Rating Action Commentary
ֳ Affirms Odea at 'B'; Outlook Negative
Thu 27 May, 2021 - 9:30 AM ET
ֳ - London - 27 May 2021: ֳ has affirmed Odea Bank A.S.'s Long-Term Issuer Default Ratings (IDRs) at 'B' with a Negative Outlook and Viability Rating (VR) at 'b'.
Key Rating Drivers
IDRS, VR AND NATIONAL RATING
Odea's IDRs are driven by its standalone strength, as reflected by its VR. The VR primarily reflects Odea's small size and limited franchise in Turkey, and weak asset quality and ensuing modest profitability, in light of which capitalisation is only adequate. It also reflects the bank's high, albeit reducing, exposure to more risky sectors. These factors are balanced by the bank's reasonable funding and liquidity profiles.
The Negative Outlook on Odea's Long-Term IDRs reflects downside risks to its credit profile from operating environment pressures and asset quality weakness. In addition, the recent clean-up of the bank's loan portfolio weighs on its performance metrics.
In our view, Odea's risk profile is largely independent from its 76% shareholder, Lebanese based Bank Audi SAL, while we believe internal and regulatory restrictions on capital and funding transfers to be sufficiently strict. ֳ withdrew Bank Audi's ratings at 'Restricted Default' in January 2020, following restrictions imposed by the Banque du Liban on banks' operations in foreign currency (FC). Odea had no exposure to Lebanese risk and limited funding from its parent at end-2020.
Odea focuses on lending to corporate (end-2020: 55% of loans) and commercial (30%) customers, and retail lending is limited (3%). Its market shares (below 1% of sector assets at end-2020) have fallen following several years of loan deleveraging (CAGR: -1% between 2017-1Q21) as it has followed a de-risking strategy due to rising asset quality problems.
Asset quality risks remain significant for Odea, as reflected in significant Stage 2 loans and risky sector exposures. Stage 2 loans comprised a material 30% of loans at end-1Q21 (46% restructured). This partly reflects the bank's conservative loan classification approach in recent years, but also reflects high risks notably from shopping mall and tourism exposures heavily affected by the pandemic. At end-2020, the bank had material exposure to the real estate (27%), energy (14%), and tourism sectors (12%). Exposure to SMEs, which are sensitive to GDP growth, amounted to a further 13%.
An above-sector-average share of FC lending (end-1Q21: 44%) also heightens risks, given that not all borrowers will be fully hedged against lira depreciation - albeit this has fallen significantly (down 57% in US dollar terms between 2017-1Q21) as Odea has shifted to more granular, lira lending.
Odea's impaired loans ratio improved to 10.2% at end-1Q21 (end-2019: 14.3%), despite operating environment pressures, but included write-offs equivalent to 2.9% of end-2020 loans. This ratio remains high compared with peer- and sector (3.8%) averages but should also be considered in light of the bank's muted loan growth (negative 4% in 2020; 0% in 1Q21; FX-adjusted basis).
Total loan loss allowances covered 86% of impaired loans at end-1Q21, which is below the sector average of 137%, primarily reflecting low specific reserves coverage of impaired loans (43%). The latter is partly a function of its focus on commercial, and therefore collateralised, lending but also large write-offs in 2020. Stage 2 reserves coverage (13%) was more reasonable and compared well with peers.
Odea's operating profit/risk-weighted assets (RWAs) ratio remained weak at 0.7% in 1Q21 (0.6% in 2020), as loan impairment charges (LICs) absorbed a high 69% of pre-impairment operating profit (2020: 70%). ֳ expects profitability to remain under pressure in the short-term due to margin contraction in the high lira interest rate environment and elevated LICs given ongoing asset quality risks. Odea's pre-impairment operating profit (3.1% of average loans in 1Q21, annualised) provides only a moderate buffer to absorb losses through the income statement. We consider cost efficiency (cost/assets: 1.8%) reasonable relative to the bank's limited scale.
Odea's common equity Tier 1 (CET1)/RWAs ratio of 11.5% at end-1Q21 (10.0%, net of forbearance) is only adequate given its small size, high asset-quality risks, concentration risk, weak capital generation, sensitivity to lira depreciation and unreserved impaired loans (equal to 10% of CET1). The total capital ratio is a stronger 20.4%, supported by FC Tier 2 capital, which provides a partial hedge against lira depreciation.
The loans-to-deposits ratio was a reasonable 84% at end-1Q21 and outperforms the sector average (108%). The bank is largely customer deposit funded (end-1Q21: 77% of total funding), but a high share is in FC (66%; sector: 55%). Odea's share of FC wholesale funding (15%) is moderate and lower than at larger banks. At end-2020, available FC liquidity (mainly comprising swaps with the Turkish central bank) was sufficient to cover the bank's FC debt due in 12 months plus a modest share of FC deposits. Nevertheless, FC liquidity could come under pressure from FC deposit instability or a prolonged market closure.
NATIONAL RATING
The affirmation of the National Rating reflects our view that Odea's creditworthiness in local currency relative to other Turkish issuers has not changed.
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 either from the Turkish authorities, due to the bank's small size and limited systemic importance, or from the bank's shareholders.
SUBORDINATED DEBT
Odea's subordinated notes' rating of 'CCC+' is notched twice down for loss severity from its VR anchor rating, reflecting our expectation of poor recoveries in case of default.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The bank's IDRs and National Rating are primarily sensitive to its VR. The VR could be downgraded due to a marked deterioration in the operating environment - as reflected in adverse changes to the lira exchange rate, market sentiment and economic growth prospects - or if economic recovery is not as swift as currently expected by ֳ.
In addition, a greater-than-expected deterioration in asset quality that leads to a protracted weakening in operating profitability (in particular if the bank recorded operating losses on a sustained basis), would be negative for the VR, particularly if it leads to an erosion of capital ratios. The VR would also likely come under pressure if the CET1 ratio fell sustainably below 9% or we viewed capitalisation as no longer commensurate with the bank's risk profile, for example due to significantly higher unreserved impaired loans.
A VR downgrade could also result from a material weakening in FC liquidity, most likely due to deposit instability or a loss of market access.
A downgrade of the VR would lead to a downgrade of the subordinated debt rating.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Upside for the bank's ratings is limited in the near term given the Negative Outlook. The Outlook could be revised to Stable following sustained market stability that supports an improvement in asset quality, while reducing downside risks to earnings, capitalisation and funding and liquidity.
A positive reassessment of Odea's support-driven ratings, although not impossible, is very unlikely in our view, given Odea's limited systemic importance in Turkey, and the weak financial flexibility of its majority shareholder.
An upgrade of Odea's VR would lead to an upgrade of the subordinated debt rating.
NATIONAL RATING
The National Rating is sensitive to changes in Odea's Long-Term Local-Currency IDR and its creditworthiness relative to other Turkish issuers.
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
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
| Odea Bank A.S. | UK Issued, EU Endorsed |