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Press Release: Fitch Rates Turkey's Vakif Katilim Bankasi A.S. 'BB+'; Outlook Stable

22 Nov 2017 10:06 am
 
 
The following is a press release from Fitch Ratings: 
 

Fitch Ratings-London-22 November 2017: Fitch Ratings has assigned Turkey's Vakif Katilim Bankasi A.S. (Vakif Katilim) a Long-Term Foreign-Currency Issuer Default Rating (IDR) of 'BB+' and a Long-Term Local-Currency IDR of 'BBB-'. The Outlook is Stable. A full list of ratings is at the end of this rating action commentary.

KEY RATING DRIVERS

- IDRS, NATIONAL RATING, SUPPORT RATING AND SUPPORT RATING FLOOR

- Vakif Katilim's IDRs are underpinned by the bank's 'BB+' Support Rating Floor (SRF), which is aligned with the sovereign's Long-Term Foreign-Currency IDR. This reflects Fitch's view that the Turkish authorities would have a high propensity to support the bank in case of need, given the bank's 99% ownership by state-related General Directorate of Foundations and significant share of funding being provided in the form of state-related deposits (according to the bank definition). It also factors in Vakif Katilim's participation (Islamic) banking nature, in the light of the government's strategic focus on developing this particular sector. The Stable Outlook on the bank's IDRs mirrors that on the sovereign rating.

VR

- The 'b+' Viability Rating (VR) takes into account the bank's only short record of operation and ensuing limited franchise in the challenging Turkish operating environment. It also reflects high - although improving - concentration in the finance portfolio due to the bank's focus on corporate and commercial finance and small size. Foreign currency financing is also fairly significant, heightening credit risk in case of depreciation in the Turkish lira, albeit less than participation bank peers' and the sector average.

The bank's capital ratios are moderate, considering planned rapid growth and concentration risk. As a result, additional capital support is likely to be required to support further growth.

Vakif Katilim's financing/deposits ratio is low in absolute terms and compares well with other Turkish participation banks'. While it is budgeted to rise it should remain reasonable. The bank is mainly deposit-funded and benefits from access to state-related deposits, which are significant relative to total deposits according to management's estimate. Funding from other sources is currently limited but is being developed. The bank aims to diversify and lengthen the maturity of funding through murabaha syndications and external foreign-currency sukuk issuance. Fitch expects wholesale funding to reach about 15% of total liabilities by end-2018 (end-3Q17: 10%).

Liquidity is healthy as reflected in a strong liquidity coverage ratio of 146%, far above the regulatory requirement of 70% at end-3Q17. At end-1H17, short-term foreign currency non-customer liabilities maturing within a year were fully covered by short-term foreign currency liquid assets maturing within a year.

Performance is only moderate reflecting the bank's small size, investments in growth and ensuing high cost base. The operating profit/risk weighted assets ratio rose sharply in 1H17 to 2.3%, bringing it closer to the sector average. However, operating profit included sizeable gains on sharia-compliant derivatives resulting from excess lira liquidity in 9M17, unlike most other Turkish banks. The bank benefits from an above-sector-average net financing margin, reflecting its high share of low-cost state-related deposits. Limited financing impairments have also underpinned profitability to date, although impaired financing could rise due to seasoning.

RATING SENSITIVITIES

- IDRS, NATIONAL RATING AND SENIOR DEBT

- Vakif Katilim's IDR could be downgraded in case of a sovereign downgrade or if Fitch believes the sovereign's propensity to support the bank has reduced, which would also lead to a negative action on the SR and SRF. An upgrade of the sovereign could lead to an upgrade of the bank's IDRs.

A change of ownership at the bank (including privatisation), or the introduction of bank resolution legislation in Turkey aimed at limiting sovereign support for failed banks, could also negatively impact Fitch's view of support propensity, and hence the bank's IDRs, SR and SRF, although such developments are not expected in the near term.

VR

- A VR downgrade could result from material weakening of asset quality - which could be indicative of weaknesses in underwriting standards and the control environment - as financing seasons following rapid growth, in turn putting pressure on performance and capitalisation. The VR could also be downgraded due to an erosion of capital ratios, in the event that the bank is unable to source for or generate sufficient capital to fund growth.

A VR upgrade is unlikely in the short-term given the bank's small size, limited record of operation and start-up phase. A material expansion of the bank's franchise, a reduction in risk appetite - reflected in a reduction in borrower concentration and a more moderate pace of growth - and a successful asset quality and performance record could result in positive pressure on the VR in the medium term.

The rating actions are as follows:

Vakif Katilim Bankasi A.S.

- Long-Term Foreign-Currency IDR assigned at 'BB+'; Outlook Stable

- Long-Term Local-Currency IDR assigned at 'BBB-'; Outlook Stable

- Short-Term Foreign-Currency IDR assigned at 'B'

- Short-Term Local-Currency IDR assigned at 'F3'

- Viability Rating assigned at 'b+'

- Support Rating assigned at '3'

- Support Rating Floor assigned at 'BB+'

- National Long-Term Rating assigned at 'AAA(tur)'; Outlook Stable

Contact:

- Primary Analyst

- Lindsey Liddell

- Director

- +44 20 3530 1008

- Fitch Ratings Limited

- 30 North Colonnade

- London E14 5GN

Secondary Analyst

- Aurelien Mourgues

- Analyst

- +44 20 3530 1855

Committee Chairperson

- Alexander Danilov

- Senior Director

- +7 495 956 2408

Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com.

Additional information is available on www.fitchratings.com

Applicable Criteria

- Global Bank Rating Criteria (pub. 25 Nov 2016)

- https://www.fitchratings.com/site/re/891051

- National Scale Ratings Criteria (pub. 07 Mar 2017)

- https://www.fitchratings.com/site/re/895106

Additional Disclosures

- Dodd-Frank Rating Information Disclosure Form

- https://www.fitchratings.com/site/dodd-frank-disclosure/1032732

- Solicitation Status

- https://www.fitchratings.com/site/pr/1032732#solicitation

- Endorsement Policy

- https://www.fitchratings.com/regulatory

- ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

- Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitchs factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitchs ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature

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