OREANDA-NEWS. Fitch Ratings has assigned Istanbul Takas ve Saklama Bankasi A.S. (Takasbank) Long- and Short-term Issuer Default Ratings (IDRs) of 'BBB-' and 'F3' respectively. The Outlook on the Long-term IDR is Stable.

At the same time, Fitch has assigned Takasbank a Viability Rating (VR) of 'bbb-' and a National Long-term Rating of 'AAA(tur)'. A full list of rating actions is detailed at the end of this rating action commentary.

Takasbank is Turkey's only central clearing counterparty (CCP) and is majority-owned by Borsa Istanbul, Turkey's main stock exchange. Borsa Istanbul in turn is majority-owned by the Turkish government. Takasbank is operating under a limited banking licence, and is regulated by three Turkish regulatory bodies, namely the Central Bank of Turkey, the Banking Regulation and Supervision Agency and the Capital Markets Board.

KEY RATING DRIVERS
VIABILITY RATING AND FOREIGN CURRENCY IDRS
Takasbank's IDRs are driven by the bank's standalone credit profile as captured in the VR. The VR takes into account Takasbank's unique infrastructure for the local financial market, sound risk controls and counterparty risk management, adequate capitalisation and leverage as well as a sound funding and liquidity profile. The VR also reflects moderate credit risk (largely interbank and broker exposures) in the sizeable treasury activities of Takasbank as well as concentration risks in its CCP activities, currently provided only on the securities lending and standardised derivatives markets.

As the country's only major clearing house, Takasbank has dominant franchises in domestic clearing, custody and CCP collateral management services. Given Takasbank's near-monopolistic franchise in organised exchange markets and the limited number of available counterparties in Turkey's capital markets, the bank's strategy is primarily to roll out its clearing and collateral management services to other product areas, notably offering CCP services for equity, debt securities and OTC derivative markets during 2016 and 2017.

Credit risk is moderate and is represented primarily by the bank's treasury activity (mostly short-term money market operations) and counterparty risk in CCP activity. While the credit quality of money market placements is generally acceptable (typically with 'BBB-' rated institutions), considerable concentration risk exists (exposure to the three largest counterparties account for about 90% of total placements).

Counterparty risk arising from CCP activity is mitigated by sound margin procedures (including both initial and variation margining) and default management procedures, which are generally in line with international best practice and recent international recommendations for market infrastructure. The guarantee funds (collective funded contributions from market participants to absorb losses) for the securities lending and futures and options market are sized to withstand the default of the two largest counterparties in each market.

Takasbank is also exposed to operational and reputation risks, which in our opinion are adequately controlled. The bank is also exposed to legal risks in case of system failures. To date, operational losses have been immaterial.

Takasbank is well-capitalised (Fitch Core Capital ratio of 25.8% at end-2015) and Fitch estimates that the bank's capital base is able to withstand defaults of all counterparties, except for the largest, even under quite significant stress. At the same time, defaults in Takasbank's concentrated treasury portfolio could have a more adverse impact on capitalisation.

Takasbank's funding and liquidity profile is sound, as the stock of liquid assets allowed the bank to repay all of its liabilities as at end-2015. The majority of liabilities consists either of interbank funding relating to treasury activities (with proceeds invested in the interbank market with matching tenors) or collateral accounts (with proceeds invested in liquid assets in line with Takasbank's investment policy). The bank's investment policy is governed by quite stringent criteria and allows only for short-term interbank placements and a small portfolio of government securities.

Profitability is solid (ROAE of 21% in 2015), although a fairly high dividend pay-out ratio (53% in 2014) weighs on internal capital generation. Profitability is supported by strong net fee generation (more than covering operating expenses with operating costs/fees of 87.5%) but also net interest income from Takasbank's treasury operations. The interest income earned on placing surplus collateral is passed on to collateral holders, while Takasbank earns only commission from this amount. Cost efficiency is reasonable as reflected in a 28% cost/income ratio in 2015.

The Stable Outlook on Takasbank reflects our expectation that the bank should be able to maintain reasonable performance without compromising its currently adequate risk profile, notwithstanding the planned introduction of new products and a challenging operating environment in Turkey.

SUPPORT RATING, SUPPORT RATING FLOOR, LOCAL CURRENCY IDRS AND NATIONAL RATING
Takasbank's Support Rating of '2' and Support Rating Floor (SRF) of 'BBB-' reflect our view of the high probability of support from the Turkish sovereign (BBB-/Stable), in case of need. The SRF, which underpins Takasbank's Long-term Foreign Currency IDR, is aligned with the sovereign's Long-term Foreign Currency IDR. The bank's Long-term Local Currency IDR of 'BBB' is also aligned with that of the sovereign, reflecting our high support expectations and Turkey's ability to provide support in local currency. The National Long-term Rating of Takasbank is driven by its Long-term Local Currency IDR.

Takasbank has, in our opinion, exceptionally high systemic importance for the Turkish financial sector and contagion risk from its default would be considerable given its interconnectedness. The state's ability to provide extraordinary foreign currency support to the banking sector, if required, may be constrained by limited central bank reserves (net of placements from banks) and the sector's sizable external debt. However, in our view, the foreign currency support needs of Takasbank in even quite extreme scenarios should be manageable for the sovereign given the bank's adequate liquidity position.

RATING SENSITIVITIES
VIABILITY RATING AND FOREIGN CURRENCY IDRS
Given Takasbank's almost entirely domestic credit exposure including large exposures to the country's largest banks, upside potential for its VR and Foreign Currency IDRs is limited and would require a sovereign upgrade. In addition, its VR is constrained by the bank's focus on the fairly narrow Turkish capital markets, which limits the scope for risk diversification.

A downgrade of Turkey's sovereign rating or the ratings of Turkey's largest banks would have an impact on Takasbank's credit profile and could put pressure on the VR. A material operational loss or significantly increased risk appetite (eg by growing rapidly in untested asset classes) could also be negative for the VR.

SUPPORT RATING, SUPPORT RATING FLOOR, LOCAL CURRENCY IDRS AND NATIONAL RATING
A rating action on Turkey's sovereign rating would likely be mirrored in Takasbank's SRF and Local Currency IDRs. A downgrade of Turkey's Long-term Local Currency IDR could lead to a downgrade of Takasbank's National Long-term Rating.

The ratings assigned are as follows:

Istanbul Takas ve Saklama Bankasi A.S. (Takasbank)
Long-term Foreign Currency IDR: 'BBB-'/Stable Outlook
Short-term Foreign Currency IDR: 'F3'
Viability Rating: 'bbb-'
Support Rating: '2'
Support Rating Floor: 'BBB-'
Long-term Local Currency IDR: 'BBB'/Stable Outlook
Short-term Local Currency IDR: 'F3'
National Long-term Rating: 'AAA(tur)'/Stable Outlook