Rating Action Commentary
ֳ Affirms Fibabank at 'B'; Outlook Positive
Mon 25 Nov, 2024 - 6:56 AM ET
ֳ - London - 25 Nov 2024: ֳ has affirmed Fibabanka Anonim Sirketi's (Fiba) Long-Term Foreign-Currency (FC) and Long-Term Local-Currency (LC) Issuer Default Ratings (IDRs) at 'B'. The Outlooks are Positive. ֳ has also affirmed the bank's Viability Rating (VR) at 'b'.
ֳ has upgraded Fiba's National Long-Term Rating to 'A-(tur)' from 'BBB(tur)', reflecting a strengthening in its creditworthiness relative to other Turkish issuers in LC, following sustained improvements in the bank's underlying profitability and asset quality amid an improving operating environment. The Positive Outlook reflects that on the bank's LTLC IDR.
Key Rating Drivers
VR Drives Ratings: Fiba's Long-Term IDRs are driven by its standalone creditworthiness, as reflected in its VR. The VR considers the concentration of its operations in the improving albeit still-challenging Turkish market, where it has a limited franchise, albeit supported by the expansion of digital banking operations, adequate capitalisation, above sector earnings performance and adequate funding profile. The VR also considers the bank's relatively high share of unsecured retail lending in a high interest rate and weaker growth environment. The bank's 'B' Short-Term IDRs are the only possible option mapping to LT IDRs in the 'B' rating category.
ֳ does not apply a one-notch uplift to the bank's Long-Term IDRs from the VR, according to its criteria. This reflects our view that the bank's qualifying junior debt buffer (QJD) (13% of risk-weighted assets, RWAs, at end-9M24) is unlikely to be maintained sustainably above 10% of RWA, a level sufficient to protect senior obligations in case of default. This partly reflects RWA volatility.
Improving but Challenging Operating Environment: Fiba's operations are concentrated in the improving but challenging Turkish operating environment. The normalisation of monetary policy has reduced near-term macro-financial stability risks and external financing pressures but banks remain exposed to high inflation, potential further lira depreciation, slowing economic growth, and multiple macroprudential regulations, despite simplification efforts.
Digital-Oriented; Small Franchise: Fiba has a small franchise (end-9M24: 0.5% of sector assets) and limited pricing power. Nevertheless, through its digital banking channels and, notably, its partnerships with well-known retailers across Turkiye, where it provides instant loans via its application-based channel, the bank has reached 6.6 million customers and a 1% market share in personal finance lending, reflecting the success of its digital banking channels.
Exposure to Unsecured Retail Lending: Fiba has been growing in line with the sector average although the bank's FC loans only grew slightly in 9M24, unlike the sector. FC loans (18% of gross loans) were significantly below the sector average (37%) at end-9M24. The non-retail loan book is concentrated in the wholesale and retail trade sector (end-9M24: 22% of business loans), but these are diversified by sub-sectors while exposure to construction (8%) is fairly high but mainly to contracting companies. A high share of unsecured retail loans (23% of gross loans) creates credit risks amid rising rates and slower GDP growth, although the loans are granular, fixed-rate and in lira.
Asset Quality Risks: The continued improvement of Fiba's Stage 3 loans ratio (end-9M24: 1.2%; sector average: 1.7%) reflects collections, nominal loan growth in the high-inflation environment and non-performing loan (NPL) sales. NPLs were 71% covered by specific reserves. Stage 2 loans comprised 8.9% of loans (about half restructured, 7% average reserve coverage). Exposure to risky segments and unsecured retail lending mean that credit risks remain and we expect the NPL ratio to rise to about 2% by end-2025.
Above Sector Average Profitability: Fiba's operating profitability remained high in 9M24 (7.5% of RWAs), boosted by net interest income growth in addition to significant trading gains and fee income growth. We expect Fiba's operating profit to be around 5% of RWAs (excluding the inflation accounting impact) in 2025, given slower GDP growth and a moderate increase in loan impairment charges.
Improved Capitalisation and AT1 Issuance: Fiba's common equity Tier 1 (CET1) ratio strengthened to 13.8% at end-9M24 (13.3% excluding forbearance), reflecting relative lira stability, still-strong internal capital generation and the revised risk weighting on retail loans. The total capital ratio (end-9M24: 20.2%, or 19.4% excluding forbearance) includes about USD200 million subordinated debt (maturity in 2027), which provides a hedge against lira depreciation. Fiba issued USD150 million AT1 notes in October (5.5% of end-9M24 RWAs), supporting total capital and boosting QJD buffers.
Capitalisation is supported by high pre-impairment operating profit (end-9M24: 14% of gross loans, annualised), full total reserve coverage of NPLs and free provisions (1.4% of RWA), but is sensitive to the macro outlook, lira depreciation and asset-quality weakening. We expect Fiba's CET1 ratio to remain around 13% in 2025.
Adequate FX Liquidity: Fiba is largely funded by customer deposits (end-9M24: 77% of total funding; loans/deposits ratio of 85%), 27% of which were in FC, below the sector average of 37%, and a limited 6% in FX-protected deposits. The share of FC wholesale funding (19% of total funding) is high but mainly composed of FC repo. We expect Fiba's loans/deposits ratio to get close to 90% levels at end-2025.
FC liquidity, largely comprising FX swaps with foreign counterparties and cash, as well as placements at foreign banks, and unencumbered government securities was sufficient to cover short-term debt (excluding repo) for up to one year at end-9M24.
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Fiba's Long-Term IDRs are mainly sensitive to a downgrade of its VR.
The VR is sensitive to a weakening in the operating environment, although this is not our base case. An erosion in the bank's capitalisation buffers, likely driven by worse-than-expected asset quality deterioration or a sharp increase in risk appetite, or pressure on profitability and FC liquidity could also lead to a downgrade of the VR.
The Short-Term IDRs are sensitive to a multi-notch downgrade of its IDRs.
Fiba's National Long-Term Rating is sensitive to a negative change in the entity's creditworthiness relative to other rated Turkish issuers in LC.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade of the bank's ratings would require an upward revision of our assessment of the operating environment for Turkish banks, while Fiba maintained overall stable risk and financial profiles.
A clear and sustainable record of the bank maintaining a QJD buffer at above 10% of its RWA could also generate upside potential for the bank's Long-term IDRs and National Long-Term Rating.
The Short-Term IDRs are sensitive to positive changes in its IDRs.
The National Long-Term Rating is sensitive to a positive change in Fiba's creditworthiness in LC relative to other rated Turkish issuers.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Fiba's subordinated notes' rating is notched down twice from its VR, anchor rating, for loss severity, reflecting our expectation of poor recoveries in case of default. The Recovery Rating of these notes is 'RR6'.
The AT1 notes are rated three notches below Fiba's VR, comprising two notches for loss severity given the notes' deep subordination, and one notch for incremental non-performance risk given their full discretionary, non-cumulative coupons. In accordance with our criteria, we have applied three notches from Fiba's VR, instead of the baseline four notches, as Fiba's VR is below the 'BB-' threshold.
The bank's 'no support' Government Support Rating (GSR) reflects ֳ's view that support from the Turkish authorities cannot be relied upon, given the bank's small size and limited systemic importance. In addition, support from Fiba's shareholders, while possible, cannot be relied upon.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
Fiba's subordinated debt rating is sensitive to any change in its VR, anchor rating. It is also sensitive to the maintenance of a QJD buffer sustainably above 10% of RWAs, which would likely result in a narrowing of the notching to one notch from the VR reflecting reduced loss severity.
Fiba's AT1 notes rating is primarily sensitive to a change in its VR anchor rating. The notes' rating is also sensitive to an unfavourable revision in ֳ's assessment of incremental non-performance risk.
An upgrade of Fiba's 'ns' GSR is unlikely given its limited systemic importance.
VR ADJUSTMENTS
The operating environment score of 'b+' for Turkish banks is lower than the category implied score of 'bb', due to the following adjustment reasons: macroeconomic stability (negative). The latter adjustment reflects heightened market volatility, high dollarisation and high risk of FX movements in Turkiye.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The ESG Relevance Score for Management Strategy of '4' reflects an increased regulatory burden on all Turkish banks. Management ability across the sector to determine their own strategy and price risk is constrained by regulatory burden and also by the operational challenges of implementing regulations at the bank level. This has a moderately negative impact on the banks' credit profiles and is relevant to the banks' ratings in combination with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ֳ's ESG Relevance Scores, visit/topics/esg/products#esg-relevance-scores.
Additional information is available on
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
| Fibabanka Anonim Sirketi | UK Issued, EU Endorsed |