Rating Action Commentary
ֳ Affirms Odea Bank at 'B'; Outlook Negative
Mon 20 Jan, 2020 - 11:29 AM ET
ֳ - London - 20 Jan 2020: ֳ has affirmed Odea Bank A.S.'s (Odea) Long-Term Issuer Default Ratings (IDR) at 'B', with Negative Outlook, and the bank's Viability Rating (VR) at 'b'.
Key Rating Drivers
The Long-Term IDRs of Odea are driven by its standalone creditworthiness, as reflected in its 'b' VR. The VR reflects the bank's limited franchise, high asset-quality risks and weak profitability, but also a reasonable funding profile and limited reliance on wholesale funding.
The Negative Outlook reflects the potential for further weakening in financial metrics given operating environment risks and the bank's weakened credit risk profile, due to an exposure to the troubled real -estate sector.
Odea is rated above its Lebanese parent, Bank Audi S.A.L. whose ratings were placed on 'RD' following the Banque due Liban restrictions on banks' operations in foreign currency, including for payments on customer deposits in Lebanon. However, ֳ sees limited contagion risk for Odea from its parent given i) limited exposure to Lebanon (2% of total assets, or 20% of ֳ Core Capital (FCC), in the form of Lebanese government debt); ii) that Odea has not paid any dividends to date; and iii) the fairly strong Turkish banking regulator, which ֳ believes would seek to limit transfers of capital and liquidity to the parent in case of stress.
Odea has a limited franchise in Turkey with less than a 1% market share. Furthermore, the bank has been deleveraging since 2017 due to asset-quality pressures, with loans contracting by 10% (FX-adjusted) in 9M19. Odea provides banking services to corporate, commercial, SME and retail customers in Turkey, with most loans being extended to the corporate and commercial segments and a limited exposure to retail loans.
Asset-quality risks are heightened by high foreign-currency lending (50% of gross loans), single-name borrower risk and exposure to troubled segments and sectors, notably construction (26% of gross loans, equal to 1.5x of FCC) and to a lesser extent energy (10%). Odea's impaired loans ratio increased to a high 12.6% at end-9M19, compared with the sector average of 5.4%, albeit lending contracted over this period (9M19: FX-adjusted, down 10%). The bank's non-performing loan (NPL) generation and origination ratios also remained high, despite some improvement in the latter.
Stage 2 loans are also high (27% of gross loans), in part reflecting the bank's stringent loan classification approach, and could become NPLs as loans season. A third of Stage 2 loans at end-9M19 were restructured.
Total reserve coverage of NPLs remained below the sector average at 90.8% at end-9M19. However, the bank has an additional TRY135million free provision for potential losses, which increases coverage to 96%. Specific reserves held against NPLs amounted to a low 54%, but this is partly due to the bank's focus on commercial, and therefore collateralised, lending. However, current market illiquidity means that collateral, which is largely in the form of real estate, is likely to be challenging to realise, although loan collections could also start to increase given an improving economic outlook. Reserves coverage of Stage 2 loans is above peer average but total unreserved Stage 3 loans/equity equals a rather high 35% of equity.
We expect further asset-quality weakening in 2020 given the bank's risk profile and operating environment pressures, although the improving growth outlook and greater market stability, notably in respect of the lira and local-currency interest rates, should help mitigate asset-quality pressures.
ֳ considers Odea's capital ratios as only adequate given the bank's weak asset quality, limited internal capital generation - reflecting low growth and high impairments - and a high share of unreserved problematic loans. The bank's FCC and Tier 1 ratio were 12.5% and 13.4%, respectively, at end-9M19. Its total capital ratio of 20.6% was more reasonable, supported by USD284 million of subordinated Tier 2 capital, which provides partial hedge against lira depreciation.
Profitability metrics have been dampened by loan impairments and are set to remain under pressure from low growth and likely asset-quality weakening. The bank's cost-efficiency metrics are also weighed down by limited earnings generation and a lack of economies of scale. The operating profit/risk-weighted assets was a negligible 0.1% in 9M19 as loan impairments absorbed 93% of pre-impairment profit, but this included the aforementioned TRY118 million of free provisions.
The bank is largely funded by customer deposits, which represented 80% of non-equity funding at end-9M19. The ֳ-calculated gross loans-to-deposits ratio was a solid 94%. However, the share of foreign-currency deposits is high at 66%, up from 58% at end-2018, reflecting sector-wide dollarisation. The bank has lower wholesale funding reliance than large bank peers and foreign-currency wholesale funding was a moderate 16% of non-equity funding at end-9M19 (about 20% was short-term). Foreign-currency liquidity is adequate and broadly sufficient to cover the bank's maturing foreign-currency non-deposit liabilities over the next 12 months. It comprises mainly interbank assets, mandatory reserves held against local-currency liabilities in the reserve option mechanism and cash. However, foreign-currency liquidity could come under pressure in case of prolonged market closure and deposit instability.
NATIONAL RATING
The change in Outlook on the National Rating to Negative from Stable reflects our view that the bank's creditworthiness in local currency has weakened compared with Turkish bank peers. This is because the bank's Long-Term Local-Currency IDR remains on Negative Outlook compared with the majority of Turkish banks on Stable (see ֳ Revises 20 Turkish Banks' Outlooks to Stable on Sovereign Change at ).
SUBORDINATED DEBT
The subordinated notes of Odea are rated one notch below its VR anchor rating. The notching includes zero notches for incremental non-performance risk and one notch for loss severity.
SUPPORT RATING AND SUPPORT RATING FLOOR
Odea's '5' Support Rating and 'No Floor' Support Rating 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. In addition, support from Bank Audi, although possible, cannot be relied upon.
RATING SENSITIVITIES
The bank's ratings could be downgraded due to i) marked deterioration in the operating environment, as reflected in adverse changes to the lira exchange rate, domestic interest rates, economic growth prospects, and external funding market access; ii) a weakening of the bank's foreign-currency liquidity position due to deposit outflows; or iii) a sharp asset-quality deterioration leading to significant pressure on capitalisation. A material increase in exposure to Lebanese risk could lead to a downgrade, but this is not expected by ֳ.
Odea's National Ratings are sensitive to a change in the entity's creditworthiness relative to other rated Turkish issuers.
SUBORDINATED DEBT
As the notes of Odea are notched down from its VR, 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' incremental non-performance risk relative to the risk captured in the bank's VR, or in our assessment of loss severity.
In addition, on 15 November 2019, ֳ published an exposure draft of its Bank Rating Criteria, which includes proposals to alter our approach to notching subordinated debt ratings. If the final criteria are published in line with the exposure draft, Odea's subordinated debt rating could be downgraded by one notch.
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 to the way in which they are being managed by the entity. For more information on our 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.