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Rating Action:

Moody's Reviews for Downgrade the Ratings of 17 Turkish Banks

19 Jul 2016

Action follows the review of Turkey's Baa3 sovereign rating

London, 19 July 2016 -- Moody's Investors Service has today placed under review for downgrade the ratings of 17 Turkish banks following a failed coup attempt last week in Turkey and the related placement of the Turkish sovereign rating under review for downgrade.

The review for downgrade of the banks' ratings is driven by the need to assess risks arising from the evolving political and economic situation, namely 1) the potential weakening of the government's capacity and willingness to provide support to the banks in case of need, as implied by the review for downgrade on the sovereign rating, and 2) the risk of further deterioration in the domestic operating environment, which could affect the banks' financials, as potential increases in the cost of funding, reduced profitability, more limited capital generation capacity and weakening asset quality could weigh on results over the coming quarters.

While Moody's expects all rated financial institutions to be affected to some degree by the economic and financial implications of recent events, the review will assess each institution's particular credit characteristics, in order to determine to what extent their individual credit ratings could display resilience or susceptibility to the aforementioned risks.

As noted in the press release announcing the sovereign action, even though the coup failed, Moody's considers it to be a reflection of broader political challenges and expects credit risks associated with recent events to remain elevated. For further details, please see the July 18 Sovereign rating action at https://www.moodys.com/research/--PR_352273.

Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_191196 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and identifies each affected issuer.

RATINGS RATIONALE

Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_191196 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

• Methodologies Used

RISK OF WEAKENING GOVERNMENT SUPPORT

The long-term ratings of all Turkish banks whose ratings incorporate uplift from government support have been placed on review for downgrade to assess a potential weakening in the government's capacity to provide support in case of need, as signalled by the review for downgrade of the sovereign rating. In addition to assessing the capacity of the authorities to provide support, Moody's will also reassess its assumptions regarding the likelihood or probability of support incorporated in the banks' ratings, including an analysis of any potential shifts in policy towards the resolution of ailing banks and/or signs that the authorities may want to become more selective in providing support in the future.

The banks' ratings have also been placed on review to capture the likelihood of a lower foreign currency deposit ceiling given the review on the government debt rating.

RISK OF DETERIORATION IN DOMESTIC OPERATING ENVIRONMENT AFFECTING BANKS' FINANCIAL PERFORMANCES

Another key driver for the review for downgrade of the Turkish financial institutions' ratings is the risk of a deteriorating environment driven by weaker investor and consumer confidence, leading to lower growth and pressured financial performance for banks and their customers. A weaker environment and/or financial metrics could pressure individual standalone credit profiles, as captured by the baseline credit assessment (BCA) assigned to each institution.

The operating conditions for financial institutions are captured by Moody's under a macro profile that currently stands at "Moderate" for Turkey, which Moody's views at risk of being lowered owing to the heightened challenges that may emerge from the aftermath of the failed coup.

A lower macro profile implies that a financial institution would require enhanced loss-absorbing buffers in order to withstand the harsher conditions while maintaining the same credit scores and ratings. However, Moody's observes that there is a risk that, in practice, the financial metrics of Turkish banks could weaken.

More particularly, Moody's highlights funding, capital, asset quality and profitability as potentially vulnerable.

Funding for Turkish banks could become more expensive or even more difficult to access given their large dependence on market funds and their exposure to the FX market in a context where the local currency could be under pressure. Loans stood at 123% of deposits at year-end 2015, and more than half of banks' capital market borrowing is short-term (less than one year) and is therefore particularly sensitive to a deterioration in investor sentiment and a perception of increased emerging market risk because it must be frequently refinanced.

Capital ratios, while currently relatively robust, are vulnerable to 1) a weakening in the credit quality of governments bonds, which could trigger higher risk-weights for these bonds for the purpose of calculating capital ratios, and 2) currency depreciation, as up to 40% of the institutions' assets are in foreign currencies while Tier 1 capital buffers held against these assets tend to be in Turkish liras.

Asset quality is also at risk over time, as weaker economic growth and risk aversion will likely require a higher volume of restructuring and increased non-performing loans, especially from highly leveraged corporates and households.

Profitability and, therefore, the internal capital generation capacity of the institutions will likely be affected by an economic slowdown and risk aversion that would likely cause some investments to be postponed. In turn, this will likely reduce the institutions' credit growth and revenues, while any higher funding and credit costs would exacerbate the pressure on net earnings.

AFFILIATE SUPPORT

Where bank ratings currently benefit from an uplift from affiliate support, Moody's will assess the extent to which there is any recent reason to change its assumptions, either positively in a way that might potentially offset pressure on the banks BCAs, or negatively if needed. However, the default assumption is that existing support assumptions regarding parent companies' capacity and willingness to support are well positioned and should be unaffected.

WHAT COULD MOVE RATINGS UP OR DOWN

There is limited upside to the ratings given the review for downgrade.

For banks with potentially weaker BCAs, standalone ratings could be downgraded if Moody's anticipates that the deterioration in the macro environment will lead to a meaningful weakening in refinancing capability, profitability and asset quality of the banks.

For banks whose ratings incorporate an uplift from government support, the ratings could be downgraded following the downgrade of the sovereign rating or if Moody's changes its views of the government's capacity and / or willingness to provide support in light of the weakening economic environment. Similarly, ratings could also be downgraded if any ceilings are lowered in conjunction with any sovereign downgrade.

The principal methodology used in rating Akbank TAS, Alternatifbank A.S., Burgan Bank A.S., Denizbank A.S., Finansbank AS, HSBC Bank A.S. (Turkey), ING Bank A.S. (Turkey), Sekerbank T.A.S., T.C. Ziraat Bankasi, Turk Ekonomi Bankasi AS, Turkiye Garanti Bankasi AS, Turkiye Halk Bankasi A.S., Turkiye Is Bankasi AS, Turkiye Sinai Kalkinma Bankasi A.S., Turkiye Vakiflar Bankasi TAO, and Yapi ve Kredi Bankasi AS was Banks published in January 2016. The principal methodology used in rating Export Credit Bank of Turkey A.S. was Government-Related Issuers published in October 2014. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

REGULATORY DISCLOSURES

Please click on this link http://www.moodys.com/viewresearchdoc.aspx?docid=PBC_191196 for the List of Affected Credit Ratings. This list is an integral part of this Press Release and provides, for each of the credit ratings covered, Moody's disclosures on the following items:

• Lead Analyst

• Person Approving the Credit Rating

• Releasing Office

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

Moody's considers a rated entity or its agent(s) to be participating when it maintains an overall relationship with Moody's. On this basis Turk Ekonomi Bankasi AS or their agents are considered to be participating entities. These rated entities or their agents generally provide Moody's with information for their ratings process.

The below contact information is provided for information purposes only. Please see the ratings tab of the issuer page at www.moodys.com, for each of the ratings covered, Moody's disclosures on the lead analyst and the Moody's legal entity that has issued the ratings.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Irakli Pipia
VP - Senior Credit Officer
Financial Institutions Group
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Sean Marion
Managing Director
Financial Institutions Group
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Releasing Office:
Moody's Investors Service Ltd.
One Canada Square
Canary Wharf
London E14 5FA
United Kingdom
JOURNALISTS: 44 20 7772 5456
SUBSCRIBERS: 44 20 7772 5454

Moody's Reviews for Downgrade the Ratings of 17 Turkish Banks
No Related Data.
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