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July 17 (Reuters) - (The following statement was released by the rating agency)
Fitch Ratings has placed Turkland Bank A.S.'s (Turkland) 'BBB-' Long-term foreign and local currency Issuer Default Ratings (IDRs), 'F3' Short-term foreign and local currency IDRs, 'AAA(tur)' National Long-term rating and '2' Support Rating on Rating Watch Negative (RWN). The bank's Viability Rating (VR) has been affirmed at 'b+'.
KEY RATING DRIVERS - IDRs, NATIONAL RATING AND SUPPORT RATING
The RWN follows Fitch's placement of Arab Bank PLC (A-) on RWN (see 'Fitch Places Arab Bank on Rating Watch Negative' dated 11 July 2013 at www.fitchratings.com).
Turkland's IDRs, National Rating and Support Rating are driven by potential support from Arab Bank. Currently, there is a three-notch difference between the Long-term IDRs of Arab Bank and Turkland. This reflects Turkland's ownership structure, in which Arab Bank (28% stake) and its sister bank, Arab Bank (Switzerland) Ltd (22%), control only a combined 50% of the bank's capital, with Lebanese Bank Med SAL (not rated by Fitch) holding the other 50%. In addition, Turkland is small in relation to Arab Bank, and at present has a limited impact on the latter's balance sheet and income statement. Positively, though, all shareholders have continued to provide fresh capital to support Turkland's growth; during 2013, a total of USD110m will be injected into the bank.
RATING SENSITIVITIES - IDRs, NATIONAL RATING AND SUPPORT RATING
The RWN on Turkland's ratings will be resolved following the resolution of the RWN on Arab Bank. Turkland's ratings will be driven by the ability of entities within the Arab Bank group to provide support, if needed. Any indication of a material reduction in Arab Bank's commitment to its subsidiary would also impact Turkland's ratings, but this is not expected by Fitch at present.
Turkland's VR reflects its generally satisfactory financial metrics and reasonable management and governance, and the still quite supportive operating environment. However, the VR also reflects the bank's limited franchise, some uncertainty about the long-term sustainability of its business model, and the potential for some near-term deterioration in performance and asset quality.
Turkland's above-sector-average loan growth and tight cost control combined to boost profitability in 2012-Q113. However, it is still difficult to identify recurrent trends, and results can be affected by fluctuating impairment charges and one-off events. Past results have been volatile and performance indicators still lag those of its closest peers. Projected branch expansion could boost volumes, supported by USD55m of capital injected in May 2013, which could lead to profitability becoming more stable.
Asset quality is acceptable, considering the bank's primary focus on serving small and medium-sized companies, with an impaired loans ratio of 3.2% at Q113. However, in Fitch's view asset quality is likely to deteriorate moderately as loan portfolios season following recent growth. Turkland is funded by stable deposits and, compared to peers, its loans/deposits ratio, at around 100%, is sound.
The Fitch core capital/weighted risks ratio hovers around 13%. Similar ratios at peers vary considerably, ranging from a high 17% to a low 8%. Considering Turkland's risks, Fitch believes capital is adequate and additional capital is being injected in 2013.
Turkland's VR could be upgraded if management is able to strengthen the bank's franchise and grow prudently, while maintaining sound key financial indicators. A significant deterioration in asset quality could result in a downgrade of the VR.