Sunday 16, July 2017 by Jessica Combes

Moody's assigns Ba3 deposit rating to Odea Bank; outlook negative


Moody's Investors Service has assigned Ba3 long-term deposit ratings, Not Prime short-term deposit ratings and a ba3 standalone baseline credit assessment (BCA) and adjusted BCA to Odea Bank A.S. (Odeabank).

The outlook on the long-term deposit ratings is negative.

Moody's has also assigned National Scale Deposit Ratings of and a Counterparty Risk Assessment of Ba2(cr)/Not Prime(cr).

According to the ratings agency, the ba3 BCA is underpinned by Odeabank's overall solid financial profile and prudent risk culture but constrained by the challenging Turkish operating environment.

Moody's noted that Odeabank–Turkey's 13th largest bank by assets–is a relatively new bank set up in 2012 by Lebanon's Bank Audi S.A.L. (Bank Audi; B2 negative/b2), which now has a 76 per cent stake, with multinational institutions International Finance Corporation and European Bank for Reconstruction and Development as minority shareholders.

According to Moody's, the bank's prudent risk culture partially mitigates rising problem loans, modest coverage and loan concentration. Moody's expects the bank's problem loans of three per cent at March 2017 to rise to around five per cent next year, owing to the seasoning of the portfolio. Coverage with specific provisions, at 45 per cent, however, is weaker than peers. Furthermore, loans exhibit a degree of concentration by both borrower and sector.

Odeabank's capitalisation is sound, Odeabank's 12.5 per cent CET1 ratio as of March 2017 is the highest among its Turkish peers, however Moody's notes the downside risk that its Lebanese parent, Bank Audi, could take steps to upstream capital in excess of Odeabank's prudential limits, in case of need, in a scenario of adverse developments in the already challenging Lebanese operating environment.

In Moody's opinion, the bank's profitability is modest and will face headwinds to improve significantly. Over the period 2014 to Q1 2017 the bank generated a modest average net income equivalent to 0.4 per cent of tangible assets. Moody's viewed a significant improvement as challenging because of i) rising funding costs given intensifying competition in Turkey for deposits combined with the bank's branch-light business model, with only 51 branches,  and ii) a higher cost of credit given increasing problem loans.

Odeabank is well positioned for the risk of disturbances in foreign funding markets, according to Moody’s, given its strong liquidity profile. Odeabank benefits from the combination of moderate foreign-currency (FX) denominated market funds, at about 14 per cent of assets and robust liquidity, with liquid assets equivalent to 28 per cent of total assets at end 2016. The bank is structurally long FX liquidity, as indicated by a conservative FX liquidity coverage ratio, which is swapped into Turkish lira to fund domestic-currency lending. In addition to the potential for upstreaming capital and liquidity, Moody's also considers that there is a risk that, in the event any credit issues were to arise at Bank Audi, these could negatively affect confidence in Odeabank, particularly considering the bank's focus on corporate, commercial and SME clients–89 per cent of loans and 42 per cent of deposits– typically more sensitive than retail clients.

The negative outlook on the bank's long-term deposit ratings is driven by the negative outlooks on the ratings of both the parent and the Turkish sovereign (Ba1, negative), as well as by the potential for the challenging operating environment in Turkey to weaken the Turkish banks’ financial fundamentals.

Reaching a net income around 1.5 per cent of tangible assets on a sustainable basis, an improved operating environment in Turkey and an upgrade of the parent–unlikely given the negative outlook–could lead Moody's to upgrade Odeabank's ratings.

Conversely, Moody's could be downgrade the ratings given i) problem loan ratio trending towards six per cent, ii) capital adequacy ratio falling towards 12 per cent, iii) failure to sustain the 0.6 per cent ROA seen in 2016, iv) a significantly deteriorating operating environment in Turkey or v) a downgrade of the parent, which has a negative outlook.


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