Rating Action Commentary
ֳ Affirms Odea at 'B'; Outlook Negative
Mon 23 May, 2022 - 12:10 PM ET
ֳ - London - 23 May 2022: ֳ has affirmed Odea Bank A.S.'s (Odea) Long-Term Issuer Default Ratings (IDRs) at 'B' with a Negative Outlook and its Viability Rating (VR) at 'b'. A full list of rating actions is below.
ֳ has withdrawn Odea's Support Rating and Support Rating Floor as they are no longer relevant to the agency's coverage following the publication of its updated Bank Rating Criteria on 12 November 2021. In line with our updated criteria, we have assigned Odea a Government Support Rating (GSR) of 'no support' (ns).
Key Rating Drivers
Odea's Long-Term IDRs are driven by its standalone strength, as reflected in its VR. The Negative Outlooks reflect operating-environment pressures, which heighten risks to the bank's credit profile.
The VR reflects the concentration of the bank's operations in the volatile Turkish operating environment, limited franchise and only adequate capitalisation. It also reflects weak, but improving, underlying asset quality and the bank's adequate funding and liquidity profile.
Odea is exposed to Turkish operating-environment risks and heightened macro and market volatility characterised by inflationary pressures and currency volatility. Risks to the bank's credit profile remain skewed to the downside, given macro and policy uncertainty in the run-up to the 2023 elections and Turkey's large external financing need amid tighter global financing conditions.
Turkish banks are vulnerable to exchange-rate volatility, due to refinancing risks, although the latter are more limited at Odea given its limited external foreign-currency (FC) wholesale funding exposure, and high sector foreign-currency (FC) lending as not all exposures are fully hedged against lira depreciation. Turkish banks also face risks to FC liquidity, due to exposure to external FC wholesale funding and high deposit dollarisation.
The bank's 'B' Short-Term IDRs are the only possible option in the Long-Term 'B' IDR category.
Odea's National Rating is affirmed at 'BBB(tur)'/Negative, reflecting our view that the bank's creditworthiness in local currency relative to other ֳ-rated Turkish issuers' remains unchanged. The Negative Outlook on the National Rating reflects that on the Long-Term Local-Curreny (LTLC) IDR.
Odea's subordinated notes' rating is affirmed at 'CCC+' and is notched down twice from the VR anchor rating for loss severity, reflecting our expectation of poor recoveries in case of default.
Limited Franchise, No Lebanese Exposure: Odea is a small commercial bank (0.6% share of total sector assets at end-1Q22) with operations concentrated in the volatile Turkish market and limited competitive advantages. It focuses on corporate and commercial lending and has a limited retail presence. It operates independently of its 76% shareholder, Lebanese-based Bank Audi SAL, and has no exposure to Lebanese risk.
Consistent De-Risking: Odea has tightened underwriting standards and has been focusing on loan book clean-up in recent years, leading to a contraction of its loan book on a foreign-exchange (FX)-adjusted basis since 2017. However, single obligor concentration remains high, with the top-20 loans constituting 49% of gross loans at end-1Q22.
Exposure to high-risk sectors such as real estate (22% of loans; notably shopping malls), tourism (10.4%) and energy (8.3%) is high, especially in light of the sensitivity of these sectors to the operating environment. FC lending remains high (end-1Q22: 50%), heightening credit risks as not all borrowers are fully hedged against lira depreciation, in our view.
Decreased NPLs; High Stage 2: Odea's non-performing loan (NPL) ratio has been improving in recent years, reflecting the bank's de-risking strategy. It fell to 6.5% at end-1Q22 (end-2020: 10.7%), despite loan book contraction, supported by higher collections and lower impaired loan generation, but remains high versus the sector average of 2.9%. However, Stage 2 loans are reportedly higher (end-1Q22: 30%) than at peers though they have remained stable, while average reserves coverage is also fairly high (35% at end-2021), reflecting the concentrated nature of this portfolio. A high 72% of Stage 2 loans are restructured.
Moderate Profitability: Odea's annualised operating profit/risk-weighted assets (RWAs) improved to 1.8% in 1Q22 from 0.7% in 2021, but this was mainly due to higher trading income. Profitability has been weighed down by high loan impairment charges (equal to a high 60% of pre-impairment profit in 2021), as the bank has built up provisions in its loan book clean-up, and low growth. ֳ expects the bank's profitability to remain moderate given its fairly limited growth appetite, despite pressure on operating expenses in the inflationary environment and risks to asset quality from macro uncertainty, although we expect some uplift from CPI-linked products in the short term.
Adequate Capitalisation: Odea's common equity Tier 1 (CET1)/RWAs improved to 13.6% at end-1Q22 (10.3% net of forbearance) from 12% at end-2020. The bank's total capital adequacy ratio is substantially higher at 26.5% (around 21% net of forbearance), supported by US dollar-denominated subordinated debt, which has a call option in August 2022 and provides a partial hedge against lira depreciation. ֳ views Odea's capitalisation as only adequate given risks to asset quality and the sensitivity of capital to lira depreciation.
Deposits-Funded; Low Refinancing Risks: Odea is largely funded by customer deposits (81% of total funding at end-1Q22). The bank's loans/deposits of 72% significantly outperforms the sector average, but the share of FC deposits remains high (64%). FC wholesale funding is low, and the bank has sufficient FC liquidity to cover short-term FC debt and a moderate share of FC deposits. However, FC liquidity could come under pressure from FC deposit instability or market closure.
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The bank's Long-Term IDRs are primarily sensitive to a downgrade of the bank's VR. The bank's VR could be downgraded due to marked deterioration in the operating environment; to a perceived increase in government intervention risk in the banking sector, which currently caps most Turkish banks' LTFC IDRs at 'B', one notch below the sovereign rating; and to a sovereign downgrade.
In addition, Odea's VR would likely be downgraded if its CET1 ratio falls and remains below 9% for a sustained period, or if FC liquidity comes under pressure most likely from sector-wide FC-deposit instability.
The Short-Term IDRs are sensitive to a multi-notch downgrade of the Long-Term IDRs.
Odea's National Rating is sensitive to a downgrade in the bank's creditworthiness relative to other ֳ-rated Turkish issuers'.
Subordinated debt rating is primarily sensitive to a downgrade of Odea's VR anchor rating. The debt rating could also be downgraded should ֳ adversely change its assessment of non-performance risk.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Upside for the bank's ratings is limited in the near term by the Negative Outlook.
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: sovereign rating (negative) and macroeconomic stability (negative).
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
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
| Odea Bank A.S. | UK Issued, EU Endorsed |