Fitch Affirms Turkiye Finans & Kuveyt Turk at 'BBB'; Outlook Stable

Mon Dec 9, 2013 10:07am EST

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(The following statement was released by the rating agency) LONDON, December 09 (Fitch) Fitch Ratings has affirmed Turkiye Finans Katilim Bankasi A.S. (Turkiye Finans) and Kuveyt Turk Katilim Bankasi A.S.'s (Kuveyt Turk) Long-term foreign currency (FC) Issuer Default Ratings (IDR) at 'BBB' with Stable Outlooks. The banks' Viability Ratings (VR) have also been affirmed at 'bb-'. A full list of rating actions is at the end of this comment. KEY RATING DRIVERS AND SENSITIVITIES - IDRS, NATIONAL RATINGS, SENIOR DEBTAND SUPPORT RATINGS The affirmation of the banks' support-driven ratings reflects Fitch's opinion that there is a high probability of support being available from their majority shareholders - respectively National Commercial Bank and Kuwait Finance House (both rated A+/Stable) - in case of need (for more details see 'Correction: Fitch Affirms Support-Driven Ratings of 7 Turkish Banks' dated 12 November 2013 at www.fitchratings.com). KEY RATING DRIVERS - VR The banks' VRs reflect their generally solid financial metrics in terms of profitability, asset quality, liquidity and capital adequacy. However, the VRs also consider the banks' still limited franchises, quite limited track records and rapid ongoing growth. Operating return on equity, supported by fairly wide margins reflecting a focus on SME business, has consistently been around 19% for Turkiye Finans and 17% for Kuveyt Turk, broadly in line with the peer average. Impairment charges are still contained and impaired loans represented below 3% of total loans at end-1H13, which is better than peer ratios and broadly in line with the 2.8% sector average. Loan growth at both banks (c.19% in 1H13) is slightly above the sector's already high average (16%) and Fitch believes underwriting systems need to be fully tested throughout longer credit cycles, as is the case for several Turkish banks. This is particularly important given the banks' core SME customer base (45% of total lending at both banks), whose performance could be more volatile. Risks in the SME portfolios tend to be broadly based across sectors and diversification can help contain risks. Given ambitious growth plans (a trebling of the balance sheet at at Kuveyt Turk over the next five years, and a doubling at Turkiye Finans), Fitch believes capital requirements are likely to be considerable. Turkiye Finans' Fitch core capital/weighted risks ratio, of 14.2% at end-1H13, was slightly above Kuveyt Turk's 12.9%, but shareholders provide regular capital injections to support expansion. Kuveyt Turk's largest risk exposure, equivalent to around 16% of equity, is, in Fitch's opinion, to a related party. By law, the exposure is not classified as related but Fitch considers that, in essence, this is the case. These loans are performing and Fitch takes some comfort from (i) the fact that other banks also lend to the same entities; and (ii) the Turkish regulator, the BRSA, having publicly stated that it has no significant concerns with respect to these exposures. Nevertheless, any marked further increase in related party business could become a significant negative driver for the bank's VR. Both banks conduct interest-free banking, locally known as participation banking. Demand for this service is growing. The banks are largely funded by customer deposits, although they have each also placed public sukuk issues. As larger Turkish banks plan to open specialised participation subsidiaries, competition is likely to increase for smaller niche players such as Turkiye Finans and Kuveyt Turk. RATING SENSITIVITIES - VR The banks' VRs are unlikely to be upgraded in the near term, given continued rapid growth and the fact that mainly underwriting standards and operating systems need to be more fully tested. Evidence of significant asset quality deterioration or weakening of capitalisation would put negative pressure on the VRs. At Kuveyt Turk, a marked further increase in related party business could become a significant negative driver for the bank's VR. The rating actions are as follows: Kuveyt Turk Katilim Bankasi A.S. and Turkiye Finans Katilim Bankasi A.S.: Long-term foreign currency IDR: affirmed at 'BBB'; Stable Outlook Long-term local currency IDR: affirmed at 'BBB+'; Stable Outlook Short-term foreign currency IDR: affirmed at 'F3' Short-term local currency IDR: affirmed at 'F2' Support Rating: affirmed at '2' National Long-term Rating: affirmed at 'AAA(tur)'; Stable Outlook Viability Rating: affirmed at 'bb-' TF Varlik Kiralama A.S., KT Sukuk Varlik Kiralama A.S. Senior unsecured debt issues (sukuk): affirmed at 'BBB' Contact: Primary Analyst Janine Dow Senior Director +44 20 3530 1464 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Banu Cartmell Director +44 203 530 1109 Committee Chairperson James Watson Managing Director +7 495 956 6657 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. Additional information is available on www.fitchratings.com Applicable criteria, 'Global Financial Institutions Rating Criteria', dated 15 August 2012, 'Rating Sukuk' dated 9 August 2013, 'Rating Financial Institutions Above the Sovereign' dated 12 December 2012, 'Rating FI Subsidiaries and Holding Companies' dated 10 August 2012, 'National Scale Ratings Criteria' dated 30 October 2013, 'Evaluating Corporate Governance' dated 12 December 2012 are available at www.fitchratings.com. Applicable Criteria and Related Research: Global Financial Institutions Rating Criteria here Rating Financial Institutions Above the Sovereign here Rating FI Subsidiaries and Holding Companies here National Scale Ratings Criteria here Evaluating Corporate Governance here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '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. 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.

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