MOODY'S LOWERS RATINGS OF FOUR TURKISH BANKS, WITHDRAWS RATINGS OF OTTOMAN BANK AND CHANGES RATING OUTLOOKS TO STABLE FOR ALL TURKISH BANKS
Moody's Investors Service announced today that it has downgraded its ratings for four Turkish banks -Akbank, Turkiye Garanti Bankasi, Turkiye Is Bankasi and Turk Ekonomi Bankasi - and withdrawn the ratings of Ottoman Bank. The rating actions conclude Moody's review of the Financial Strength Ratings (FSRs) of the five Turkish banks and the local currency deposit ratings of Akbank and Ottoman Bank.
At the same time, Moody's has assigned first-time local currency deposit ratings for Garanti Bankasi and Turkiye Is Bankasi.
The rating changes are as follows:
- Akbank: FSR downgraded to D+ with a stable outlook from C; long-term local currency deposit ratings downgraded to Baa2 from A3. The Prime-2 short-term local currency deposit rating is confirmed.
- Turkiye Garanti Bankasi: FSR downgraded to D+ with a stable outlook from C; local currency deposit ratings assigned at Baa2/Prime-2.
- Isbank: FSR downgraded to D with a stable outlook from C-; local currency deposit ratings assigned at Baa2/Prime-2.
- Turk Ekonomi Bankasi: FSR downgraded to D+ from C-.
- Ottoman Bank: B3/Not-Prime foreign currency deposit ratings, C- financial strength rating and Baa1/Prime-2 local currency deposit ratings are all withdrawn.
The rating agency added that it has also changed to stable from negative the outlook for the B1 senior debt rating of Eximbank and the outlooks for the B3 long-term foreign currency deposit ratings of all Turkish banks rated by Moody's following a similar change in the country ceilings. The banks affected by the outlook change on their foreign currency deposit ratings are: Akbank, Turkiye Garanti Bankasi, Turkiye Is Bankasi, Turk Ekonomi Bankasi, Finansbank, Disbank, Pamukbank, Turkiye Vakiflar Bankasi, Kocbank, T.C. Ziraat Bankasi, Toprakbank.
TURKEY'S WEAK OPERATING ENVIRONMENT CONSTRAINS BANK RATINGS
Moody's said that the country's operating environment - one of the main pillars in Moody's assessment of banks' FSRs - remains weak, thus making it difficult for banks to attain FSRs higher than D+ until macro-economic conditions improve.
Moody's noted that Turkey's operating environment is weaker than it was at the time of the initial assignment of the banks' FSR ratings. The B3 domestic debt rating and the B1 foreign currency debt rating are indicative of such a weak operating environment.
According to Moody's, the financial crises that hit Turkey in 2000 and 2001 had a material negative impact on the Turkish economy and on most banks operating in the country. Moody's estimates that GNP contracted by around 8.5% in 2001, while interest rates and average inflation remained high at the end of 2001.
The rating agency added that the severe contraction in economic activity in 2001 has led to the closure of thousands of businesses in Turkey, which in turn resulted in a sharp rise in unemployment. In addition, the devaluation of the Turkish Lira (TRL) and the rise in inflation have eroded the purchasing power of consumers in Turkey. Moody's noted that these factors have had a direct impact on Turkish banks' asset quality, with aggregate non-performing loans for the system reaching around 18% at the end of September 2001. Furthermore, the prospect for good credits in Turkey for 2002 is bleak with an expected mild growth of 2% in GNP for this year.
Moody's also voiced concerns regarding the increase of related party loans among large banks in Turkey relative to their shareholders' equity. Although this increase is in part due to the shrinking equity base, the scarce lending opportunities and the weaker financial situation of group companies have led many banks to increase their exposure to such companies. Moody's stated that it takes a cautious view regarding connected lending in Turkey and that such activities depress banks' FSRs.
In Moody's view, it has become difficult for Turkish banks to generate quality earnings in such an environment. This is happening at a time when such earnings are badly needed to replenish banks' real capital, which has been significantly eroded during 2001 and continues to be eroded in view of the high inflation.
Nevertheless, Moody's believes that the recent banking reforms are impressive and are likely to result in a sounder banking system, which will be less vulnerable to the types of shocks that occurred in November 2000 and February 2001. In addition, the recent announcement by the Turkish financial authorities of their intention to help banks improve their capital adequacy ratios is indicative of the expected support from the government as well as the need for support of the banking system.
TURKISH BANKS AFFECTED BY THE RATING ACTIONS
Akbank fared relatively better than most of its peers through the crisis period, but could not fully escape the impact of the weakening operating environment. On an inflation-adjusted basis, its equity was eroded in first three-quarters of 2001, while the related party lending remained at a high level. In addition, the profitability of the bank suffered during the period.
Moody's said that the Baa2/P-2 local currency rating takes into account not only the intrinsic financial strength of the bank, but also the likelihood of support from Akbank's owners, the Sabanci Group.
OTTOMAN BANK (Ottoman)
Moody's has withdrawn all the ratings of Ottoman following the merger of the bank's operations with those of Turkiye Garanti Bankasi (Garanti) and the withdrawal of its banking licence by the Banking Regulation and Supervision Agency (BRSA), the banking authority of the Republic of Turkey.
Prior to its merger with Garanti, Ottoman had merged with Korfezbank, a sister bank owned by the Dogus Group. As Korfezbank had sustained significant losses following the February 2001 crisis, Moody's considers the merger with Ottoman essentially as a bail-out of Korfezbank. Just prior to its merger with Garanti, Ottoman was left with practically no capital.
TURK EKONOMI BANKASI (TEB)
Moody's said that the difficult operating environment also affected TEB's financial standing. Even though a conservative attitude helped the bank protect its asset quality, also after the crisis on inflation adjusted basis, the bank's capital base was weakened and profitability suffered.
TURKIYE GARANTI BANKASI (Garanti)
According to Moody's, Garanti's D+ FSR is mainly driven by the weak operating environment and the bank's merger with Ottoman, which has not only provided Garanti with the largest market share in total assets among private banks in Turkey but also has the potential to enhance Garanti's overall franchise. In addition, the merged entity is likely to have good efficiency ratios stemming from a common back office, lower combined number of employees and other cost-saving measures.
Having evaluated the benefits as well as the disadvantages of the merger, Moody's concludes that the poor fundamentals of Ottoman have weakened Garanti's overall financial strength. Moody's also notes that, had it not been for the US$310 million capital support from the Dogus Group, Garanti would have ended the year with possible deficiencies in regulatory capital. Although such support boosts the capitalisation ratios to adequate levels, Moody's still believes that additional capital would be required to sustain healthy growth over the next few years. Moody's expressed its concern about the large amount of government securities that Garanti will inherit from Ottoman.
Moody's said that the D+ rating reflects a significant deterioration in Garanti's asset quality, with gross NPLs increasing dramatically during the first nine months of 2001 to reach nearly 6.5% of total cash loans. Moody's additional concern lies in the low coverage of such NPLs by provisions, with a coverage ratio of 44% at the end of September 2001 compared with 100% at the end of 2000.
As regards the issue of related party lending, Moody's believes that the increase in such activities is a concern, even though the amount relative to the bank's shareholders' equity remains lower than that of its peers. Moody's does not view favourably the high number of equity participations on Garanti's balance sheet and notes that a divestment from such participations would have a positive impact on the bank's financial health.
Moody's said that the Baa2/Prime-2 local currency rating of Garanti is higher than would be suggested by the financial strength rating of the bank, reflecting the likelihood of strong support from the Turkish financial authorities and the Dogus Group, Garanti's largest shareholder.
TURKIYE IS BANKASI (Isbank)
Moody's said that in addition to the negative effect of the weak operating environment, Isbank's D FSR reflects the significant contingent liability that could arise from any the possible support required by its equity participations and in particular by its GSM joint venture. The crisis has negatively affected the potential growth of the GSM operation, and has delayed the cash flow it was expected to generate in the near term. Moody's concern is that such a trend could put additional pressure on the GSM operation's debt dynamics and drive Isbank to provide more financial support for an institution to which Moody's assigns high credit risk. The issue is compounded by the fact that related party loans as a percentage of shareholders equity are already at high levels consistent with a D FSR. Moody's added that until Isbank's GSM operation is well established, its financial health improves and related party loans are reduced, it would be difficult to upgrade the bank's FSR.
Moody's noted however, that Isbank's franchise remains very strong and has benefited from the flight to quality during the course of 2001. Its deposit base continues to grow and the bank had reached 9.8% market share in deposits at the end of September 2001 compared to 6.8% at the end of 2000.
On the other hand Moody's expressed its concern about the deterioration of Isbank's asset quality. The ratio of gross non-performing loans (NPLs) to gross loans had reached 6.7% at the end of September 2001 compared to 4.6% a year earlier. Moreover, while the coverage by provisions constituted 100% of NPLs in 2000, it stood at only 32% at the end of September 2001.
Moody's added that it has assigned Baa2/Prime-2 ratings for Isbank's local currency deposits. Such ratings are in-line with the ratings of its peers, namely Akbank and Garanti, despite the fact that Isbank's FSR is lower. The Baa2/Prime-2 ratings reflects Isbank's important role in Turkey's banking sector and the likelihood that the bank may receive support from the Turkish authorities if it were to encounter financial difficulties.
Akbank, Ottoman Bank, Turk Ekonomi Bankasi, Turkiye Garanti Bankasi and Turkiye Is Bankasi are all headquartered in Istanbul and had total consolidated assets of USD 11.57 billion, USD 3.4 billion , USD 2 billion, USD 14.5 billion and USD 21.1 billion respectively at the end of 2000.
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