Islamic Finance 

RAM Ratings: Turkey rating downgrade triggers Kuveyt Turk downgrade

| 18 July, 2018

JULY 18, 2018

RAM Ratings has downgraded Kuveyt Turk Katilim Bankasi AS (the Bank)’s long-term rating to A1/Stable from AA3/Negative. Concurrently, the rating of KT Kira Sertifikalari Varlik Kiralama AS’s RM2.0 billion Islamic MTN Programme (2015/2025) has been revised downwards to A1(s)/Stable from AA3(s)/Negative. The Bank’s short-term financial institution rating remains unchanged at P1. 

The rating actions were triggered by our downgrade of Turkey’s sovereign ratings to gBB2(pi)/Stable/gNP(pi) from gBBB3(pi)/Negative/gP3(pi), due to an erosion of the country’s fiscal discipline, a rising likelihood of contingent liabilities crystallising and higher economic volatility. Based on our rating methodology for entities rated higher than the sovereigns of their domicile, as is the case with Kuveyt Turk, the downgrade of Turkey’s rating to the gBB category necessitates a one-notch “sovereign weight”, which then lowers the Bank’s long-term rating despite a currently low transferability and convertibility risk. 

Despite the downgrade, Kuveyt Turk’s ratings continue to reflect a high likelihood of support from its majority shareholder, Kuwait Finance House KSCP (KFH), which owns 62% of the Bank. The Bank’s sizeable profit contributions and high growth potential underpin its strategic importance to KFH. The latter has a well-established track record of supporting Kuveyt Turk, including its participation in all of the Bank’s equity raising exercises and the provision of inter-bank funding and subordinated capital. 

Following a year of relatively subdued growth, Kuveyt Turk’s financing base expanded a brisk 29% in fiscal 2017 (fiscal 2016: 12%). The Bank’s gross impaired financing (GIF) ratio improved to 2.2% as at end-December 2017 (end-December 2016: 2.7%), although this was mainly attributable to hefty write-offs during the year. That said, we note that GIF accretion had moderated during this period. While this may be indicative of easing asset quality concerns, tapering economic growth and the sharp depreciation of the lira could lead to vulnerabilities in Kuveyt Turk’s SME and foreign-currency (FCY) financing, which made up a respective 29% and 32% of total financing as at end-December 2017. However, the Bank’s comfortable pre-provision profit provides a healthy buffer against potential asset quality deterioration.

In fiscal 2017, Kuveyt Turk’s pre-tax profit jumped 30% y-o-y to TRY904 million (fiscal 2016: TRY696 million), notwithstanding elevated impairment charges. Alongside effective cost management, Kuveyt Turk’s sturdy margins given its large SME exposure, had contributed to an increase in the Bank’s return on risk-weighted assets to 2.8% (fiscal 2016: 2.4%).

Kuveyt Turk has a relatively favourable funding profile, with a moderate reliance on market-based funding compared to the industry norm. The Bank’s customer deposit base is well diversified, with a sizeable proportion of these deposits being non-profit bearing. Accordingly, its financing-to-deposit ratio of 92% stayed adequate against the industry average of 116%. Meanwhile, the Bank’s liquidity profile is robust, with an average liquidity coverage ratio of 230% in fiscal 2017.

Kuveyt Turk’s common equity tier-1 (CET-1) and total capital ratios stood at a respective 13.1% and 17.3% as at end-December 2017. These ratios are sensitive to forex movements as a weaker lira will inflate the value of the Bank’s FCY assets (39% of total assets). All else equal, the current depreciation of the lira will reduce the Bank’s CET-1 capital ratio to a pro forma 12%, although still deemed healthy.

For further information on RAM’s assessment of Turkey and the application of “sovereign weights”, please refer to our press release on the country (dated 18 July 2018) and our methodology paper, Sovereign Weight Explained (published in February 2017), available on www.ram.com.my.

 

Analytical contact
Choong Andrea
(603) 7628 1115
andrea@ram.com.my

Media contact
Padthma Subbiah
(603) 7628 1162
padthma@ram.com.my

 

The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security’s market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations.

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Similarly, the disclaimers above also apply to RAM Ratings’ credit-related analyses and commentaries, where relevant.

Published by RAM Rating Services Berhad
© Copyright 2018 by RAM Rating Services Berhad

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