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
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
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
Ottoman Bank: FSR of D+ confirmed with outlook changed to negative;
LCDR of Baa1/P-2 confirmed with outlook changed to negative from
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
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.
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.
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.
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.
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.
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.
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.
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
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.
Financial Institutions Group
Moody's Interbank Credit Service Ltd.
Vice President - Senior Analyst
Financial Institutions Group
Moody's Interbank Credit Service Ltd.