Fitch Ratings has upgraded Turkiye Cumhuriyeti Ziraat Bankasi Anonim Sirketi’s (Ziraat), Turkiye Vakiflar Bankasi T.A.O.’s (Vakifbank) and Turkiye Sinai Kalkinma Bankasi A.S.’s (TSKB) Long-Term (LT) Foreign-Currency (FC) Issuer Default Ratings (IDRs) to ‘BB-‘ from ‘B+’. Fitch has also upgraded the banks’ Viability Ratings (VRs) to ‘bb-‘ from ‘b+’ and affirmed their LT Local-Currency IDRs at ‘BB-‘ and National LT Ratings at ‘AA(tur)’. The Outlooks are Stable.
Fitch has also upgraded Arap Turk Bankasi A.S.’s (ATB) LT IDRs to ‘B+’ from ‘B’, VR to ‘b+’ from ‘b’ and National LT Rating to ‘A(tur)’ from ‘A-(tur)’. The Outlooks are Stable.
The upgrades reflect Fitch’s improved assessment of the Turkish operating environment, as shown by the recent revision of the operating environment score for Turkish banks to ‘bb-‘/stable from ‘b+’/positive. The upgrades also consider the banks’ stable business and financial profiles maintained in the context of improved operating conditions.
Fitch has upgraded the Government Support Ratings (GSRs) of state-owned Ziraat and Vakifbank, and privately-owned development bank TSKB to ‘bb-‘ from ‘b+’. This reflects our assessment of the Turkish authorities’ improved ability to support the banking sector in FC, following the sovereign’s improved foreign-exchange reserves position.
Fitch has also upgraded Ziraat Katilim Bankasi A.S.’s (Ziraat Katilim) support driven LTFC IDR to ‘BB-‘ from ‘B+’, with a Stable Outlook, following the upgrade of parent bank Ziraat’s LT IDR.
Key Rating Drivers
Ziraat, Vakifbank and TSKB’s IDRs and National LT Ratings are driven by their VRs and underpinned by government support. Ziraat, Vakifbank’s and TSKB’s ‘bb-‘ VRs are one notch above the ‘b+’ implied VRs, reflecting positive adjustments for their business profiles.
The upward revision of our assessment of the Turkish operating environment reflects the normalisation and stronger record of monetary policy. This has reduced refinancing risks, and improved external market access, policy credibility and consistency and exchange-rate stability, despite financial market volatility. However, banks remain exposed to still high – albeit declining – inflation, slowing economic growth, domestic political volatility and multiple macroprudential regulations, despite simplification efforts.
Ziraat and Vakifbank’s VRs reflect their strong domestic franchises diversified business profiles and reasonable external market access as the largest state-owned banks in Turkiye, but also below sector average core capitalisation and higher risk profiles.
We consider TSKB’s standalone credit profile commensurate with Turkish operating environment risks, given its niche policy role and development focus, fairly consistent performance and adequate capitalisation and FC liquidity, balanced by its highly dollarised balance sheet.
Ziraat’s and Vakifbank’s GSRs underline the government’s high propensity to provide them with support given their state ownership, systemic importance, policy role (Ziraat) and record of capital support. TSKB’s GSR captures its policy role, strategic importance to the state, development lending expertise and the significant share of Turkish Treasury-guaranteed development financial institution funding.
ATB’s IDRs and National LT Rating are driven by its standalone creditworthiness, as reflected in its VR. The VR reflects its small niche franchise within trade finance and high balance sheet concentration. It also reflects stable but below sector average profitability, contained asset quality risks, adequate capitalisation and stable, but concentrated, funding.
ATB’s ‘no support’ GSR reflects Fitch’s view that support from the Turkish authorities cannot be relied upon, given the bank’s small size and limited systemic importance. In addition, support from ATB’s shareholders, while possible, cannot be relied on.
Rating Sensitivities Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Downgrades of Ziraat, Vakifbank and TSKB’s IDRs would require a simultaneous downgrade of their VRs and GSRs.
All banks’ VRs and IDRs are sensitive to a sovereign downgrade or to a weakening in the operating environment. The banks’ VRs could also be downgraded due to a material erosion of the banks’ FC liquidity buffers, or of their capital buffers, most likely due to asset-quality weakening, if not offset by government support or shareholder support (TSKB).
The VRs of Ziraat and Vakifbank are also potentially sensitive to government influence over their management of balance sheets and particularly if this increases pressure on the banks’ risk profiles.
Ziraat, Vakifbank and TSKB’s GSRs are sensitive to a sovereign downgrade and to a weakening in the ability and propensity of the authorities to provide support.
The ST IDRs are sensitive to multi-notch downgrade of their respective IDRs.
The National Ratings are sensitive to a change in the banks’ creditworthiness in LC relative to that of other Turkish issuers.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Upside for the VRs of Ziraat, Vakifbank, and TSKB is constrained by the Turkish sovereign rating and exposure to Turkish operating environment risks. An upgrade of the operating environment score, which could only result from a sovereign rating upgrade, could support VR upgrades if combined with these banks’ stable financial profiles.
An upgrade of the sovereign’s IDRs would likely lead to an upgrade of the GSRs and the IDRs.
ATB’s ratings are primarily sensitive to the strength of its capital (including net of forbearance) and FC liquidity buffers in the context of improved operating environment conditions. A VR upgrade for ATB would also require a strengthening of the bank’s business profile.
The ST IDRs are sensitive to positive changes in their respective IDRs.
An upgrade of ATB’s ‘no support’ GSR is unlikely given its limited systemic importance.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
Ziraat’s, Vakifbank’s and TSKB’s senior debt ratings are in line with the banks’ IDRs.
The subordinated Tier 2 notes’ ratings of Ziraat and Vakifbank have been upgraded to ‘B’ from B-‘ following the one-notch upgrade of the VR anchor ratings. The subordinated notes’ ratings are notched twice from their VR anchor ratings for loss severity, reflecting our expectation of poor recoveries in case of default, in line with Fitch criteria’s baseline approach.
Vakifbank’s and TSKB’s AT1 notes have been upgraded by one notch to ‘B-‘ from ‘CCC+’ due to the upgrade of their anchor ratings. The notes are rated three notches below their VRs, comprising two notches for loss severity, given the notes’ deep subordination, and one notch for incremental non-performance risk, given their full discretionary, non-cumulative coupons. In accordance with the Bank Rating Criteria, Fitch has applied three notches from the banks’ VRs, instead of the baseline four notches, as their VRs are at the ‘BB-‘ threshold.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
The senior unsecured debt ratings are sensitive to changes in their respective IDRs. Ziraat’s and Vakifbank’s subordinated notes’ ratings are sensitive to a change of their respective VR anchor ratings. They are also sensitive to a revision in Fitch’s assessment of potential loss severity in case of non-performance.
Vakifbank’s and TSKB’s additional Tier 1 notes’ ratings are sensitive to a change in their VRs. The notes’ ratings are also sensitive to an unfavourable revision of Fitch’s assessment of incremental non-performance risk.
SUBSIDIARIES & AFFILIATES: KEY RATING DRIVERS
Ziraat Katilim’s IDRs are driven by its ‘bb-‘ Shareholder Support Rating (SSR). The SSR reflects our view of support from the parent Ziraat, due to Ziraat Katilim’s role as the provider of Islamic banking products (a segment of strategic importance to the authorities) and high, although declining integration, ownership and shared branding.
The Outlook on the Ziraat Katilim’s LT IDR is Stable, mirroring that on its parent.
Ziraat Katilim’s senior unsecured sukuk ratings (issued through its SPVs) are in line with the bank’s IDRs.
SUBSIDIARIES AND AFFILIATES: RATING SENSITIVITIES
Ziraat Katilim’s IDRs and senior debt ratings are sensitive to a change in its SSR. The SSR is sensitive to a weakening of the ability and propensity of Ziraat to provide support.
VR ADJUSTMENTS
The operating environment score of ‘bb-‘ for Turkish banks is below the ‘bbb’ category implied score due to the following adjustment reason: sovereign rating (negative).
The business profile scores of ‘bb-‘ for Ziraat and Vakifbank are below the ‘bbb’ category implied score due to the following adjustment reason: business model (negative).
The asset quality scores of ‘b+’ for TSKB and ATB are below the ‘bb’ and ‘bbb’ category implied scores, respectively, due to the following adjustment reasons: concentrations (negative).
The asset quality scores of ‘b+’ for Ziraat and Vakifbank are below the ‘bb’ category implied scores due to the following adjustment reason: underwriting standards and growth (negative).
The earnings & profitability score of ‘bb-‘ for TSKB is below the ‘bbb’ category implied score due to the following adjustment reason: revenue diversification (negative).
The earnings & profitability score of ‘b+’ for ATB is below the ‘bb’ category implied score due to the following adjustment reason: revenue diversification (negative).
The capitalisation & leverage score of ‘b+’ for TSKB and ATB is below the ‘bb’ category implied score due to the following adjustment reason: size of capital base (negative).
The capitalisation & leverage scores of ‘b+’ for Ziraat and Vakifbank are below the ‘bb’ category implied score due to the following adjustment reason: leverage and risk weight calculation (negative).
The funding & liquidity score of ‘b+’ for ATB is below the ‘bb’ category implied score due to the following adjustment reason: deposit structure (negative).
The funding & liquidity score of ‘bb-‘ for TSKB is above the ‘b & below’ category implied score due to the following adjustment reason: non-deposit funding (positive).
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
Ziraat Katilim’s ratings are driven by support from Ziraat.
ESG Considerations
All (excluding development bank TSKB)
The ESG Relevance Score for Management Strategy of ‘4’ reflects an increased regulatory burden on all Turkish banks. Management ability across the sector to determine their own strategy and price risk is constrained by regulatory burden and also by the operational challenges of implementing regulations at the bank level. This has a moderately negative impact on the banks’ credit profiles and is relevant to the banks’ ratings in combination with other factors.
State-owned Turkish banks
In addition, the state-owned commercial banks – Ziraat, Vakifbank and Ziraat Katilim – have ESG Relevance Scores of ‘4’ for Governance Structure due to potential government influence over their boards’ effectiveness and management strategy in the challenging Turkish operating environment, which has a negative impact on the banks’ credit profiles and is relevant to the ratings in conjunction with other factors.
Islamic Banks (Ziraat Katilim)
Ziraat Katilim’s ESG Relevance Score of ‘4’ for Governance Structure also reflects its Islamic banking nature where its operations and activities need to comply with sharia principles and rules, which entails additional costs, processes, disclosures, regulations, reporting and sharia audit. This has a negative impact on its credit profile and is relevant to the ratings in conjunction with other factors.
Ziraat Katilim also has an ESG Relevance Score of ‘3’ for Exposure to Social Impacts, above sector guidance for an ESG Relevance Score of ‘2’ for comparable conventional banks, which reflects that Islamic banks have certain sharia limitations embedded in their operations and obligations, although this only has a minimal credit impact on Islamic banks.
The highest level of ESG credit relevance is a score of ‘3’, unless otherwise disclosed in this section. A score of ‘3’ means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch’s ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch’s ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
Ziraat Katilim Varlik Kiralama A.S.
—-senior unsecured; Long Term Rating; Upgrade; BB-
Turkiye Cumhuriyeti Ziraat Bankasi Anonim Sirketi; Long Term Issuer Default Rating; Upgrade; BB-; Rating Outlook Stable
; Short Term Issuer Default Rating; Affirmed; B
; Local Currency Long Term Issuer Default Rating; Affirmed; BB-; Rating Outlook Stable
; Local Currency Short Term Issuer Default Rating; Affirmed; B
; National Long Term Rating; Affirmed; AA(tur); Rating Outlook Stable
; Viability Rating; Upgrade; bb-
; Government Support Rating; Upgrade; bb-
—-senior unsecured; Long Term Rating; Upgrade; BB-
—-subordinated; Long Term Rating; Upgrade; B
—-senior unsecured; Short Term Rating; Affirmed; B
Ziraat Katilim Bankasi A.S.; Long Term Issuer Default Rating; Upgrade; BB-; Rating Outlook Stable
; Short Term Issuer Default Rating; Affirmed; B
; Shareholder Support Rating; Upgrade; bb-
Ziraat Katilim MTN Limited
—-senior unsecured; Long Term Rating; Upgrade; BB-
—-senior unsecured; Short Term Rating; Affirmed; B
Turkiye Vakiflar Bankasi T.A.O.; Long Term Issuer Default Rating; Upgrade; BB-; Rating Outlook Stable
; Short Term Issuer Default Rating; Affirmed; B
; Local Currency Long Term Issuer Default Rating; Affirmed; BB-; Rating Outlook Stable
; Local Currency Short Term Issuer Default Rating; Affirmed; B
; National Long Term Rating; Affirmed; AA(tur); Rating Outlook Stable
; Viability Rating; Upgrade; bb-
; Government Support Rating; Upgrade; bb-
—-senior unsecured; Long Term Rating; Upgrade; BB-
—-subordinated; Long Term Rating; Upgrade; B
—-subordinated; Long Term Rating; Upgrade; B-
—-senior unsecured; Short Term Rating; Affirmed; B
Arap Turk Bankasi A.S.; Long Term Issuer Default Rating; Upgrade; B+; Rating Outlook Stable
; Short Term Issuer Default Rating; Affirmed; B
; Local Currency Long Term Issuer Default Rating; Upgrade; B+; Rating Outlook Stable
; Local Currency Short Term Issuer Default Rating; Affirmed; B
; National Long Term Rating; Upgrade; A(tur); Rating Outlook Stable
; Viability Rating; Upgrade; b+
Turkiye Sinai Kalkinma Bankasi A.S.; Long Term Issuer Default Rating; Upgrade; BB-; Rating Outlook Stable
; Short Term Issuer Default Rating; Affirmed; B
; Local Currency Long Term Issuer Default Rating; Affirmed; BB-; Rating Outlook Stable
; Local Currency Short Term Issuer Default Rating; Affirmed; B
; National Long Term Rating; Affirmed; AA(tur); Rating Outlook Stable
; Viability Rating; Upgrade; bb-
; Government Support Rating; Upgrade; bb-
—-senior unsecured; Long Term Rating; Upgrade; BB-
—-subordinated; Long Term Rating; Upgrade; B-
—-senior unsecured; Short Term Rating; Affirmed; B
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