December 1 (SeeNews) - Standard & Poor's (S&P) Global Ratings said it has affirmed its 'B/B' long- and short-term issuer credit ratings on Turkey's bank Albaraka Turk Katilim Bankasi, with a negative outlook.
S&P also affirmed the bank's 'CCC-' issue ratings, it said in a statement last week.
The negative outlook reflects the possibility to lower the long-term rating over the next 12 months if the agency anticipates the bank's liquidity, capital, and asset quality will suffer more from the prolonged deterioration in the domestic operating environment than expected, S&P said.
The ratings agency also said:
"The rating action balances the expected deterioration of ABT's capitalization, on the back of accelerated lending expansion and rising credit losses, with our consideration that the bank has successfully reduced its nonperforming assets (NPAs) and now carries credit risks similar to those of domestic and international peers at the current rating. Our ratings on ABT already reflect our belief that the bank has limited buffers to absorb the risks it faces amid a toughening operating environment.
Specifically, we anticipate the bank's earnings and capitalization will further weaken as credit losses are likely to rise, and organic capital generation will reduce substantially compared with previous years. We believe the Central Bank of Turkey's new stance toward monetary policy tightening, along with intense competition--particularly from state-owned banks--will weigh on ABT's margin. In addition, difficult operating conditions in Turkey prompted by the sharp depreciation of the lira (about 30% year to date), increasing interest rates, and COVID-19-related effects will further weigh on borrowers' ability to repay their debts. As a result, we expect ABT will face elevated cost of risk of about 130 basis points (bps) per year in the 2020-2021 period. Furthermore, the bank's loan book expanded by a high about 36.5% over the first nine months of 2020, in line with that of other Turkish banks, consuming a significant amount of capital. Therefore, we now expect the bank's risk-adjusted capital ratio (RAC ratio) will decline below 3% by year-end 2020 and remain at relatively weak levels in 2021, compared with 3.5% at year-end 2019. ABT's capital adequacy ratio, at 15.3% as of Sept. 30, 2020--considering Turkey's Banking Regulation and Supervision Agency forbearance measure--is above the minimum requirement of 8% and the recommended 12% by regulators.
At the same time, we note that ABT accelerated problem asset reduction in recent quarters through sizable disposals, primarily of loans covered by real estate assets--taking advantage of increasing property prices and improving market dynamics.
ABT's nonperforming loan (NPL) ratio has declined and accounted for 4.6% of total loans on Sept. 30, 2020, compared with the about 4% Turkish system average. In addition, we note that despite disposals, ABT's NPL-specific coverage improved somewhat to 55% from 42.6% at year-end 2019. Although remaining lower than the system average (of about 74%), we consider higher collateralization partially mitigates the risk of additional losses. In this context, the real estate market's performance remains a crucial factor in determining the final losses ABT will suffer.
We also view positively management's continuous efforts to reduce exposure to the construction sector, an industry we consider inherently high risk.
We now expect the bank's problem loans (NPLs plus restructured loans) will deteriorate in line with the rest of the sector and exceed 20% over 2021-2022.
As such, although we anticipate capitalization will decline, we expect ABT's asset-quality metrics will be aligned with peers' over our forecast horizon.
The affirmation also reflects our view that the bank has enough liquidity to face potential limited access to external funding. Although still-high by international standards, we acknowledge that ABT's reliance on short-term wholesale funding has declined in recent years. Moreover, we view positively ABT's increased deposit base, which remains granular. At the same time, we do not anticipate the bank will enjoy the same pace of deposit expansion over the coming quarters, due to the less competitive nature of Islamic accounts during times of rate hikes.
Overall, we assess ABT's stand-alone credit profile at 'b-'. We incorporate one notch of uplift into the issuer credit rating to reflect group support from parent, Albaraka Banking Group B.S.C., in accordance with our group rating methodology.
The negative outlook on ABT reflects the possibility that we could lower our long-term rating over the next 12 months if we anticipate the bank's liquidity, capital, and asset quality will suffer more from the prolonged deterioration in the domestic operating environment than expected.
We could lower our ratings on ABT if asset quality deteriorated more than anticipated and far beyond average market levels, which would pressure the bank's business stability and compliance with capital adequacy or other prudential ratios. We could also lower the rating if market turbulence further exacerbates ABT's already-high refinancing risks and we see pressure on its deposit base, or if the parent's willingness and capacity to support its subsidiary reduces. Furthermore, a downgrade could follow if the operating environment in Turkey deteriorates more than anticipated, either because of a longer economic recession or a less intense or slower economic rebound.
We could revise the outlook to stable if we see ABT's risks abating. Specifically, if the Turkish economic and operating environment stabilizes or the bank takes initiatives that would materially improve its capitalization, while maintaining asset-quality metrics in line with those of peers."