MOODY'S ASSIGNS LONG- AND SHORT-TERM RATINGS FOR DEPOSITS AT B1/NOT PRIME AND BANK FINANCIAL STRENGTH RATING OF E+ TO EMLAK BANKASI
Limassol, 02-20-96 -- Moody's Investors Service assigned B1/Not Prime ratings for deposits and an E+ bank financial strength rating (BFSR) to Emlak Bankasi. The ratings for deposits which reflect overall credit risk, are based on the bank's key role in the economy and its government ownership and are at the current ceiling for bank deposit ratings in Turkey.
BFSR ratings are intended to provide a measure of the intrinsic safety and soundness of an institution but exclude external considerations such as ownership, support and transfer risk. Moody's BFSRs are not constrained by a country ceiling and use a scale ranging from "A" (exceptional) to "E" (very weak), with a "+" appended to ratings below the "A" level to distinguish stronger banks within the category. Moody's commented that the impact of the operating environment on a bank's fundamentals meant that it would be unusual for a bank in a relatively challenging environment, such as Turkey, to obtain a rating above the "C" level.
Moody's said that a high percentage of the banking business carried out by Emlak is in connection with housing finance, giving the bank a unique and vital role in the community. The government's Mass Housing Fund provided US$677mn to the bank in 1994 for on-lending, business for which the bank receives a fee rather than interest. In addition, one-third of customer deposits are compulsory deductions from the salaries of employees in large companies. The bank also has access to funds from a number of European official sources to help its housing construction program. The bank has no funding problem, but it does have a significant maturity mismatch that could become a problem in the future.
The bank had been providing foreign currency denominated or indexed mortgage facilities, and after the devaluation of the lira during the economic crisis early in 1994, many borrowers with these loans found that they could not meet the higher payments required. Many of these loans are currently underperforming and the bank has been unable to resolve the problem. The issue may only be settled if the government intervenes. Meanwhile, the bank's profitability is adversely affected. Moody's said that while the bank may have a large non-performing loan portfolio, the position is somewhat tempered by its extensive holdings of land and property that are probably undervalued. However, these assets are not producing income for the bank.
Moody's also noted that the bank is presently undercapitalized and fails to meet the minimum required levels. As a state-owned institution, the bank has applied to the government for a capital increase.
Emlak Bank in its present form is a result of a 1988 merger between two ailing public sector banks and the 1993 takeover of an insolvent state bank. Staffing has not been consolidated during this merger process and, partly as a result, the bank is over-staffed and inefficient. Although management believes that privatization will lead to solutions to the bank's problems, Moody's believes that some restructuring will be required before privatization can be a viable option.
Emlak Bankasi is headquartered in Istanbul. It had total assets of US$4.5 billion at the end of 1994 and was Turkey's third largest bank.
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