September 25, 2017 / 4:42 PM / a year ago

Fitch Affirms Arap Turk Bank at 'BB-'; Outlook Stable

(The following statement was released by the rating agency) LONDON, September 25 (Fitch) Fitch Ratings has affirmed Arap Turk Bankasi A.S.'s (ATB) Long-Term Local and Foreign Currency Issuer Default Ratings (IDRs) at 'BB-' with a Stable Outlook. A full list of rating actions is available at the end of this rating action commentary. KEY RATING DRIVERS IDRS, VIABILITY RATING AND NATIONAL RATING The IDRs and National Rating are driven by the standalone strength of ATB, as measured by its 'bb-' Viability Rating (VR). The VR reflects ATB's reliance on substantial deposit funding from majority shareholder, Libyan Foreign Bank (LFB), and on trade flows between Libya and Turkey. The ratings also take into consideration the limited franchise of ATB within the Turkish banking sector, its specialist focus on the high-risk Middle East and North Africa (MENA) region and high credit concentrations on- and off-balance sheet. The VR benefits from ATB's track record of consistently sound financial performance. ATB has developed significant expertise in trade financing between Turkey and MENA countries, in particular Libya. Other activities include correspondent banking with regional counterparties including Libyan banks, as well as cash loans to major Turkish corporates. Transactions with Libya, although high in risk, have performed well over time, and their high proportions of the bank's activity are mitigated by guarantees from large Turkish banks and corporates. Consequently, ATB's asset quality metrics compare well with Turkish commercial banks' and trade finance bank peers', as impaired exposures represented a low 0.4% of total credit exposure (total cash and non-cash commitments) at end-1H17. The main risk to asset quality is from high borrower and geographic concentrations in volatile economies. Deposits from LFB represented 44% of ATB's non-equity funding at end-2016, presenting significant funding concentration. However, this has been fairly stable over the years and has supported ATB's operations within the region. Other sources of funding consist of bank borrowings (30%), of which a high proportion is from LFB affiliates or related entities, and customer deposits (12%). Management intends to diversify sources of funding to reduce concentrations. ATB's capital adequacy ratios are adequate (Fitch Core Capital (FCC)/risk-weighted assets: 17.2% at end-1H17), but capital is small in terms of absolute size (end-June 2017: TRY757 million), especially given the bank's high credit concentrations. Capitalisation is supported by acceptable internal capital generation. However, capital adequacy ratios are vulnerable to an increase in risk-weighted assets from lira depreciation, given ATB's large proportion of foreign currency (FC) assets (81% at end-1H17), mainly in euros and US dollars. Profitability ratios compare well with trade finance bank peers', despite tough operating conditions (return on equity: 11% in 1H17). Margins are healthy (net interest margin: 4.7% in 1H17), but are expected to come under pressure as funding costs increase due to the focus on diversification. Integration with LFB group banks and a small branch network of seven help keep cost efficiency stable (cost/income: 39% in 1H17). The affirmation of ATB's 'A+(tur)' National Long-Term Rating reflects Fitch's view that the bank's credit profile relative to others financial institutions in the Turkish market has not changed. SUPPORT RATING AND SUPPORT RATING FLOOR The bank's '5' Support Rating reflects Fitch's view that support cannot be relied upon either from the Turkish authorities or from the shareholders. Fitch believes that support cannot be relied upon from the Turkish authorities, given ATB's limited systemic importance. ATB's Support Rating Floor (SRF) has been affirmed and withdrawn, as Fitch believes the primary source of any potential support would be LFB and not the Turkish authorities. Given the uncertain economic and political environment in Libya, LFB's ability to provide support cannot be relied upon despite a track record of past support for the Turkish bank's operations. LFB has over time shown a high propensity to support ATB, underlining the importance of the bank to the former's international strategy. As well as providing low-cost funding, LFB appoints key senior management (including the CEO) and plays a vital role in introducing business to its Turkish subsidiary. RATING SENSITIVITIES IDRS, VR AND NATIONAL RATING The bank's IDRs and National Rating are sensitive to a change in the VR. The bank's VR could be downgraded if ATB's strategic importance to LFB is reduced, through a substantial loss or withdrawal of funding or business, due to, for example, a change in the regime in Libya. ATB's VR is also sensitive to a material weakening of the domestic operating environment and the potential negative impact of this on asset quality and earnings as well as the sufficiency of the bank's capital and liquidity buffers. However, these scenarios do not represent Fitch's base case. Upside for the ratings is limited given the bank's niche franchise, high reliance on parent funding and exposure to the Libyan economy. However, diversification of ATB's funding profile and business model or significant improvements in Libya's operating environment could bring rating upside. SUPPORT RATING The Support Rating could be upgraded if Fitch judges that LFB is able to provide extraordinary support to ATB in case of need. This would be contingent on a more stable regime in Libya while maintaining the importance of ATB to LFB. The rating actions are as follows: Long-Term Foreign and Local IDRs affirmed at 'BB-'; Stable Outlook Short-Term Foreign and Local IDRs affirmed at 'B' Viability Rating affirmed at 'bb-' Support Rating affirmed at '5' Support Rating Floor affirmed at 'No Floor' and withdrawn National Long-term Rating affirmed at 'A+(tur)'; Stable Outlook Contact: Primary Analyst Mahin Dissanayake Director +44 20 3530 1618 Fitch Ratings Limited 30 North Colonnade, London E14 5GN Secondary Analyst Huseyin Sevinc Associate Director +44 20 3530 1027 Committee Chairperson Bridget Gandy Managing Director +44 20 3530 1095 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: Additional information is available on Applicable Criteria Global Bank Rating Criteria (pub. 25 Nov 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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