Fitch Affirms Three Turkish State-Owned Commercial Banks 'BBB-'
The banks are either fully or majority state-owned and have a combined share of 29% of Turkey's banking sector assets.
KEY RATING DRIVERS - VRs, FOREIGN CURRENCY IDRS, NATIONAL RATINGS, DEBT RATINGS
The affirmation of the banks' Viability Ratings (VRs) at 'bbb-', as well as their Long-Term Foreign Currency IDRs and senior debt ratings at 'BBB-', reflects their still reasonable financial metrics in terms of profitability, asset quality and capitalisation, notwithstanding the increased pressures resulting from the challenging Turkish operating environment. The ratings also reflect the banks' still reasonable foreign currency liquidity positions - with generally good coverage of short-term liabilities by liquid assets - and their well-established franchises.
Nevertheless, banking sector performance has weakened as a result of slowing economic growth and the devaluation of the Turkish lira. The outlook remains uncertain, heightened by political uncertainty. As a result, downside risks for the ratings of Ziraat, Halk and Vakifbank, as for other banks in the sector, have increased.
The banks' reported ROE ranged from an acceptable 13% to 17% in 2014. While Ziraat and Halkbank's ROE remained in this range in 1H15, Vakif's fell to a moderate 9% (around 10% net of a one-off loss at an insurance subsidiary). Vakifbank's profitability has historically been slightly weaker than that of its state-owned peers, although still satisfactory, due to its weaker margins and cost efficiency and somewhat higher impairment charges. The performance of the three banks, as for the rest of the sector, is likely to remain under pressure due to slower economic growth, potential increases in non-performing loans (NPLs) as loan books season and tough competition. However, performance should remain adequate in the near to medium term in the absence of a material deterioration in the operating environment.
Fitch believes the banks' capital adequacy ratios, which are broadly in line with those reported by private sector peers, to be still reasonable. At end-1H15 their Fitch Core Capital ratios were 10.1% (Vakifbank), 11.7% (Halk) and 13.8% (Ziraat). Those levels are still sufficient to absorb the likely moderate increase in credit losses resulting from the slowing economy. Nevertheless, capital buffers are less robust than in the past at a time when internal capital generation capacity across the sector is under pressure, and capital ratios could tighten again in case of a further marked deterioration of the Turkish lira.
Non-performing loans (NPLs, defined as loans overdue by 90 days) remain fairly low at all three banks (end-1H15: 1.7% at Ziraat, 3.2% at Halk, 3.6% at Vakifbank). The state-owned banks do not write off and sell problem loans, a practice prevalent amongst privately-owned peers, making asset quality ratios not fully comparable. However, the ratios, in particular at Ziraat, in part reflect recent rapid growth and are likely to increase as portfolios season. Loan quality has been traditionally sound at Halk, but was negatively impacted in 2014 by the reclassification of a large exposure. Vakifbank's impaired loan ratio has historically been higher than peers, but its provisioning policies are conservative (end-1H15: reserve coverage of 91%, compared to 72% and 76% at Ziraat and Halk), while net NPL exposure relative to equity is low at all three banks.
Banks' foreign currency liquidity positions are reasonable. Foreign currency liquidity (defined as cash, placements in foreign banks, unpledged government foreign currency securities, placements in the Central Bank's reserve option mechanism and net receivables under foreign currency swaps) fully covered short-term foreign currency non-deposit liabilities at Halk and Vakifbank, while the ratio was an acceptable 80% at Ziraat. Residual medium/long-term debt is also significant, but maturities are quite spread, and refinancing risks should be manageable in most scenarios. Overall, the banks are primarily deposit-funded and non-deposit foreign currency funding represented a moderate 15% of non-equity funding at Ziraat at end-1H15, but a higher 21% at Halk and Vakifbank.
Ziraat is the country's largest deposit taker and leader in the consumer loans segment, while Halk and Vakifbank are the sixth and seventh-largest banks, respectively, in terms of deposits. Ziraat and Halk perform policy roles as they are the sole distributors of subsidised loans to the agricultural and SME sectors, respectively. Only state-owned commercial banks are eligible to receive savings deposits from certain state-owned companies, and stable state-related deposits represent a high 30% of total deposits at Vakifbank and around 20% at Ziraat and 16% at Halk. Ziraat, the largest of the state-owned banks, has a particularly deep franchise, and its widespread branch network provides it with significant competitive advantages.
Loan growth in the banking sector has slowed somewhat in 1H15 (13% in 1H15 compared with 19% in 2014; in both periods driven in part by exchange rate effects). Credit expansion at Vakifbank and Halk has been roughly in line with the sector average, but lending at Ziraat has grown at a more rapid pace (by 19% in 1H15 and 28% in 2014). This has reflected a continued drive to shift assets away from Turkish government bonds and into customer (mainly corporate) loans and in so doing has brought the bank's asset structure more into line with Halk and Vakif. Nevertheless, Fitch views Ziraat's risk appetite as somewhat higher than at peers, although all three banks have been expanding long-term US dollar project finance lending and potentially riskier SME lending.
Concentration risks at the state-owned peers remain manageable. The mix of borrowers is fairly similar to that at the leading private sector banks. In some cases their largest exposures include significant long-term dollar-denominated loans, reflecting energy privatisation finance or loans to state-owned companies. Given the control over the state-owned banks (the boards of the state-owned banks are dominated by government appointments), and the limited size (lending capacity) of the country's development banks, in Fitch's view there is some risk that the authorities could influence lending strategy at the state-owned commercial banks; however, there is little evidence of such influence to date.
KEY RATING DRIVERS - SUPPORT RATINGS, SUPPORT RATING FLOORS, LOCAL CURRENCY IDRS
The three banks' Support Ratings (SRs) of '2' and Support Rating Floors (SRFs) of 'BBB-' reflect Fitch's view of the high probability of support from the Turkish sovereign, in case of need. The SRFs, which underpin the banks' Long-Term Foreign Currency IDRs, are aligned with the sovereign's Long-Term Foreign Currency IDR. The banks' Long-Term Local Currency IDRs of 'BBB' are also aligned with those of the sovereign, reflecting Fitch's high support expectations.
In Fitch's view, the Turkish state's propensity to support the state-owned banks is likely to be very high, reflecting their ownership, the policy roles of Ziraat and Halk and the significant state-related deposits held at the banks. Fitch believes the state's ability to provide extraordinary foreign currency support to the banking sector, if required, may be somewhat constrained given limited central bank reserves (net of placements from banks) and the sector's sizable external debt. However, in Fitch's view, the foreign currency support needs of the state-owned banks in even quite extreme scenarios should be manageable for the sovereign given their generally reasonable liquidity positions.
KEY RATING DRIVERS AND SENSITIVITIES - VAKIFBANK SUBORDINATED DEBT
The affirmation of Vakifbank's subordinated debt rating at 'BB+' reflects the fact that this is notched one off the bank's 'bbb-' VR. This reflects Fitch's usual approach to rating subordinated debt, and also its view that government support for state-owned banks in Turkey will not necessarily in all circumstances be extended to subordinated creditors.
The banks' ratings are sensitive primarily to changes in the operating environment and the sovereign credit profile. A downgrade of the sovereign ratings would be likely to result in a similar action on the banks as it would signal both a reduced ability of the sovereign to provide support and a weakening of the operating environment, which is a key driver of the banks' VRs. A deterioration in the operating environment could result in a weakening of banks' asset quality, performance, capitalisation and access to foreign currency funding.
Downgrades of banks' VRs could also result from (i) a bank-specific deterioration of asset quality, resulting from weaknesses in underwriting; (ii) further erosion of capital ratios due to continued lira depreciation and/or growth; or (iii) a weakening of banks' foreign currency liquidity positions given their significant levels of foreign currency wholesale funding and exposure to investor sentiment. However, a downgrade of any of the banks' VRs would only result in negative action on the banks' IDRs if at the same time Fitch believed the ability and/or propensity of the Turkish authorities to provide support had weakened.
Any change in Vakifbank's VR would likely lead to a change in its subordinated debt rating.
Changes in the banks' SRs and SRFs, and hence the levels at which support underpins their IDRs, would likely be linked to changes in the sovereign's ratings. However, these ratings could also be downgraded, resulting in a notching of the banks' SRFs off the sovereign rating, if either (i) the banks' foreign currency positions deteriorate considerably, to an extent which might limit the sovereign's ability to provide them with sufficient extraordinary support in foreign currency; or (ii) Fitch believes the sovereign's propensity to support the banks has reduced. A change of ownership of the banks, or the introduction of bank resolution legislation in Turkey aimed at limiting sovereign support for failed banks, could negatively impact Fitch's view of support propensity, and hence the banks' SRs and SRFs. However, such developments are not currently anticipated in the near term.
The rating actions are as follows:
T.C. Ziraat Bankasi A.S., Turkiye Halk Bankasi A.S. and Turkiye Vakiflar Bankasi T.A.O.
Long-Term Foreign Currency IDR affirmed at 'BBB-'; Outlook Stable
Long-Term Local Currency IDR affirmed at 'BBB'; Outlook Stable
Short-Term Foreign and Local Currency IDRs affirmed at 'F3'
Viability Ratings affirmed at 'bbb-'
Support Ratings affirmed at '2'
Support Rating Floors affirmed at 'BBB-'
Senior unsecured debt affirmed at 'BBB-'
Senior unsecured debt (short-term; Ziraat and Vakifbank) affirmed at 'F3'
Subordinated debt rating (Vakifbank): affirmed at 'BB+'
National Long-Term rating affirmed at 'AAA(tur)'; Outlook Stable.