May 26 (SeeNews) - Fitch Ratings said it has downgraded the long-term foreign-currency (LT FC) issuer default rating (IDR) of Turkiye Emlak Katilim Bankasi A.S. to 'B' from 'B+', as well as revised the outlook on the Turkish lender to negative from stable.
The rating reflects the sovereign's weaker FC reserves position, and, therefore, reduced ability to support the bank in FC in case of need, the ratings agency said in a statement last week.
Fitch also said in the statement:
"KEY RATING DRIVERS
IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR
The LT FC IDR of Emlak Katilim continues to be driven by potential state support following the rating action. The Support Rating (SR) of the bank is affirmed at '4'.
The bank's SRF has been revised downwards by one notch, to 'B' from 'B+', further widening its notching from Turkey's 'BB-' LT FC IDR. This reflects Fitch's assessment of the authorities' reduced ability to provide support in FC, given the marked weakening in sovereign net FC reserves.
Fitch calculates that the Central Bank of the Republic Turkey's (CBRT) net international on-balance-sheet FC reserves fell to USD20 billion at end-March 2020 from USD37 billlion at end-2019. Furthermore, when adjusting this figure for Turkish banks' FC swap transactions with the CBRT (but adding back more stable Treasury placements at the CBRT), we calculate the CBRT's net FC reserves to be materially lower, at about USD9 billion at end-March 2020. We estimate that this position deteriorated significantly again in April 2020. This implies a marked reduction in the ability of the authorities to provide FC liquidity support to banks in case of need.
The sovereign net FC reserves position should, however, be considered in light of Turkey's limited short-term sovereign external debt requirements. In addition, access to external funding markets could underpin Turkey's ability to provide FC support to the bank in case of need, depending on market conditions. The government was able to raise FC debt in 1Q20.
The SRF of Emlak Katilim continues to reflect a high government propensity to provide support to the bank, in case of need, given its ultimate government ownership, the strategic importance of Islamic banking to the Turkish authorities and the record of capital support. The authorities have shown a strong commitment to support the bank, as reflected in the capital increase in April 2019 (additional Tier 1).
The Long-Term Local-Currency IDR (LT LC IDR) of the bank also continues to be driven by state support and is equalised with Turkey's sovereign LT LC IDR at 'BB-'. This reflects the stronger ability of the sovereign to provide support in LC. The Stable Outlook on the rating consequently mirrors that on the sovereign.
NATIONAL RATING
The affirmation of the bank's National Rating reflects our view that the bank's creditworthiness in LC relative to other Turkish issuers has not changed.
Emlak Katilim does not have a Viability Rating assigned due to its very small size and limited record of performance and ensuing limited standalone franchise.
RATING SENSITIVITIES
IDRS, SUPPORT RATING AND SUPPORT RATING FLOOR
Factors that could, individually or collectively, lead to a negative rating action/downgrade:
The LT FC IDR, SR and SRF of Emlak Katilim could be downgraded if Fitch concludes that further stress in Turkey's external finances materially reduces the reliability of support for the bank in FC from the Turkish authorities.
The introduction of bank resolution legislation in Turkey aimed at limiting sovereign support for failed banks could negatively affect Fitch's view of support, but Fitch does not expect this in the short term.
The bank's LT LC IDR could be downgraded if the Turkish sovereign is downgraded, Fitch believes the sovereign's propensity to support the bank has reduced (not our base case) or Fitch's view of the likelihood of intervention risk in LC increases.
Factors that could, individually or collectively, lead to positive rating action/upgrade:
The Outlook on bank's LT FC IDR could be revised to Stable if Fitch believes the sovereign's ability to provide support to the bank in FC has strengthened. An upgrade of the bank's LT FC IDR is unlikely in the near term given the Negative Outlook on the bank.
The LT LC IDR of Emlak Katilim could be upgraded in case of a sovereign upgrade.
NATIONAL RATING
The bank's National Rating is sensitive to change in its LT LC IDR and also its relative creditworthiness to other Turkish issuers.
BEST/WORST CASE RATING SCENARIO
International scale credit ratings of Financial Institutions issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit [...].
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
The bank's ratings are driven by potential state support as reflected in a 'B' SRF and a '4' SR."