Published on 23 Sep 2019.
RAM Ratings has reaffirmed Turkiye Finans Katilim Bankasi AS’ (Turkiye Finans or the Bank) A1/Stable/P1 financial institution ratings as well as the A1/Stable rating of TF Varlik Kiralama AS’ (TF Varlik) RM3.0 billion Sukuk Murabahah MTN Programme (2014/2034). The Bank’s ratings continue to incorporate a high likelihood of support from The National Commercial Bank (NCB or the Group), while also taking into account a one-notch sovereign weight, given Turkey’s non-investment grade sovereign ratings gBB2(pi)/Negative/gNP(pi) although the country’s transferability and convertibility risk is assessed to be ‘low’. While the outlook on Turkey’s gBB2 rating has been revised to negative (from stable) in view of economic fragilities following the currency crisis in 2018 and the elevated threat of severe international sanctions against the country, a similar revision of Turkiye Finans ’ and TF Varlik’s ratings is not warranted at this juncture.
Turkiye Finans is strategically important to NCB, which owns 67% of the Bank and whose credit profile is robust. The Bank stands as NCB’s largest investment abroad. NCB has established a firm track record of support for the Bank over the years through equity injections and the provision of subordinated capital, among others. The Group has also been instrumental to the revamp of the Bank’s risk management in the last few years.
As at end-December 2018, Turkiye Finans’ gross impaired financing (GIF) ratio ascended to 5.5% (end-December 2017: 5.1%), following a steep depreciation of the lira in August 2018 and the subsequent slowdown of the Turkish economy. Notwithstanding its tighter underwriting standards since 2016/2017, Turkiye Finans’ asset quality was weighed down by a significant proportion of SME and foreign currency (FCY) financing, which stood at a respective 49% and 40% of the Bank’s financing portfolio as at end-December 2018.
Correspondingly, Turkiye Finans’ credit cost ratio rose to an elevated 1.6% in 2018 (2017: 1.2%), while its GIF coverage ratio stayed at 90.4% as at end-December 2018 (end-December 2017: 90.1%). Although the Bank’s GIF ratio had declined to 5.1% as at end-March 2019 due to a large GIF disposal, asset quality headwinds are expected to persist owing to the uncertain economic landscape. In addition, Stage 2 financing based on Turkish Financial Reporting Standards 9 – i.e. financing that has shown credit deterioration but is not yet impaired – came up to a high 14% of total financing as at the same date (industry: 11%).
In view of a broader margin (4.8% in 2018), Turkiye Finans’ pre-tax profit climbed 25% y-o-y to TRY570 mil (fiscal 2017: TRY455 mil), translating into a return on risk-weighted assets of 1.8%. Nonetheless, profitability is likely to remain muted on account of potential margin compression from a recent rate cut as well as possibly higher impairment charges.
Reliance on wholesale funding continues to feature prominently, although the Bank’s financing-to-deposits ratio had eased to 96.7% as at end-March 2019 as deposit growth continued to outpace financing growth. The Bank has made a concerted effort to reduce external wholesale funding, particularly after the currency rout, while also building up sufficient liquidity buffers. Its liquidity coverage ratio stood at 298% in 1Q 2019. Further, we believe liquidity support from NCB will be forthcoming if required.
In terms of capitalisation, Turkiye Finans’ common equity tier-1 and total capital ratios dipped to 10.9% and 15.2% as at end-March 2019 (end-December 2017: 14.2% and 18.2%) due to an enlarged risk-weighted asset base, given the revival of the Bank’s financing growth in 2018, compounded by a sharply weaker lira which inflated the value of its FCY assets. That said, the Bank’s USD250 mil subordinated loan from NCB provides a partial hedge against the impact of the lira’s devaluation on its total capital ratio.
For further information on RAM’s assessment of Turkey and the application of ‘sovereign weights’, please refer to our methodology paper, Sovereign Weight Explained (published in February 2017), available on www.ram.com.my.
Liang Huey Jean, CFA
(603) 3385 2495
(603) 3385 2577
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Ratings on Turkiye Finans Katilim Bankasi AS