Rating Action: Moody's reviews for downgrade the ratings of 10 Turkish banks Global Credit Research - 18 Mar 2014

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1 Rating Action: Moody's reviews for downgrade the ratings of 10 Turkish banks Global Credit Research - 18 Mar 2014 London, 18 March Moody's Investors Service has today announced that it has placed on review for downgrade the ratings of 10 Turkish banks. Drivers for the review include (1) pressures on the standalone credit strength of the institutions, and (2) Moody's evolving views on the level of systemic support that should be incorporated in the senior ratings. Further detail of the individual rating actions is provided later in the Press Release. A summary of today's actions is available at docid=pbc_166164, which is an integral part of this press release and identifies each affected issuer. The first driver reflects concerns regarding pressures on the banks' standalone credit strength, as the operating environment for the banking system will become more challenging over the next months because of (1) a material slowdown in real GDP growth, which is still exposed to significant downside risks; (2) increased funding costs for Turkish banks because of the impact on emerging markets from US Fed tapering and the economic recovery in developed markets, both of which are tightening global liquidity; and (3) a climate of uncertainty affecting the banks because of Turkey's current political developments. The second driver for the review stems from Moody's evolving views on the degree of systemic support that is incorporated in most Turkish banks' senior ratings. This is in light of the fact that the banking system and its financial obligations have grown significantly in relation to GDP in recent years, and will continue to do so in the coming years, increasing the potential cost of any government support, in case of need. RATINGS RATIONALE --- STANDALONE CREDIT STRENGTH Moody's expects that the banks' asset quality and profitability will weaken and that liquidity will tighten because of (1) a material slowdown in economic activity (Moody's expects real GDP growth to advance by around 2.5% in 2014, down from an estimated 4.1% for 2013); (2) rising funding costs (where domestic funding cost for the system has increased by approximately 400 basis points compared to the average for 2013); (3) a volatile exchange rate that depreciated by over 20% over a one-year period, and above-target inflation (estimated 7.4% vs. 5.0% target). Moody's notes that there is significant downside risk to the growth forecast as the impact of the US Fed tapering and the country's political developments continue to unfold, potentially triggering further liquidity tightening and weakening of domestic demand. With regard to asset quality, Moody's says that the most vulnerable segments will be credits to SMEs, unsecured consumer lending, and corporates with open FX positions. The highly unseasoned loan books add elements of risk. However, Moody's notes that the banking system has the capacity to absorb potential credit challenges ahead because it remains well-capitalised, with a Core Tier 1 ratio of 13% (Basel II) as of year-end In addition, the system benefits from significant levels of reserves if refinancing needs were to intensify. Regulatory reserves represent 9% of the system balance sheet, which are held in foreign currency, relative to the system's total foreign-currency market funding of 19%, half of which matures within 12 months. Moody's also believes that the central bank may consider reducing these reserve requirements to ease liquidity pressures in the system, if the external funding conditions continue to weaken. At this time, Moody's is reviewing the standalone credit strength of those banks that it believes are more immediately exposed to these challenges. Such banks have lower balance-sheet resilience, reflected in factors such as leaner core Tier 1 capital levels, lower internal capital generation, higher-than-expected volatility of their loan book, and/or tighter liquidity positions. However, Moody's says that it expects that the extent to which the credit profile of these banks will weaken is relatively limited at present, and that any lowering of the banks' BCAs would likely be limited to one notch. --- REVIEW OF SENIOR DEBT AND DEPOSIT RATINGS Moody's has placed on review for downgrade the senior debt and deposit ratings of 10 banks. Nine of these

2 currently benefit from up to two notches of rating uplift from their standalone BCAs. These supported ratings have been placed on review because of the following factors. First is the review of the bank's stand-alone credit strength. Second is the agency's decision to reassess the level of systemic support that it believes should be incorporated into Turkish banks' ratings. The specific detail of the drivers for these reviews is explained below. The Turkish banking system's total assets and loans have grown by 72% and 99% respectively since 2010, resulting in higher reliance on market funds and a shift from liquid assets to loans, raising the loan to deposit ratio to 114% from 88%. This higher market reliance has eroded some of the system's previous strong ring fencing from market turbulence. Furthermore, the systems' leverage has gradually increased to 9x from 8x as growth outpaced internal capital generation. As loan growth continues in the system, Moody's expects this trend to continue in the coming years. In addition, Moody's highlights the domestic political turbulence that are exacerbating the challenges the Turkish banks face, on top of US Fed Tapering that is affecting all emerging markets. In systems with low cross-border diversification like Turkey, Moody's says that one banks' idiosyncratic problem could prompt wider systemic issues, given the interconnectedness of the financial sector and banks' confidence sensitivity. Furthermore, the recent global financial crisis has illustrated how the support framework for banks can rapidly change. The reviews of the level of systemic support will take into account (1) the size of the banking sector relative to the government's resources; (2) the capacity of the governments to provide broad based support in the context of a systemic banking crises scenario; and (3) predictability of policy responses in light of political and historical patterns, and any recent shift in government priorities. Moody's says that in most cases, the overall impact of the reviews on the bank's standalone BCAs, and its reassessment of the level of systemic support, is unlikely to result in downgrades of the senior debt and deposit ratings of more than one notch in most cases. --- NATIONAL SCALE RATINGS (NSR) For four banks, the NSRs were placed on review for downgrade as they map directly to the banks GLC deposit ratings, which are on review for downgrade. --- FOREIGN-CURRENCY SUBORDINATED DEBT RATINGS Rating actions on the subordinated debt ratings of the affected banks follow the rating actions on the banks' adjusted BCA which in most cases equals the banks' standalone BCAs -- the subordinated debt ratings are positioned one notch below the relevant adjusted BCAs. Banks' adjusted BCAs, where applicable, incorporate majority shareholder support of up to one notch. WHAT COULD MOVE THE RATINGS UP/DOWN Currently there is no upward pressure on the ratings, as reflected by the reviews for downgrade. Rating stabilising factors over medium term could be an improvement in the operating environment and external liquidity conditions available towards emerging markets that will contribute to a stronger performance of the banking system. Conversely, further downward pressure on the ratings could stem from (1) evidence that the operating environment is leading to further significant deterioration in profitability or asset quality; or (2) market access becoming restricted for a long period. A lowering of bank BCAs -- or a lower level of systemic support incorporated in the banks' ratings -- could prompt a downgrade of the long-term deposit and debt ratings. A downgrade of the Turkey's government bond rating would also lead to a downgrade of the banks' debt and deposit ratings. A detailed list of ratings affected follows below: LIST OF RATING ACTIONS Moody's took the following rating actions today: Akbank TAS Moody's has affirmed the D+ BFSR with a stable outlook. Moody's placed on review for downgrade the Baa2 and Prime-2 long and short-term local-currency and Baa3 and Prime-3 long and short-term foreign-currency deposit ratings, the Baa2 local and foreign-currency senior debt ratings and (P) Baa2 and (P) Prime-2 long and short-term local and foreign-currency unsecured MTN program ratings. The affirmation of the BFSR with a stable outlook

3 reflects Moody's view that despite the expected deterioration in the bank's performance, the rating agency views the bank as having more inherent resilience to the operating environment. The review for downgrade of the debt and deposit ratings reflects (1) the possibility that the bank's baa3 standalone BCA may become more weakly positioned within the current BFSR category, due to the operating environment pressures detailed above; and (2) Moody's evolving view on systemic support. Asya Katilim Bankasi A.S. The D BFSR, the Ba1 long-term local and foreign-currency deposit ratings, A2.tr/TR-1 NSR were placed on review for downgrade. Furthermore, the Ba3 foreign-currency subordinated debt rating - issued under Asya Sukuk Company Limited, was placed on review for downgrade. The review for downgrade of the debt and deposit ratings and NSR reflects (1) the likelihood that the bank's standalone BCA may be lowered due to the possibility of a downgrade of its BFSR, because of the operating environment pressures detailed above (as well as the credit challenges specific to the bank, i.e., its deposit base volatility in recent months); and (2) Moody's evolving view on systemic support. The review of the subordinated debt rating follows the review of the BCA as the subordinated debt rating is currently positioned one notch below the BCA. Sekerbank T.A.S. The D BFSR, the Ba1 long-term local and foreign-currency deposit ratings, A2.tr/TR-1 NSR were placed on review for downgrade. The review for downgrade of the debt and deposit ratings, and the NSR reflects (1) the likelihood that the bank's standalone BCA may be lowered due to the possibility of a downgrade of the BFSR, because of the operating environment pressures detailed above; and (2) Moody's evolving view on systemic support. T.C. Ziraat Bankasi A.S. The D+ BFSR, the Baa2 and Prime-2 long and short-term local-currency and Baa3 and Prime-3 long and shortterm foreign-currency deposit ratings were placed on review for downgrade. The review for downgrade of the debt and deposit ratings reflects (1) the likelihood that the bank's standalone BCA may be lowered due to the possibility of a downgrade of the BFSR, because of the operating environment pressures detailed above; and (2) Moody's evolving view on systemic support. Turk Ekonomi Bankasi A.S. The D+ BFSR, and the Baa3 and Prime-3 long and short-term local and foreign-currency deposit ratings were placed on review for downgrade. The review for downgrade of the deposit ratings reflects (1) the likelihood that the bank's standalone BCA may be lowered due to the possibility of a downgrade of the BFSR, because of the operating environment pressures detailed above; and (2) Moody's evolving view on systemic support. The high likelihood of support incorporated from majority shareholder BNP Paribas group (deposits A2 stable, C- BFSR/baa2 BCA, stable), dampens the magnitude of a potential downgrade of the senior ratings compared with the BCA. Turkiye Garanti Bankasi A.S. The D+ BFSR was affirmed with stable outlook. Moody's placed on review for downgrade the Baa2 and Prime-2 long and short-term local and Baa3 and Prime-3 long and short-term foreign-currency deposit ratings, the Baa2 local and foreign-currency senior debt ratings, (P) Baa2 long-term foreign-currency unsecured MTN program rating, and Aa2.tr/TR-1 NSR. The affirmation of the BFSR with a stable outlook reflects Moody's view that despite the expected deterioration in the bank's performance, the rating agency views the bank as having more inherent resilience to the operating environment. The review for downgrade of the applicable ratings reflects (1) the possibility that the bank's baa3 standalone BCA may, however, become more weakly positioned within the current BFSR category, due to the operating environment pressures detailed above; and (2) Moody's evolving view on systemic support. Turkiye Halk Bankasi A.S. The D+ BFSR was affirmed with stable outlook. Moody's placed on review for downgrade the Baa2 and Prime-2 long and short-term local-currency deposit ratings, Baa3 and Prime-3 long and short-term foreign-currency deposits ratings, and Baa2 foreign-currency senior debt rating. The affirmation of the BFSR with a stable outlook reflects Moody's view that despite the expected deterioration in the bank's performance, the rating agency views the bank as having more inherent resilience to the operating environment. The review for downgrade of the debt and deposit ratings reflects (1) the possibility that the bank's baa3 standalone BCA may, however, become more

4 weakly positioned within the current BFSR category, due to the operating environment pressures detailed above; and (2) Moody's evolving view on systemic support. Turkiye Is Bankasi A.S. The D+ BFSR was affirmed with stable outlook. Moody's placed on review for downgrade the Baa2 and Prime-2 long and short-term local-currency deposit ratings, Baa3 and Prime-3 long and short-term foreign-currency deposits ratings, the Baa2 foreign-currency senior debt rating, and (P) Baa2 and (P) Prime-2 long and short-term local and foreign-currency unsecured MTN program ratings, and the Ba1 foreign-currency subordinated debt rating. The affirmation of the BFSR with a stable outlook reflects Moody's view that despite the expected deterioration in the bank's performance, the rating agency views the bank as having more inherent resilience to the operating environment. The review for downgrade of the debt and deposit ratings reflects (1) the possibility that the bank's baa3 standalone BCA may become more weakly positioned within the current BFSR category, due to the operating environment pressures detailed above; and (2) Moody's evolving view on systemic support. The review of the subordinated debt rating follows the review of the BCA as the subordinated debt rating is currently positioned one notch below the BCA. Turkiye Vakiflar Bankasi T.A.O. Moody's placed on review for downgrade the D+ BFSR, the Baa2 and Prime-2 long and short-term local-currency and Baa3 and Prime-3 long and short-term foreign-currency deposit ratings, Baa2 foreign-currency senior debt rating, and (P) Baa2 unsecured long-term foreign-currency MTN program ratings, and the Ba2 foreign-currency subordinated debt rating. The review for downgrade of the debt and deposit ratings reflects (1) the likelihood that the bank's standalone BCA may be lowered due to the possibility of a downgrade of the BFSR, because of the operating environment pressures detailed above; and (2) Moody's evolving view on systemic support. The review of the subordinated debt rating follows the review of the BCA as the subordinated debt rating is currently positioned one notch below the BCA. Yapi ve Kredi Bankasi A.S. (YapiKredi) Moody's placed on review for downgrade the D+ BFSR, the Baa2 and Prime-3 long and short-term local-currency and Baa3 and Prime-3 long and short-term foreign-currency deposit ratings, Baa2 foreign-currency senior debt rating, (P) Baa2 and (P) Prime-3 long and short-term local and foreign-currency unsecured MTN program ratings, the Ba1 foreign-currency subordinated debt rating, and Aa3.tr/TR-1 NSR. The review for downgrade of the debt and deposit ratings and of the NSR reflects (1) the likelihood that the bank's standalone BCA may be lowered due to the possibility of a downgrade of the BFSR, because of the operating environment pressures detailed above; and (2) Moody's evolving view on systemic support. The review of the subordinated debt rating follows the review for downgrade of the YapiKredi's baa3 adjusted BCA that is triggered by the review of the bank's standalone baa3 BCA. The subordinated debt rating is currently positioned one notch below the adjusted BCA. The adjusted BCA of YapiKredi currently benefits from one notch of uplift because of the moderate probability of parental support from UniCredit SpA (deposits Baa2 stable, BFSR D+, negative/bca baa3), which holds a 40.9% stake in YapiKredi. PRINCIPAL METHODOLOGY The principal methodology used in these ratings was Global Banks published in May Please see the Credit Policy page on for a copy of this methodology. Moody's National Scale Credit Ratings (NSRs) are intended as relative measures of creditworthiness among debt issues and issuers within a country, enabling market participants to better differentiate relative risks. NSRs differ from Moody's global scale credit ratings in that they are not globally comparable with the full universe of Moody's rated entities, but only with NSRs for other rated debt issues and issuers within the same country. NSRs are designated by a ".nn" country modifier signifying the relevant country, as in ".mx" for Mexico. For further information on Moody's approach to national scale credit ratings, please refer to Moody's Credit rating Methodology published in October 2012 entitled "Mapping Moody's National Scale Credit Ratings to Global Scale Credit Ratings". REGULATORY DISCLOSURES For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain

5 regulatory disclosures in relation to the rating action on the support provider and in relation to each particular rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this rating action, and whose ratings may change as a result of this rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity. The bank deposit rating of rated entity Turk Ekonomi Bankasi AS was initiated by Moody's and was not requested by this rated entity. This rated entity or its agent(s) participated in the rating process. The rated entity or its agent(s)provided Moody's access to the books, records and other relevant internal documents of these rated entities. Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review. Please see for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating. Please see the ratings tab on the issuer/entity page on for additional regulatory disclosures for each credit rating. Arif Bekiroglu Asst Vice President - Analyst Financial Institutions Group Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: SUBSCRIBERS: Yves Lemay MD - Banking Financial Institutions Group JOURNALISTS: SUBSCRIBERS: Releasing Office: Moody's Investors Service Ltd. One Canada Square Canary Wharf London E14 5FA United Kingdom JOURNALISTS: SUBSCRIBERS: Moody's Corporation, Moody's Investors Service, Inc., Moody's Analytics, Inc. and/or their licensors and affiliates (collectively, "MOODY'S"). All rights reserved.

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