Fitch Ratings has affirmed
Fitch has also upgraded
Fitch has withdrawn the bank's '5' Support Rating and 'No Floor' Support Rating Floor, as they are no longer relevant to its coverage following the publication of the updated Bank Rating Criteria on
Key Rating Drivers
The VR reflects the concentration of the bank's operations in the volatile Turkish operating environment, in light of which we assess the core capitalisation as weak and FX liquidity only adequate. The VR also considers
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
The bank's 'B' Short-Term IDRs are the only possible option in the 'B-' Long-Term IDR category.
High Exposure to Vulnerable Sectors:
Nevertheless, the bank is exposed to the high-risk SME and micro-SME segments (end-2021: 45% of gross loans, including commercial loans), which are highly sensitive to economic cycles, and vulnerable sectors, including construction (end-2021: 17% of gross loans), tourism (16%) and agriculture (9%). FC lending also remains high (end-1Q22: 44%), given that in our view, not all borrowers are fully hedged against lira depreciation. Single-name risk is also high. The bank's top 25 loans comprised 3.4x of common equity Tier 1 (CET1) capital at end-2021.
Loan Book Clean-Up:
Coverage of NPLs by specific reserves was moderate 78% at end-1Q22, reflecting reliance on collateral given the bank's SME focus. However, total reserves coverage of NPLs was a reasonable 98% at end-1Q22 (up from 90% at end-2021) and Stage 2 reserves coverage was 10%. The bank aims to further increase provisioning levels in 2022.
Improving Profitability: Profitability has improved in 2021 and 1Q22, driven by lower loan impairment charges but also margin widening in the lower lira rate environment. The bank reported return on equity (ROE) of 45% (annualised) in 1Q22 as lira funding costs declined to 5.4%, from 7.2% in 2021 and loan impairment charges (LICs) moderated to 24% of pre-impairment profit from 52%. We expect profitability to be solid in 2022 boosted by gains on CPI linkers in the high inflation environment, notwithstanding pressure on costs.
Weak Core Capitalisation: Core capitalisation is weak for
Granular Deposit Base, Adequate FX Liquidity:
FC liquidity, largely comprising cash and interbank balances and government securities, is sufficient to cover short-term refinancing needs. Nevertheless, FC liquid assets are small in absolute size and insufficient to cover a material share of FC deposits in case of sector-wide deposit instability.
The bank's 'no support' GSR reflects Fitch'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
SUBORDINATED DEBT RATING
Rating Sensitivities
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The bank's ratings could be downgraded in case of further deterioration of the operating environment or if core capital metrics weaken below their respective minimum regulatory requirements, particularly in the absence of remedial actions. A notable deterioration of
The Short-Term IDRs are sensitive to changes in the Long-Term IDRs.
SUBORDINATED DEBT RATING
The subordinated debt rating is primarily sensitive to a change in
Factors that could, individually or collectively, lead to positive rating action/upgrade:
An upgrade of the bank's ratings is unlikely in the near-term given the Negative Outlooks.
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). The latter adjustment reflects heightened market volatility, high dollarisation and high risk of FX movements in
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 '
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 Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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