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Rating Action:

MOODY'S CONCLUDES RATING REVIEW OF 13 TURKISH BANKS AMID LIQUIDITY CONCERNS

19 Dec 2000
MOODY'S CONCLUDES RATING REVIEW OF 13 TURKISH BANKS AMID LIQUIDITY CONCERNS

Two FSRs downgraded, 11 FSRs confirmed, two deposit ratings confirmed

Limassol, December 19, 2000 -- Moody's Investors Service announced today that it had concluded its review of the Financial Strength Ratings (FSRs) of 13 Turkish banks and the local currency deposit ratings (LCDRs) of Akbank and Ottoman Bank. Moody's said that the B2 long-term foreign currency deposit ratings that were placed on watch for possible upgrade in July of this year would remain on watch until the review of the country ratings is concluded.

Moody's said that during the review period the analysis focused on the banks' liquidity position and asset and liability management. The rating agency's principal concerns about the banks today lie in three areas: the high funding costs of repo portfolios, the interest rate risk from the recent spurt in consumer lending which may compound funding concerns, and the large open positions carried by many of the banks.

First, the size of the repo portfolios that banks must fund at rates that still hover around 100%. This compares with average yields on the underlying securities of around 35%. Moody's believes that high repo rates may persist well into January, which potentially could cause banks to show losses and even threaten their solvency. In addition, the mark-to-market cost will be high, although this may not be an issue if bonds and bills are held to maturity next year and if in the meantime interest rates fall.

The second issue relates to the banks' loan books. Although many banks lend predominantly in foreign currency or in Turkish Lira (TL) for short maturities, this past year has seen a rapid growth in consumer lending, fuelled, ironically, by the fall in interest rates. Most consumer loans have been for car purchase and in some cases have been very aggressively priced. By law, consumer loans cannot be re-priced, so the banks with large portfolios will be carrying these loans for many more months and their funding cost will be higher, so causing them to lose money.

The third issue raised by Moody's is the large open position carried by many of the banks. It has in the past proved profitable to borrow in foreign currency to fund a TL book. While the on balance sheet open position is hedged so the net position is within the regulatory band of 20% of equity, Moody's has concerns over the counterparty risk. It may be that many of these hedges are unenforceable, indeed some banks admit that this is the case. Many other hedges are with related parties. The government's agreement with the IMF says that TL will depreciate against the dollar within a narrow band up until mid-2001. After this, the band will widen. However, Moody's is concerned that the government may find itself unable to stick with this target and may feel the need to widen the band earlier than expected. If this is a sudden event, banks may be forced to take a loss on their position.

Moody's said that the current environment has become more threatening to banks. All banks need to be nimble to survive. Moody's said that 2001 is expected to be a difficult year for the banks if the government programme succeeds. With dismal GDP growth forecast for next year, credit risk and market risk are both heightened.

Moody's concluded that for many years banks have been able to make handsome profits by lending to the government. From now on they will need to look increasingly to fee and commission income, learn to live with lower margins and reduce their costs. As a result of the recent liquidity crisis, many banks will be facing difficult times from a position of weakness and Moody's said that this view of the coming year was also factored into its rating decisions.

THE NEW RATINGS ARE AS FOLLOWS:

Akbank: FSR of C confirmed with outlook changed to negative from stable; LCDR of A3/P2 confirmed with outlook changed to negative from stable

Finansbank: FSR of D confirmed with a positive outlook

Iktisat: FSR downgraded to E+ from D with a stable outlook

Isbank: FSR of D+ confirmed with a stable outlook

Kocbank: FSR downgraded to E+ from D with outlook changed to positive

Ottoman Bank: FSR of D+ confirmed with outlook changed to negative; LCDR of Baa1/P-2 confirmed with outlook changed to negative from stable

Pamukbank: FSR of D confirmed with a stable outlook

T.C. Ziraat Bankasi: FSR of E+ confirmed with a stable outlook

Toprakbank: FSR of E+ confirmed with a stable outlook

Turk Dis Ticaret Bankasi: FSR of D confirmed with a stable outlook

Turk Ekonomi Bankasi: FSR of D+ confirmed with a stable outlook

Turkiye Garanti Bankasi: FSR of C confirmed with a stable outlook

Vakifbank: FSR of D confirmed with outlook changed to negative from stable

AKBANK

Moody's confirmed the FSR of "C" and the local currency rating of A3/P2 of Akbank and assigned a negative outlook to both of them. The change in outlook to negative from positive is primarily related to concerns about the sizeable gross open foreign currency position of the bank. This may lead, in the case of devaluation, to severe losses. Even though a large portion of the exposure is hedged, it would be difficult to estimate the performance of hedges under the stress scenario. However, Moody's understands that management is taking the necessary steps to reduce the open position. Another limiting factor for Akbank is its exposure to related parties, which keeps fluctuating but typically grows in a depressed economy.

FINANSBANK

Moody's said that it confirmed Finansbank's "D" FSR and its positive outlook. Finansbank had one of the highest core liquidity ratios during the crisis and has been consistently a net lender. Similar to its larger peers the volume of repos represented around 5% of total assets. Moody's said that the high level of auto loans relative to its total loan portfolio, which carry fixed interest rates and longer maturity, was a source of concern. However, the fixed rate TL loans do not constitute more than 6% of the bank's total assets, a moderate amount in the opinion of the rating agency. Moody's concluded by saying that, although it maintains a positive outlook on the FSR of Finansbank, the destabilised banking environment has put back the timing of a possible upward movement of the rating.

IKTISAT BANKASI

Moody's downgraded the FSR of Iktisat to "E+" from "D" to reflect the level of related-party lending and exposure to additional interest rate volatility from a relatively large repo portfolio, as well as exposure to foreign exchange rate risks. Moody's understands that the bank's owner is in negotiations to sell a portion of his assets to repay the bank; however, Moody's believes that the risk carried by the related party exposure has been heightened by the crisis. In addition, Moody's is concerned that a substantial gross short foreign exchange position leaves the bank very vulnerable to counterparty failure. Moody's understands that Iktisat has a relatively large client portfolio of exporters; however, given the size of the open position, concerns exist that the client cash flow may be neither sufficient, nor timely, to assist the bank in a devaluation stress-event. Moody's stated that a reduction of related-party lending and rationalisation of liability and foreign exchange risks would place upward pressure on the rating.

ISBANK

Moody's said that it confirmed the "D+" rating with a stable outlook for Isbank. This rating continues to reflect the strength of its franchise and the liquidity position of the bank when it entered the crisis. Similar to its peers, Isbank has been a net lender during the crisis. Moody's added that Isbank's repo portfolio is of a similar size to its peers and may continue to make losses in the current interest rate environment. However, such losses are slightly compensated by the bank's profitable reverse repo activities and interbank lending. Moody's estimates the bank's fixed TL loan portfolio to be around 6% of total assets, similar to its peers and at comfortable levels. Moody's believes that Isbank will benefit from a consolidation in the banking sector and will likely be able to gain market share.

KOCBANK

Moody's said that it has downgraded the FSR of Kocbank to "E+" from "D" but has assigned a positive outlook to that rating. Moody's elaborated on this rating action by stating its concern about the high level of repo activity which, although it has been coming down in recent months, remains high in relation to total assets, and one of the largest in absolute value compared to other rated banks in Turkey. Moody's said that, in prior reports, it had commented on Kocbank's reliance on repos as being an activity which "leaves the bank with a substantial exposure to interest rate risk" and that it is "highly opportunistic and will not be a sustainable source of revenue if the stabilisation programme succeeds." Moody's said that in the changed environment, the high exposure to interest rate risk had weakened the bank's intrinsic health, which is now better reflected in an "E+" FSR.

Moody's said that the new top management team has been aware of such weaknesses in the bank's risk profile and has been restructuring the balance sheet. However, this crisis occurred in the middle of this restructuring process before management was able to reduce the risk to acceptable levels. Moody's added that its positive outlook on the bank's FSR reflects the new strategic initiatives which, if successful, may result in a stronger bank. Until such initiatives are concluded and the bank's risk profile is significantly improved, the bank's FSR will not move to the higher rating category.

OTTOMAN BANK

Moody's said that the negative outlooks on Ottoman Bank's "D+" FSR and LCDR reflect a lower level of highly liquid assets on its balance sheet compared to other "D+" rated banks. Moody's added that unlike some of its high rated peers, Ottoman has been a net borrower for most of the crisis period, albeit to a small degree, and has not been able to benefit from interbank lending to the same extent as its peers. Moody's said that although the crisis may affect Ottoman's profitability relatively more than some of its peers, the bank's intrinsic health and its franchise remain strong and consistent with "D+" ratings.

PAMUKBANK

Moody's said that confirming the "D" FSR with a stable outlook is a reflection of Pamukbank's lower susceptibility to interest rate risk compared to its peers. At the onset of the crisis, Pamukbank had a TL repo book of around 1.6% of total assets with nearly 64% in floating rate notes. The bank's gross foreign currency open position was around 30% of total equity, much lower than most of its peers. Moody's said that it was comforted by Pamukbank's liquidity position during the crisis, which stems from a broad and stable funding base. Moody's, however, was concerned by the high volatility in the share prices of Yapi ve Kredi Bankasi and Turkcell, both of which are held on Pamukbank's balance sheet and marked to market. Such volatility has a negative effect on the bank's equity base and net profit.

T. C. ZIRAAT BANKASI

Moody's said that it confirmed the "E+" FSR of Ziraat with a stable outlook. Already a constrained franchise, Moody's believes that this benefited Ziraat going into the crisis, by limiting Ziraat's ability to enter into fixed-rate, long-dated consumer loans. Moody's said that Ziraat had been a net TL borrower during the crisis. Moody's believes that that this was partially due to the need to fund the special duty accounts, which represented nearly 40% of total assets at end of September 2000. Moody's added that Ziraat was a net foreign exchange placer during the crisis, reflecting the franchise value of Ziraat's overseas operations. Moody's said that it remains concerned regarding the level of government receivables on Ziraat's balance sheet and believes that these hinder the bank. Moody's is also concerned with the level of repo activity by the bank, which is a result of government repayments to Ziraat in the form of paper, rather than cash.

TOPRAKBANK

Moody's said that its confirmation of the "E+" FSR with a stable outlook is primarily due to Toprakbank's low repo activity, adequate liquidity and stable domestic funding base. Toprakbank did not need to borrow from the interbank market during the crisis and has benefited from its liquidity position. Moody's added that the prudent strategy adopted by the bank's new management in controlling the bank's balance sheet risk profile has been rewarded during this crisis. However, Moody's added that the level of related party lending remains a concern and even more so now in light of the expected slowdown in economic activity in 2001.

TURK DIS TICARET BANKASI (DISBANK)

Moody's said that it confirmed Disbank's "D" rating with a stable outlook. It reflects Disbank's strength in risk measurement and management during the liquidity crisis. Moody's found that Disbank's liquidity more than compensated for its small security repurchase activity, allowing the bank to be a net lender during the crisis. At the same time, a small fixed-rate consumer loan portfolio also shielded the bank from interest rate exposure. Moody's expects net interest income to increase, while any unrealised losses from marking-to-market the TL government bond portfolio should be shielded by a reduction in the portfolio during the year and a strong capital to asset ratio. Moody's added that in a volatile operating environment, Disbank's defensive posture enables the bank to be in the game for the long run, effectively gaining market share as others exit.

TURK EKONOMI BANKASI (TEB)

Moody's confirmed the FSR of "D+" of TEB. TEB was well prepared for the liquidity squeeze and had built up a sizeable liquidity position. It was also one of the very few, if not the only bank, in Turkey carrying a long foreign currency position on its balance sheet. This, coupled with its very conservative strategy, helped TEB weather the crisis without serious consequences.

TURKIYE GARANTI BANKASI

Moody's said that the "C" FSR of Garanti is confirmed with a stable outlook. Garanti has been a net lender throughout the crisis and has been able to benefit from the high rates in the interbank market. Moody's added that Garanti's asset and liability management is among the best relative to its Turkish peers. Garanti had limited exposure to the repo market and to fixed rate TL loans at the onset of the crisis. Moody's commented on Garanti's strength in treasury operations, which continue to generate profits, compensating to some extent for the losses arising from some banking activities.

TURKIYE VAKIFLAR BANKASI

Moody's said that the negative outlook on VakifBank's "D" FSR indicates a vulnerability to additional interest rate volatility from the level of repos relative to the bank's balance sheet. Moody's believes that VakifBank's rapid expansion in overnight repo activity during the year was partially offset by its relatively slower growth in fixed-rate consumer loans. Moody's expects full-year profits to be reduced by the liquidity crisis, but not eliminated. Moody's added that a return to rapid loan growth, and an absence of improvements in liability management and capital will impair the financial strength of the bank.

Limassol
Elisabeth Jackson-Moore
Managing Director
Financial Institutions Group
Moody's Interbank Credit Service Ltd.
357-5-586586

Limassol
Adel Satel
Vice President - Senior Analyst
Financial Institutions Group
Moody's Interbank Credit Service Ltd.
357-5-586586

No Related Data.
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