidiary bank in the Netherlands, while Seker benefits from a solid regional deposit franchise, underpinned by its relatively large branch network.

Odea is rated above its parent Bank Audi S.A.L. (B-/Negative), the ratings of which are capped by the Lebanese sovereign rating. ���������ֳ� sees limited contagion risk for Odea from its parent, based on i) limited group funding; ii) the fact that Odea has not paid any dividends to date while Bank Audi has contributed about USD1.2 billion in equity to the bank; and (iii) the relatively strong Turkish regulator, which ���������ֳ� believes would seek to limit transfers of capital and liquidity to the parent in case of stress at the latter.

Fiba's IDRs of 'B+', one notch higher than the bank's VR, reflect ���������ֳ�'s view that the risk of default on the bank's senior obligations (the reference obligations that IDRs rate to) is lower than the risk of it needing to impose losses on subordinated obligations to restore its viability (to which the VR rates). This is due to the large volume of junior debt (Tier 2 subordinated debt; equal to 11% of end-3Q18 RWAs), which could be used to restore solvency and protect senior debt holders in case of a material capital shortfall at the bank.

NATIONAL RATINGS
The affirmation of the National Ratings of Anadolu, Odea and Fiba reflects our view that the banks' creditworthiness in local currency relative to other Turkish issuers has not changed. We have downgraded Seker's National Rating to 'BBB-(tur)' from 'BBB(tur)' reflecting our view that the bank's standalone creditworthiness has weakened relative to peers given heightened pressures on profitability and capitalisation.

SUPPORT RATING AND SUPPORT RATING FLOOR
The '5' Support Ratings and 'No Floor' Support Rating Floors of all four banks reflect ���������ֳ�'s view that support cannot be relied upon from the Turkish authorities, due to their small size and limited systemic importance, nor from shareholders.

SUBORDINATED DEBT The subordinated notes of Fiba, Seker and Odea 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 RATING OF FIBABANKA
VR downgrades could result from (i) a marked deterioration in the operating environment, as reflected in particular in further negative changes in lira exchange rates, domestic interest rates, economic growth prospects and external funding market access; (ii) a weakening of the banks' FC liquidity positions due to deposit outflows or an inability to refinance maturing external obligations; or (iii) bank-specific deterioration of asset quality leading to significant pressure on capital positions.

The Outlooks could be revised to Stable if the operating environment improves and bank metrics do not deteriorate significantly.

Fiba's Long-Term IDRs and senior debt rating could be downgraded to the level of the VR if the coverage of the bank's RWAs by its junior debt decreases significantly, increasing the risk of losses for senior creditors in case of the bank's failure, or if ���������ֳ� believes the bank's recapitalisation requirement in a failure scenario could exceed the junior debt buffer.

SUBORDINATED DEBT AND OTHER HYBRID SECURITIES
As the notes of Fiba, Seker and Odea 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 'B+'; Outlook Negative
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

Fibabanka A.S.
Long-Term Foreign- and Local-Currency IDRs; affirmed at 'B+'; Outlook Negative
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
Senior unsecured debt: affirmed at 'B+'/'RR4'
Subordinated debt rating: affirmed at 'B-'/'RR5'

Sekerbank T.A.S.
Long-Term Foreign- and Local-Currency IDRs; affirmed at 'B'; Outlook Negative
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: downgraded to 'BBB-(tur) from 'BBB(tur)'; Stable Outlook
Subordinated debt rating: affirmed at 'B-'/'RR5'

Odea
Long-Term Foreign- and Local-Currency IDRs; affirmed at 'B'; Outlook Negative
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 'BBB(tur)'; Stable Outlook
Subordinated debt rating: affirmed at 'B-'/'RR5'

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

Ahmet Kilinc (Odea)
Associate Director
+44 20 3530 1272
���������ֳ� Limited
30 North Colonnade
London E14 5GN

Huseyin Sevinc (Fiba)
Associate Director
+44 20 3530 1027
���������ֳ� Limited
30 North Colonnade
London E14 5GN

Secondary Analysts
Lindsey Lidell (Odea)
Director
+44 20 3530 1008

Ahmet Kilinc (Seker, Anadolubank)
Associate Director
+44 20 3530 1272

Aurelien Mourgues (Fiba)
Associate Director
+44 20 3530 1855

Committee Chairperson
James Watson
Managing Director
+7 495 956 9901


Media Relations: Louisa Williams, London, Tel: +44 20 3530 2452, Email: louisa.williams@thefitchgroup.com

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Bank Rating Criteria (pub. 12 Oct 2018)

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