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Rating Action:

MOODY'S ASSIGNS RATINGS TO FOUR TURKISH BANKS FOR LONG- AND SHORT-TERM DEPOSITS AND BANK FINANCIAL STRENGTH

08 Jul 1996
MOODY'S ASSIGNS RATINGS TO FOUR TURKISH BANKS FOR LONG- AND SHORT-TERM DEPOSITS AND BANK FINANCIAL STRENGTH Limassol, July 8, 1996 -- Moody's Investors Service assigned long-and short-term ratings for deposits and bank financial strength ratings (BFSRs) to four Turkish banks. The four banks are Turkiye Is Bankasi (Isbank), Iktisat Bankasi, Toprakbank and Pamukbank. This is the first time that these banks have been rated by Moody's.
All four banks have been assigned long- and short-term ratings for deposits of B1/Not Prime. These ratings, which
reflect overall credit risk, are set at the current ceiling for bank deposit ratings in Turkey.
BFSRs are intended to provide a measure of the intrinsic safety and soundness of an institution excluding external credit considerations such as ownership, availability of support in case of need 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 has assigned the following BFRSs: Isbank -- D+; Iktisat Bankasi -- D; Toprakbank -- D; Pamukbank -- E+.
Moody's said that Isbank's BFSR of D+ reflects the fact that the bank is the second largest bank in Turkey and benefits from a large and well distributed branch network. It has also been a pioneer in developing sophisticated computer systems and its integrated network gives it an advantage over its peers. Profitability has improved, allowing a positive restructuring of
the balance sheet in 1995, and liquidity is satisfactory. The bank has succeeded in halting the loss in market share of
customer deposits that has been a feature of recent years. Moody's also noted the key role played by the bank in supporting the industrial sector. This has led to the bank acquiring a significant investment portfolio in some important areas, most notably the successful Sise Cam Group, one of the largest glass manufacturers in Europe. While the portfolio is under-valued on the balance sheet, providing a hidden reserve for the bank, the investments still tie up the bank's capital.
Moody's also commented that the recent legal disputes with the CHP, one of Turkey's left-wing political parties, over the ownership of Ataturk's shares had hindered the bank in its desire to increase capital. However, this situation appeared to have been adequately remedied in 1995. The ownership structure, whereby a portion of the bank's shares are held by the treasury, gives the bank many of the advantages of a close association with the public sector without the bureaucratic and operational disadvantages.
One further issue that has been addressed but, in Moody's opinion, still sits uncomfortably on Isbank's balance sheet is the bank's exposure to Disbank and that bank's majority shareholder, the Dogan Group. Part of the long-term loan
facilities to Disbank, which are denominated in US dollars, may not be recovered unless the Lapis Group, which bought Disbank from Isbank in 1993 but then could not meet the stage payments during the 1994 crisis, repays Disbank. Additionally, the lack of a written repayment schedule of money owed by the Dogan Group for its subsequent purchase of Disbank has led to a qualification to the 1994 and 1995 accounts.
Moody's said that Iktisat Bankasi, which has been assigned a BFSR of D, benefited from its focused, but pragmatic strategies. Most of the bank's loans are to exporters and are denominated in foreign currency and, despite its relatively small size, Iktisat typically handles around 10% of Turkey's trade finance. The bank is also at the center of a growing financial services group with domestic and international operations.
However, Moody's noted that the holding group, Avrupa ve Amerika, also retains interests in a number of media companies. In the medium term, these may generate profits for the group, but are likely to bring volatility to overall performance, given the over-competitive nature of Turkey's media groups. In 1994 the bank's exposure to group companies increased above acceptable limits and, while the figure fell in 1995, there is no guarantee that the situation would not be repeated if Turkey experienced a further economic crisis.
Moody's commented that the overall quality and depth of management and the systems employed, set Iktisat apart from a number of its peers. The bank is always willing to take, and act on, the advice of top consultants in areas where it believes improvements can be made, the rating agency said.
Recent progress has been achieved in the bank's capitalization with the risk asset ratio now 8.7%, and furthermore, Moody's noted, the bank is committed to maintaining this ratio between 8.5% and 9% on a monthly basis. Given the bank's volume of foreign currency business and the continuing devaluation of the Turkish lira, this is a prudent decision. Profits improved significantly in 1995 but are lower than those achieved by some banks in the peer group. Liquidity management
systems are being reviewed after the difficulties Iktisat, and most other banks, faced during the 1994 crisis. However, Moody's noted that liquidity had already improved and the bank is opening new branches in order to capture more domestic deposits.
Moody's said that Toprakbank's BFSR of D reflected in part the clear strategic mission that the bank adopted at its
inception four years ago. Despite the economic crisis that engulfed Turkey in 1994, the bank had maintained its commitment
to its branch expansion policy. This decision was vindicated in 1995 when the bank was well positioned to increase its business and return healthy profits. However, Moody's also commented that the policy, which has resulted in a network of almost 100 branches, has required the recruitment and training of many new staff at a time when the bank has still been forming its corporate culture under an evolving team of senior managers.
Moody's noted that while the bank has been successful in gathering deposits in Turkey - especially demand deposits that accounted for an above market average percentage - Toprakbank has so far chosen not to seek funding from its international correspondents. Its aim has been to use only non-cash facilities while it established its reputation in the markets. While this primary aim has now been achieved, it has meant that the bank has had higher funding costs than many of its peers.
The bank aims to work with smaller businesses and has structured its operations to allow this business to be managed in a personal, people intensive way that Moody's believes should minimize the risk. Most loans are also well covered by collateral and reported non-performing facilities have been low. Board policy has also dictated that the bank should not invest heavily in treasury bills. Others found this business a profitable alternative to lending in 1995, but banks that chose this path took on significant exposures to the government's monetary policies.
Moody's commented that while Toprakbank's expansion plans have been aggressive, the bank has adopted cautious policies in managing its balance sheet, especially in the areas of funding, liquidity and capitalization.
Moody's said that Pamukbank, which has been assigned a BFSR of E+, was one of the longer established names in the Turkish market with a branch network that spans all the major urban centers. This has helped the bank develop a large retail customer base, business that is further supported by the bank's leading position in remittance flow from Germany.
Moody's commented that the bank's performance and balance sheet are not strong. The true position is difficult to assess because of the lack of significant disclosures in the financial statements and the fact that Pamukbank is one of the few remaining Turkish banks that does not provide independently audited accounts. Nevertheless, despite its strength in retail business, the bank collects a low percentage of demand deposits compared to the market overall. From the disclosure provided, liquidity calculations show the bank's position to be tighter than typically seen in the Turkish market. Moody's commented that banks have been able to arbitrage their FX/TL positions, compensating foreign exchange losses by Turkish lira interest income. However, Pamukbank's foreign exchange losses have been high, given the regulations that have restricted banks' open positions to 50% of their equity. Moody's said that the bank's low earnings suggested that Pamukbank had underperforming assets that had not been classified. The bank has had exposure to its shareholder group, Cukurova, and also to a number of public sector companies. Pamukbank may need to take additional
provisions or write off some of its exposures.
In June the bank's paid in capital increased to TL14 trillion. TL3,700 billion of the increase was new cash. Moody's said that the bank's capitalization looks strong but may be over-stated by the need for further provisions.
At the end of 1995, Isbank had total assets of US$6,305 million; Iktisat Bankasi had total assets of around US$800
million; Toprakbank had total assets of around US$700 million; and Pamukbank had total assets of around US$2,900 million. While Isbank is headquartered in Ankara, the other three banks are based in Istanbul.
No Related Data.
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MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any credit rating, agreed to pay to MJKK or MSFJ (as applicable) for credit ratings opinions and services rendered by it fees ranging from JPY125,000 to approximately JPY250,000,000.

MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.

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