Rating Action Commentary
ֳ Affirms Fibabanka at 'B+'; Outlook Negative
Thu 27 May, 2021 - 12:31 PM ET
ֳ - London - 27 May 2021: ֳ has affirmed Fibabanka A.S.'s (Fiba) Long-Term Foreign Currency Issuer Default Rating (IDR) at 'B+' with a Negative Outlook and Viability Rating (VR) at 'b'.
The affirmation of the Long-Term Foreign Currency IDR at one notch above the VR reflects our view that the bank's qualifying junior debt buffer will be maintained above 10% of risk-weighted assets (RWA) in the short term.
Key Rating Drivers
IDRS, SENIOR DEBT AND VR
Fiba's Long-Term IDRs and long-term senior debt are rated one-notch above the bank's VR, due to the large buffer of qualifying junior debt (QJD), in the form of additional Tier 1 (AT1) and other subordinated debt instruments. This buffer was equivalent to 10.6% of RWA at end-1Q21 (10.1% excluding regulatory forbearance) and would protect senior creditors in case of the bank's failure, including due to a capital shortfall. The size of the bank's QJD buffer relative to RWA is positively correlated with a weaker lira, as nearly all of the QJD comprises US dollar instruments.
We expect Fiba's QJD buffer to remain only slightly above 10% in the short term, given targeted loan growth of 16% in 2021 (1Q21: 5%, actual), only moderate uplift from regulatory forbearance (expected to cease at end-1H21) and our expectation of further lira depreciation. However, ֳ sees a significant risk that the QJD buffer could fall below 10% of RWA over the medium term, and this partly drives the Negative Outlook on Fiba's Long-Term IDRs. This is due to potential higher-than-expected growth and lira appreciation but also depends on the nature and timing of potential capital-strengthening measures.
The Negative Outlook on Fiba's IDRs also reflects downside risks to its credit profile from operating environment pressures given the implications for its financial metrics. The recent replacement of the Turkish Central Bank (CBRT) governor and ensuing damage to monetary policy credibility and investor sentiment - as evidenced by renewed market volatility and lira depreciation - increase funding and liquidity risks, as does high, increased deposit dollarisation. Furthermore, ongoing uncertainty over the pandemic, particularly given the latest resurgence and lockdown restrictions, create downside risks to both ֳ's GDP forecast of 6.7% in 2021 and Fiba's asset quality.
The affirmation of Fiba's VR reflects its small franchise (end-2020: 0.5% of sector loans and deposits) and limited competitive advantages in the volatile Turkish operating environment, high asset quality risks and structurally weak core capitalisation. However, it also reflects the bank's sufficient foreign-currency liquidity and record of moderate profitability.
The bank's moderate growth record (2020: loan growth of 19%; 6% FX-adjusted) reflects a fairly cautious approach amid challenging market conditions and capital preservation efforts, given core capital constraints. Fiba's strategy in 2021 is to grow unsecured retail loans - underpinned by digital and ecosystem banking - and lira business loans and deleverage riskier foreign-currency loans (end-1Q21: 34% of gross loans).
Fiba's impaired loans (NPL) ratio of 3.4% at end-1Q21 (including about 20bp uplift from regulatory forbearance), should be viewed in light of significant NPL sales and write-offs (2019-1Q21: equal to a cumulative 2.7% of gross loans) and high Stage 2 loans (15%; over half restructured). High single-name concentrations and exposure to the risky tourism (end-2020: 16%) and construction and real estate sectors (13% combined) also heighten risks. Total reserves fully cover NPLs, although specific reserves coverage was a low 54% at end-1Q21, reflecting reliance on collateral.
We expect NPLs to rise in 2021-2022 given waning government stimulus and regulatory forbearance (due in 2H21) and maturing loan deferrals (end-1Q21: 12% of gross loans; end-2020: 18%). However, loan restructurings could delay the migration of loans to Stage 3.
We expect Fiba's operating profitability (2020: 1.5% of RWA; sector: 1.9%) to remain moderate and below average partly reflecting its lack of scale (2020: costs/average assets ratio of 2.6%; sector: 1.8%) and limited revenue diversification. Its net interest margin is reasonable (2020: 4.6%) but will be moderately eroded in 2021 following lira interest rate hikes. Credit impairments (2020: a high 55% of pre-impairment operating profit) will also continue to put pressure on performance given underlying asset quality risks.
Fiba's core capitalisation is a rating weakness. Its common equity Tier 1 (CET1) ratio of 7.5% at end-1Q21 (including 30bp forbearance uplift) is weaker than peers and is tight for its risk profile, asset-quality, concentration risks and sensitivity to lira depreciation (which inflates RWA). Buffers over CET1 and Tier 1 minimum ratio requirements are low (end-1Q21: 40bp). However, pre-impairment operating profit (1Q21: 4.4% of average loans) and free provisions (end-1Q21: 65bp of RWA) provide a good buffer to absorb unexpected credit losses.
Fiba also expects to receive USD30 million (equivalent to about 110bp of RWAs) in core capital or AT1 debt from its majority shareholder - Fiba Holding - in 2H21 in case it is unable to replenish its capital buffers organically.
The total capital ratio is much higher at 19.2%, underpinned largely by foreign currency-denominated subordinated debt instruments, which provide a partial hedge against lira depreciation.
Fiba is mainly funded by short-term and fairly granular deposits (end-1Q21: 74% of total funding). However, a high, albeit below-sector-average, 48% of deposits are in foreign currency. Its loans/deposits ratio (109%) is broadly in line with the sector average. Nevertheless, reliance on foreign currency wholesale funding (end-1Q21: 25% of total funding) is high, including relative to peers, which increases refinancing risks given exposure to investor sentiment amid market volatility.
At end-2020, foreign currency liquidity was sufficient to cover Fiba's FC debt due over 12 months plus over 20% of foreign currency deposits. Nevertheless, it could come under pressure from a prolonged market closure or foreign currency deposit instability.
NATIONAL RATING
The affirmation of the National Rating reflects our view that Fiba's creditworthiness in local currency relative to other Turkish issuers has not changed.
SUBORDINATED DEBT
Fiba's subordinated debt has been affirmed at one notch below its VR anchor rating at 'B-'. We notch once, rather than twice, for loss severity due to the large QJD buffer, which reduces the risk of the subordinated debt being fully written off in case of bank failure.
SUPPORT RATING AND SUPPORT RATING FLOOR
The Support Rating (SR) of '5' and Support Rating Floor (SRF) of 'No Floor' reflect ֳ's view that support cannot be relied upon from the Turkish authorities, due to the bank's small size and limited systemic importance, nor from Fiba Holding.
RATING SENSITIVITIES
IDRS, SENIOR DEBT AND VR
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fiba's Long-Term IDR and senior debt rating could be downgraded to the level of the VR if the QJD buffer falls sustainably below 10%. These ratings are also sensitive to a change in Fiba's VR.
The VR could be downgraded due to further marked deterioration in the operating environment, if the fallout from the latest pandemic resurgence is more severe than expected, or economic recovery is significantly weaker than expected.
A greater than expected deterioration in underlying asset quality could put pressure on the VR, particularly if it further erodes core capitalisation and leads to a breach of the bank's 7.1% minimum CET1 regulatory requirement.
A prolonged funding market closure or deposit instability that severely erodes Fiba's foreign currency liquidity buffer could also lead to a VR downgrade.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Upside for the ratings is limited in the near term given the Negative Outlook. However, the Outlook could be revised to Stable if ֳ believes that the QJD buffer is highly likely to remain sustainably above 10% in the medium term, accompanied by a reduction in operating environment risks, including lower market- or exchange rate- volatility, an improvement in investor sentiment and a strengthening of the bank's core capitalisation.
NATIONAL RATING
The National Rating is sensitive to changes in the bank's Long-Term Local-Currency IDR and in its relative creditworthiness to other Turkish issuers.
SUBORDINATED DEBT
The subordinated debt rating is sensitive to a change in Fiba's VR anchor rating and the size of its QJD buffer. A fall in this buffer to below 10% of RWA could result in a widening of the notching for loss severity to two notches from the VR.
SR AND SRF
The SR and SRF are sensitive to ֳ's view on the likelihood of Fiba receiving extraordinary support from the Turkish authorities, which is not ֳ's base case given Fiba's limited systemic importance and the limited ability of the sovereign to provide support in foreign currency.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit /site/re/10111579
Summary of Financial Adjustments
An adjustment has been made in ֳ's financial spreadsheets of Fibabanka that has had an impact on core and complimentary metrics. ֳ has taken a loan that was classified as a financial asset measured at fair value through profit and loss in the bank's financial statements and reclassified it under gross loans as we believe this is the most appropriate line in ֳ spreadsheets to reflect this exposure.
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
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on ֳ's ESG Relevance Scores, visit
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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 |