Published on 23 Sep 2019.
RAM Ratings has reaffirmed Kuveyt Turk Katilim Bankasi A.S.’s (the Bank) A1/Stable/P1 financial institution ratings and the A1(s)/Stable rating of KT Kira Sertifikalari Varlik Kiralama A.S.’s RM2.0 billion Islamic Medium-Term Notes Programme (2015/2025). The ratings continue to incorporate our expectation of extraordinary support from Kuwait Finance House K.S.C.P. (KFH), given the Bank’s strategic importance to the former, as well as a one-notch sovereign weight necessitated by Turkey’s non-investment grade sovereign ratings of gBB2(pi)/Negative/gNP(pi) – although Turkey’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) on account of economic fragilities following the currency crisis in 2018 and the elevated threat of severe international sanctions against the country, a similar revision of Kuveyt Turk’s and KT Kira’s ratings is not warranted at this juncture.
Against a volatile macroeconomic backdrop, the Bank’s performance had stayed largely within our expectations despite some asset quality deterioration. Its headline gross impaired financing (GIF) ratio closed the year at 2.8% (end-December 2017: 2.2%). The accretion of impaired financing primarily stemmed from the construction as well as the wholesale and retail trade sectors, with broad-based weakening in the latter save for financing extended to export-oriented borrowers. Potential downside risks arising from domestic and external headwinds will continue to weigh on Kuveyt Turk’s asset quality in the near term – some of these pressures are reflected in its GIF ratio of 4.0% as at end-June 2019.
The Bank’s loan loss coverage had climbed to 163% as at end-December 2018 (end-December 2017: 100%) following a large provisioning exercise during the year, seen in its very high credit cost ratio of 4.9% in fiscal 2018 (five-year average: 2.3%). While this indicator is likely to remain lofty going forward, we do not expect a recurrence of the quantum recorded in fiscal 2018 – the exceptionally high credit costs had been mainly due to the Bank’s larger proportion of Stage 2 financing and higher provisioning requirements for this financing category under Turkish Financial Reporting Standard 9.
On balance, Kuveyt Turk’s pre-provision earnings and capitalisation continue to serve as sturdy loss absorption buffers, with the former comfortably cushioning even outsized impairments last year. The Bank’s funding and liquidity profile also stayed healthy despite some degree of vulnerability to external uncertainties. Such risks are, however, relatively contained in view of the Bank’s moderate and reduced dependence on external wholesale funding. Adding to our comfort is KFH’s ongoing support, as evidenced by regular interbank deposit placements and the availability of a USD1.0 bil contingent liquidity line that Kuveyt Turk can tap in times of liquidity stress.
KFH had reiterated its backing with a USD200 mil tier-1 capital injection in June 2019, which is estimated to raise the Bank’s total capital ratio to a pro forma 20%. While Kuveyt Turk’s common equity tier-1 capital ratio had eased to 12.0% as at end-December 2018 (end-December 2017: 13.1%) as it bore the brunt of the lira’s depreciation in the second half of last year, this level is still sound vis-à-vis the Bank’s risk profile. We expect Kuveyt Turk’s strong earnings generation to continue to prop up this indicator and support its growth agenda.
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.
Loh Kit Yoong
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Ratings on Kuveyt Turk Katilim Bankasi AS