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CI raises ratings of Turkland Bank

August 17, 2014

Capital Intelligence (CI) today announced that it has raised the ratings of Turkland Bank (T-Bank) based in Istanbul, Turkey. In view of the Bank's strong capacity to generate customer deposits and its very sound capital base especially its free capital as well as the 2013 improvement in asset quality and relatively sound liquidity ratios, the Financial Strength Rating (FSR) is raised to 'bb' from 'bb-'.

Ratings are constrained by the Bank's size, erratic patterns in net profit exacerbated by a high cost structure, the continual increase in restructured and rescheduled loans and the lack of disclosure. For the same reasons, the Long-Term Foreign Currency Rating is raised to 'bb' from 'bb-' and the Short-Term Foreign Currency Rating is affirmed at 'b'. All ratings carry a 'Stable' Outlook. In light of the Bank's ownership and a reasonable expectation of support from its major shareholders, the Support Rating is also maintained at '3'.

T-Bank is one of the smaller banks in the large Turkish banking sector. Since being acquired by Jordan'sArab Bank and Lebanon's MedBank in 2006 and following the introduction of new management, it has undergone a reorganisation and altered its business model and marketing strategy to target the commercial and SME segments of the market.

Rapid loan growth in recent years has generally been matched by strong growth in customer deposits. Where deposit growth has trailed, the Bank has received support from shareholders in the form of forgoing dividends, as well as cash injection of capital in 2011 and 2013 which has had the added benefit of allowing the Bank to maintain strong capital ratios, including one of the best CARs in the sector.

In a banking sector which displays extremely high loan-based liquidity ratios, TLB is much more conservative. While those ratios are still somewhat high in a global context, they are better in some cases significantly better than those of its peers, and those ratios generally moved in the right direction last year. The liquid asset ratio is also very sound and is offset only slightly by a sizeable stock of interbank deposits. However, the level is not such as to indicate dependence.

The loan growth generated by that deposit growth has resulted in generally good asset quality. The non-performing loan (NPL) ratio despite an occasional upward spike was lower than the peer-group average last year, when the net accretion rate was relatively low. While coverage is not full, it is almost so. With a boost from a strong free capital position, the Bank's effective coverage ratio is very sound. That said, the Bank has experienced what most other Turkish banks have observed a second consecutive year of strong growth in restructured and rescheduled loans.

The Bank's earnings profile at the gross income level is somewhat volatile, with 2013 displaying a modest increase in net interest income (the result of a reduction in the NIM) and a drop in non-interest income. While gross income growth was still positive, the Bank's perennial high cost structure was the main cause behind a decline in operating profit last year. Despite sharply lower provisioning expenses, the growth in net profit was limited.

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Source: CPI Financial

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