Credit Opinion: Turk Ekonomi Bankasi AS - Teb.com

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However, the bank's lower capital quality will likely affect its capacity to retain earnings for future capital growthdue to the comparatively higher cost of capital for its mixed capital, consisting of equity and subordinated debtcomponents. This places the bank at a disadvantage to some of its peers that have more leeway for future growthand market share expansion. We believe that the bank's future internal capital generation will be key in keepingpace with the continued strong growth in the system. We acknowledge shareholders' commitment to supportingthe bank's adequate capitalisation and growth prospects.MODERATE ASSET QUALITY WHICH IS IN LINE WITH THAT OF THE BANKING SYSTEMCompared with other Turkish banks, TEB has greater exposure to an economic slowdown because of its SMEand unsecured retail loan exposure - which we view as more vulnerable to economic swings - comprising around46% of its total performing loans compared with a system average of around 25% as of half-year 2013.As of half-year 2013, TEB reported a non-performing loan (NPL) ratio of 2.1% (2.3% in 2012) versus the systemaverage of 2.8% (2.9% in 2012). During the first half of 2013, TEB sold TRY117 million of non-performing loans,amounting to less than 1% of its total loans. In addition, about 5.2% of TEB's loans (in line with the average forMoody's rated banks) were fewer than 90 days delinquent and/or whose payment terms had been modified andwere not captured by the NPL ratios, indicating the potential for further asset-quality deterioration as they season.According to the bank's income statement, the increase in provisions for loan-losses was 102% in Q2 2013compared to the 50% increase reported for the system. In our view, the key factor of this development was TEB'sresumption of consumer lending which requires comparatively higher general reserves since 2011. TEB's NPLcoverage ratio is 58%, versus the system average of 75%.With a stronger but moderate GDP growth forecast compared to 2012, we can expect that TEB's loan lossprovisioning will gradually increase but remain within TEB's provisioning capacity and its capital should provide forsufficient loan loss-absorption as the high growth at 16% YTD 2013 in 2012 (system average 19% and 4%respectively) and comparatively higher-risk loan book seasons.MID-SIZED COMMERCIAL BANKING FRANCHISE WITH IMPROVING COMMERCIAL LEVERAGETEB belongs to the second tier of Turkish commercial banks, ranking ninth in terms of market share. The bankcommanded a loans and deposits market shares of 4% at half-year 2013 and higher market shares in selectedbusinesses, such as trade finance. Overall, we consider the merger with previous Fortis-Turkey in 2011 to havebeen largely complementary with limited overlap in their businesses.TEB has always focused on corporate and commercial banking; its 70% share still accounts for the lion's share ofits portfolio. The bank is particularly strong in SME lending, accounting for about 30% of its overall commercialbanking book. The merger of TEB and Fortis-Turkey has allowed the bank to expand into the retail bankingbusiness. Fortis-Turkey's more established mortgage portfolio contributed positively to TEB's loan bookdiversification; retail mortgages accounted for 13% as of half-year 2013 and effectively grew 12% in the first half of2013 (system average mortgage portfolio growth was 17%).In the past, TEB encountered strong competition from other domestic banks while it was developing its retailbanking business. This competition included banks with strong retail franchises that accelerated their networkexpansion plans. We believe that TEB's post-merger, larger branch network, and a doubling of its overall marketshare, will have the potential to improve the commercial leverage for all of TEB's businesses.Besides intense competition, especially in retail banking, there are rising regulatory pressures for consumerprotection; these can potentially affect banks' product distribution and pricing power capabilities, which will requirestricter risk selection and risk discipline. These pressures are evidenced by the recent fines levied on 13 Turkishbanks, including TEB, for violating competition rules. The banks were accused of colluding on maximum depositrates, interest-rate increases on credit cards, and commissions and fees for card services.Global Local Currency Deposit Rating (Joint Default Analysis)We assign a global local-currency deposit rating of Baa3/Prime-3 to TEB. The rating is supported by (1) TEB's D+standalone BFSR (with stable outlook) mapping to a baseline credit assessment of ba1; and (2) a high likelihood ofparental support on the back of BNPP's standalone BFSR/BCA of C-/baa2.Our high parental support assumptions from BNPP in the event of need are based on the latter's 67.5% ownershipof TEB and on the significant brand association of TEB with BNPP. (jointly controlled by Colakoglu Group 27.5%ownership,)
We assess a high likelihood of systemic support based on TEB's importance to the domestic financial system andon the Turkish financial authorities' track record of providing support to domestic banks in case of need. However,this does not provide additional rating uplift on top of the one notch due to our parental support assumption.Foreign Currency Deposit RatingTEB's foreign-currency deposit ratings are at Baa3/Prime-3 with a stable outlook.ABOUT MOODY'S BANK RATINGSBank Financial Strength RatingMoody's Bank Financial Strength Ratings (BFSRs) represent Moody's opinion of a bank's intrinsic safety andsoundness and, as such, exclude certain external credit risks and credit support elements that are addressed byMoody's Bank Deposit Ratings. BFSRs do not take into account the probability that the bank will receive suchexternal support, nor do they address risks arising from sovereign actions that may interfere with a bank's abilityto honor its domestic or foreign currency obligations. Factors considered in the assignment of BFSRs includebank-specific elements such as financial fundamentals, franchise value, and business and asset diversification.Although BFSRs exclude the external factors specified above, they do take into account other risk factors in thebank's operating environment, including the strength and prospective performance of the economy, as well as thestructure and relative fragility of the financial system, and the quality of banking regulation and supervision.Global Local Currency Deposit RatingA deposit rating, as an opinion of relative credit risk, incorporates the BFSR as well as Moody's opinion of anyexternal support. Specifically, Moody's Bank Deposit Ratings are opinions of a bank's ability to repay punctuallyits deposit obligations. As such, they are intended to incorporate those aspects of credit risk relevant to theprospective payment performance of rated banks with respect to deposit obligations, which includes: intrinsicfinancial strength, sovereign transfer risk (in the case of foreign currency deposit ratings), and both implicit andexplicit external support elements. Moody's Bank Deposit Ratings do not take into account the benefit of depositinsurance schemes which make payments to depositors, but they do recognize the potential support fromschemes that may provide assistance to banks directly.According to Moody's joint default analysis (JDA) methodology, the global local currency deposit rating of a bankis determined by the incorporation of external elements of support into the bank's Baseline Credit Assessment. Incalculating the Global Local Currency Deposit rating for a bank, the JDA methodology also factors in the rating ofthe support provider, in the form of the local currency deposit ceiling for a country, Moody's assessment of theprobability of systemic support for the bank in the event of a stress situation and the degree of dependencebetween the issuer rating and the Local Currency Deposit Ceiling.National Scale RatingNational scale ratings are intended primarily for use by domestic investors and are not comparable to Moody'sglobally applicable ratings; rather they address relative credit risk within a given country. A Aaa rating on Moody'sNational Scale indicates an issuer or issue with the strongest creditworthiness and the lowest likelihood of creditloss relative to other domestic issuers. National Scale Ratings, therefore, rank domestic issuers relative to eachother and not relative to absolute default risks. National ratings isolate systemic risks; they do not address lossexpectation associated with systemic events that could affect all issuers, even those that receive the highestratings on the National Scale.Foreign Currency Deposit RatingMoody's ratings on foreign currency bank obligations derive from the bank's local currency rating for the sameclass of obligation. The implementation of JDA for banks can lead to high local currency ratings for certain banks,which could also produce high foreign currency ratings. Nevertheless, it should be noted that foreign currencydeposit ratings are in all cases constrained by the country ceiling for foreign currency bank deposits. This mayresult in the assignment of a different, and typically lower, rating for the foreign currency deposits relative to thebank's rating for local currency obligations.Foreign Currency Debt RatingForeign currency debt ratings are derived from the bank's local currency debt rating. In a similar way to foreign
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