Agencies Downgrade Turkish Banks in Response to Market Volatility

Published September 13th, 2018 - 09:03 GMT
Risks to financial stability remain significant given unpredictability in the policy framework and Turkey’s large external financing requirements. (Shutterstock)
Risks to financial stability remain significant given unpredictability in the policy framework and Turkey’s large external financing requirements. (Shutterstock)

International rating agencies Moody’s and Fitch downgraded a number of Turkish banks, including Bank Audi’s subsidiary Odea Bank due to their exposure to the country’s financial crisis. Tuesday, Fitch Ratings downgraded the Long-Term Issuer Default Ratings of Anadolubank A.S. and Fibabanka Anonim Sirketi (Fiba) to ‘B+’ from ‘BB-’; Sekerbank T.A.S. (Seker) to ‘B’ from ‘B+’; and Odeabank A.S. (Odea) to ‘B’ from ‘BB-.’

The agency has also downgraded the Viability Ratings of the four banks. The banks’ Long-Term IDRs have been removed from Rating Watch Negative, and have been assigned Negative Outlooks.

“The downgrades reflect increased risks to the banks’ performance, asset quality, capitalization, liquidity and funding profiles following the recent period of market volatility, and take into account the increased risk of a hard landing for the economy and deterioration in investor sentiment.

“Risks to financial stability remain significant given unpredictability in the policy framework and Turkey’s large external financing requirements,” Fitch said in its report.

It added that the negative outlooks on the banks’ IDRs reflects the potential for further deterioration in the operating environment, which could place greater pressure on the banks’ financial metrics.

In August, Freddie Baz, vice chairman of the board, general manager and group strategy director of Bank Audi, told The Daily Star that Odea still has a sound and comfortable standing – despite the fluctuation of the Turkish lira and rumors surrounding the economic future of the country.

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“[Turkey] is facing important challenges and we are part of this country [due to Bank Audi’s subsidiary Odea in Turkey].

“Still, we are insulated for many reasons. First of all, the bank is small compared to other major banks in Turkey. We belong to the lower end of Tier 2 banks in Turkey.

“When you have a relatively small-sized bank in Turkey, you are less vulnerable and we are benefiting throughout from the contingency measures the [Turkish] central bank is taking to support bigger banks [like] relaxing reserve requirements and providing liquidity,” Baz told The Daily Star in an interview at his office.

Baz emphasized that OdeaBank has always been highly liquid and self-funded. Bank Audi is one the two Lebanese banks that have subsidiaries in Turkey.

“The downgrades reflect our view of the appropriate levels of the banks’ ratings relative to their larger Turkish bank peers whose ratings were downgraded in July 2018,” Fitch said.

The report also commented on the size of loans these banks provide to the private sector.

“The banks’ loan books are typically focused on the mid-sized and smaller companies, which are likely to be among the most sensitive to the weaker growth environment and to higher interest rates, putting pressure on their debt servicing capacity.

“Exposures to high risk sectors, such as agriculture (Seker) and real estate (Odea), are also sources of risk, while Odea’s investments in Lebanese sovereign debt (B-/Stable) also weigh on our assessment of its asset quality,” Fitch said.

It added that Odea is rated above its parent Bank Audi (B-/Stable), whose ratings are capped by the Lebanese sovereign rating.

“Fitch sees limited contagion risk for Odea from its parent, based on (i) limited group funding; (ii) the fact that Odea has not paid any dividends to date while Bank Audi has contributed about $1.2 billion in equity; and (iii) the relatively strong Turkish regulator, which Fitch believes would seek to limit transfers of capital and liquidity to the parent in case of stress at the latter,” the report said.

Baz made it clear Bank Audi is not taking anything for granted, and therefore its risk management section is monitoring the developments in Turkey and the fluctuation of the lira very closely.


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