GarantiBank International N.V.

Transcription

1 CREDIT OPINION GarantiBank International N.V. Semiannual Update Update Summary GarantiBank International NV's (GBI) baseline credit assessment (BCA) and adjusted BCA are. GBI's long-term deposit rating is A with a negative outlook and the bank's short-term deposit rating is Prime-2. RATINGS GarantiBank International N.V. Domicile Amsterdam, Netherlands Long Term Debt Not Assigned Long Term Deposit A Type LT Bank Deposits - Fgn Curr Outlook Negative GBI's BCA of reflects the bank's (1) solid capitalisation; (2) diversified trade-finance activities, which affords good profitability; () sound liquidity and solid deposit funding base; and (4) moderate asset quality. Additionally, GBI's ratings reflect (1) credit risk concentrations, albeit decreasing, and geographical imbalance between assets and liabilities; and (2) the bank's focus on trade finance, corporate finance and treasury revenues, which Moody's regards as relatively volatile income sources. Exhibit 1 Rating Scorecard - Key Financial Ratios Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. GarantiBank International N.V. (BCA: ) Median -rated banks 5% 2% 18% % Guillaume Lucien Baugas VP-Senior Analyst guillaume.lucien-baugas@moodys.com Yasuko Nakamura VP-Sr Credit Officer yasuko.nakamura@moodys.com Andreea Prodea Associate Analyst andreea.prodea@moodys.com Alain Laurin Associate Managing Director alain.laurin@moodys.com Nick Hill MD-Banking nick.hill@moodys.com % 25% 12% 2% 1% 8% 15% 6% 1% 4% 2% Liquidity Factors Analyst Contacts Solvency Factors 16% 5% 4.% 17.% % Asset Risk: Problem Loans/ Gross Loans Capital: Tangible Common Equity/Risk-Weighted Assets Solvency Factors (LHS) 17.1%.% Profitability: Net Income/ Tangible Assets 2.% % Funding Structure: Market Liquid Resources: Liquid Funds/ Tangible Banking Assets/Tangible Banking Assets Banking Assets Liquidity Factors (RHS) Source: Moody's Financial Metrics GBI's BCA of is currently positioned two notches above the adjusted BCA of parent Turkiye Garanti Bankasi A.S. (TGB; deposits and senior debt Ba1 negative, BCA ba2) and in line with ultimate parent Banco Bilbao Vizcaya Argentaria, S.A. (BBVA; deposits and senior debt A/Baa1 stable respectively, BCA ). As such, GBI's adjusted BCA does not incorporate any rating uplift from affiliates and is positioned in line with its BCA, at. GBI's long-term deposit ratings of A benefit from a very low loss-given-failure under Moody's Advanced Loss Given Failure (LGF) analysis, which results in a two-notch uplift from the adjusted BCA, reflecting substantial bail-in-able deposits sourced from the wholesale markets.

2 Credit strengths» Niche commercial positions in trade and commodity finance» Good profit generation over time» Strong capital base and good internal capital generation capacity» Solid liquidity profile supported by predominance of retail deposits» Large volume of deposits and senior debt resulting in deposit ratings benefiting from a very low loss-given-failure and a two-notch uplift from the BCA Credit challenges» GBI's BCA conditioned by a Strong- Macro Profile» Modest asset quality although improving and largely collateralised» Risk concentrations - in terms of geographies and counterparties - yet on a decreasing trend and partially offset by emphasis on corporate finance and low default exposure classes such as trade finance» Low probability of government support resulting in no uplift from BCA for deposits Rating outlook The negative outlook on the bank deposit rating reflects the evolving situation in Turkey, including weakening institutional strength, which may imply increasing asset risks in the future for GBI's lending portfolio. In addition, the changes linked to the alignment of risk policies with BBVA still need to be fully assessed, notably for their likely impact on the bank's profitability. Factors that could lead to an upgrade An upgrade of GBI's BCA and deposit ratings is unlikely in view of the recent increased riskiness of the bank's exposures to Turkish related assets, as reflected in the current negative outlook on the deposit ratings. Factors that could lead to a downgrade A downgrade of GBI's BCA and long-term deposit ratings could result from:» A deterioration of the bank's lending book on the back of weakening operating conditions in Turkey» A deterioration in GBI's loss absorption capacity, profitability and/or liquidity profile. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 Key indicators Exhibit 2 GarantiBank International N.V. (Unconsolidated Financials) [1] Total Assets (EUR million) Total Assets (USD million) Tangible Common Equity (EUR million) Tangible Common Equity (USD million) Problem Loans / Gross Loans (%) Tangible Common Equity / Risk Weighted Assets (%) Problem Loans / (Tangible Common Equity + Loan Loss Reserve) (%) Net Interest Margin (%) PPI / Average RWA (%) Net Income / Tangible Assets (%) Cost / Income Ratio (%) Market Funds / Tangible Banking Assets (%) Liquid Banking Assets / Tangible Banking Assets (%) Gross Loans / Due to Customers (%) CAGR/Avg.4 4,86 5, ,21 5, ,978 6, ,666 6, ,575 6, [1] All figures and ratios are adjusted using Moody's standard adjustments [2] Basel III - fully-loaded or transitional phase-in; LOCAL GAAP [] Basel II; LOCAL GAAP [4] May include rounding differences due to scale of reported amounts [5] Compound Annual Growth Rate (%) based on time period presented for the latest accounting regime [6] Simple average of periods presented for the latest accounting regime. [7] Simple average of Basel III periods presented Source: Moody's Financial Metrics Profile GBI is a mid-sized Dutch bank with presence in Germany, Switzerland and Turkey. Established in 199 in Amsterdam, the bank is a wholly-owned subsidiary of TGB (Turkey) and ultimately controlled by BBVA. GBI provides financial solutions to retail, corporate and institutional clients in the areas of trade and commodity finance, structured finance, global markets sales and treasury. Following the acquisition of a controlling stake in parent TGB by BBVA we expect a meaningful improvement of GBI's risk profile in the near future. GBI, which is supervised by the European Central Bank since September 215 under the Significant Supervision Entity framework (owing to BBVA being the ultimate parent) and by De Nederlandsche Bank (DNB, the Dutch supervisor), has already completed the alignment of its risk management practices with the risk policies and procedures of its Spanish parent, which implies a complete overhaul of its governance and investment policy. GBI has substantially reduced exposures to the CIS and to Turkey. Additionally, risk concentrations are being reduced and lending to parent companies has been aligned with BBVA's policies. The reduction in emerging market exposures represents a positive shift of GBI's asset risk profile, as Turkey and the CIS represented together 5% of the bank's exposures to banks and other securities at year-end 216. This improvement may be partly counterbalanced by a possible decrease in profitability, as Western European assets to be originated in replacement in the liquidity portfolio will be lower-yielding assets. Detailed credit consideration GBI's BCA is conditioned by a Strong - Macro Profile At year-end 216, GBI's exposure to the Dutch economy was 21%. Due to its significant exposure concentration to lower Macro Profile countries, including 4% to Turkey (Moderate -), the overall Macro Profile for GBI is Strong -, below the Strong + Macro Profile of the Netherlands. Turkey is an important building block for GBI s Macro Profile. Turkish economic growth is expected to be above the global emerging market median, but lower over the period than was registered in Business climate and investments are expected to be adversely affected by heightened political and policy uncertainties. Other significant country exposures as of year-end 216 are: United Kingdom (Strong+) 7%, Switzerland (Very Strong -) 6%, Germany (Very Strong -) 6%, Rest of Europe 14% (no country represents more than 4%), CIS countries 1%, Rest of the World 11% (no country represents more than 4%).

4 Niche commercial positions in trade and commodity finance The bank's commercial activities are essentially split into four divisions: 1. Trade & Commodity Finance, focusing on international trade and commodity finance. The contribution of this division has decreased since 211 because of the bank's improving revenue diversification into other transaction banking activities. 2. Structured Finance, which was created in 28 and combines activities in corporate lending, Islamic finance and shipping finance, as well as payments and cash management services for corporate clients. The revenue contribution is on a positive trend, as GBI has increased leverage in this business segment.. Global Markets Sales, which offers tailor-made financial services to institutional and high-net-worth clients. This business line focuses on balance sheet and market risk hedging offerings to institutional clients and promotes execution only and advisory services to international high-net-worth individuals. 4. Treasury, focusing on commercial trading activities in addition to the bank's balance-sheet risk management, i.e., liquidity and interest risk management. The revenue generation activities comprise investments in bonds and mainly commercial, flow-driven and intra-day trading. As of end-june 217, 68% of the bank's liabilities were composed of deposits, most of which were retail deposits collected in the Netherlands and in Germany through call centers and the Internet. We consider that internet-based deposits are inherently more sensitive to reputational risk, but we acknowledge that these deposits have shown a great degree of stability until now and throughout the financial crisis. Germany accounted for around two-thirds of total retail deposits at year-end 216. Around 95% of these are covered by the Dutch Deposit Guarantee Scheme. At year-end 216, the breakdown of GBI's credit exposures, net of provisions and cash collateral, by geographic area including cash on the balance sheet was as follows: Turkey (4.6%; 6.8% in 215); Europe excluding the Netherlands (.%;.2% in 215), the Netherlands (2.2%; 17.9% in 215), the Commonwealth of Independent States (CIS) (1.%; 4.% in 215); and rest of the world (1.6%; 7.8% in 215). We observe that some of GBI's exposures to Turkey and the CIS countries were replaced by higher exposures to the Netherlands, the European Economic Area and to the rest of the world. Given the business mix, we consider GBI's earnings to be more volatile than pure retail banking income. Largely collateralised credit portfolio, with improving yet modest asset quality We believe GBI's asset quality is modest viewing the structurally concentrated nature of its exposures in terms of corporate issuers and geographies. However, asset quality has improved in 216 and H1 217 both through a diminution of the exposures to riskier countries, including a termination of lending to Russian and CIS counterparties, and a reduction of single-issuer concentrations. Nonetheless, credit-risk concentrations remain high, as demonstrated by the top 2 bank and corporate credit exposures, which represented 297% of the bank's common equity tier 1 (CET1) capital at year-end 216, down from 4% at year-end 215. GBI's problem loan ratio improved to 2.1% at year-end 216 from 4.9% at year-end 215. Loan-loss provision coverage was 71% at year-end 216. The bank's problem loans are predominantly corporate exposures and the problem loan ratio can be, at times, volatile due to the rapid write-off of defaulted exposures, reducing the relevance of the problem loan ratio. GBI has well-established credit-monitoring processes and practices and selective credit standards. In general, the control culture appears to be strict. Nonetheless, we note that GBI has relatively high gross related-party exposures at 22% of Tier 1 capital as of yearend 216. This number falls to 9% of Tier 1 on a net basis, when offsetting the exposures with funding provided by group entities. Our assigned asset risk score of ba2 reflects the bank's modest asset quality and the low granularity of its loan book. We believe that asset quality is a relative weakness for the bank. 4

5 Strong capital base and good internal capital generation capability At year-end 216, GBI reported a CET1 ratio of 16.7%, as reported to the ECB and DNB excluding H2 216 profit (215: 16.%). GBI applies the Internal Ratings Based Approach for credit risk calculation. GBI has not issued any hybrid debt. GBI's CET1 ratio appears strong and is consistent with the risks involved in the bank's activities. Our assigned Capital score of a1 is a reflection of the strong capitalisation of the bank. Good profit generation over time GBI reported operating revenues (Dutch GAAP) of 46 million in H1 217 (-5% year-on-year), that resulted in pre-provisioning income of 22 million (-19%). The net income increased to 2 million (+12% year-on-year) mainly driven by significant reversals of loan loss provisions that resulted in net impairment charges of - 4 million in H1 217, compared to 14 million in H GBI's operating revenues are 65% composed of net-interest income and 5% of non-interest revenues. Revenues decreased in H1 217, driven by a reduction in net-interest income compared to the previous year. Net interest income dropped despite a growing loan book, reflecting the significant reduction of the securities portfolio to 5 million at end-june 217 from 86 million at end-june 216, which has been one of the corner-stones of GBI's BBVA Group alignment process. Cost of risk has been historically limited at GBI, ranging from 11% to 22% of the bank's pre-provision income in 212 and 214, respectively. However, the cost of risk increased significantly to 49 million in 215, linked to lending to companies active in commodities trading, absorbing 77% of the bank's pre-provision income. The cost of risk was reduced to 56% of the bank's preprovision income in 216 and was negative in H We remain cautious on the sensitivity of the bank's bottom-line profit to sudden hike in cost of risk. GBI's cost-to-income ratio increased to 52% during H1 217 (216: 47%; 215: 41%), reflecting both shrinking net banking revenues and increasing administrative expenses. Profitability deteriorated due to the reduction in the securities portfolio. GBI's efficiency remains strong, thanks to the lack of physical branch network. Solid liquidity profile supported by predominance of retail deposits GBI has a solid liquidity profile, supported by (1) a low average loan-to-deposit ratio of 88% as of year-end 216 (215: 86%); (2) a predominance of retail deposits (that are covered by the Dutch deposit guarantee scheme), which were stable during the global financial crisis; and () a satisfactory share of liquid assets on its balance sheet. Additionally, the short duration of a large proportion of its assets (loans representing 21% of the balance sheet mature within three months), confers greater flexibility to GBI to adapt its balance-sheet structure. At end-june 217, GBI had the following funding sources:» 68% of balance sheet is deposit funded (primarily composed of retail deposits), offered primarily through the Internet or call centers» Interbank (16%) consisting of a syndicated loan borrowing, money market borrowings, bilateral wholesale fundings, repos and borrowings under the ECB's TLTRO» 1-year subordinated debt (1%) from its shareholder (TGB) issued in 215 Historically, GBI has not issued preferred bonds and other debt capital market instruments, owing to its short asset durations (61% of assets have remaining maturity of 1 year or less). Yet it relies on the interbank market as stated above. As of year-end 216, GBI's liquid assets (presented as the sum of cash and assets due from central banks, unencumbered interbank money-market exposures to banks and unencumbered investment-grade securities, thus excluding Turkey and CIS) represented 26% of total assets, compared to 25% of year-end 215. Support and structural considerations Affiliate support GBI's BCA of is currently positioned two notches above the adjusted BCA of parent TGB and in line with ultimate parent BBVA. As such, GBI's adjusted BCA does not incorporate any rating uplift from affiliates and is positioned in line with its BCA, at. 5

6 Loss Given Failure analysis GBI is subject to the EU Bank Recovery and Resolution Directive (BRRD), which we consider to be an Operational Resolution Regime. We assume residual tangible common equity of % and losses post-failure of 8% of tangible banking assets, a 25% run-off in junior wholesale deposits, a 5% run-off in preferred deposits, a proportion of junior deposits of 26% of total customer deposits and assign a 25% probability to deposits being preferred to senior unsecured debt. These assumptions are in keeping with our standard assumptions.» Our LGF analysis indicates very low loss-given-failure for deposit ratings, leading us to assign a two-notch uplift above the Adjusted BCA. Government support considerations The implementation of the BRRD has led us to reconsider the potential for government support to benefit the bank's creditors. We expect a low probability of government support for GBI's deposits, resulting in no uplift for the long-term deposit ratings. Counterparty Risk assessment Counterparty Risk (CR) assessments are opinions of how counterparty obligations are likely to be treated if a bank fails and are distinct from debt and deposit ratings in that they (1) consider only the risk of default rather than both the likelihood of default and the expected financial loss suffered in the event of default and (2) apply to counterparty obligations and contractual commitments rather than debt or deposit instruments. The CR assessment is an opinion of the counterparty risk related to a bank's covered bonds, contractual performance obligations (servicing), derivatives (e.g., swaps), letters of credit, guarantees and liquidity facilities. The CR assessment is positioned at A2(cr)/Prime-1(cr). The CR assessment is positioned three notches above the Adjusted BCA of, based on the cushion against default provided to the senior obligations by subordinated instruments and no uplift from our assumption for a low probability of government support. The main difference with our Advanced LGF approach used to determine instrument ratings is that the CR assessment captures the probability of default on certain senior obligations, rather than expected loss, therefore we focus purely on subordination and take no account of the volume of the instrument class. About Moody's Bank Scorecard Our Scorecard is designed to capture, express and explain in summary form our Rating Committee's judgement. When read in conjunction with our research, a fulsome presentation of our judgement is expressed. As a result, the output of our Scorecard may materially differ from that suggested by raw data alone (though it has been calibrated to avoid the frequent need for strong divergence). The Scorecard output and the individual scores are discussed in rating committees and may be adjusted up or down to reflect conditions specific to each rated entity. The most recent figures incorporated into the below Scorecard are derived from GBI's 216 audited annual report. 6

7 Rating methodology and scorecard factors Exhibit GarantiBank International N.V. Macro Factors Weighted Macro Profile Strong - Factor Historic Macro Ratio Adjusted Score Credit Trend Assigned Score Key driver #1 Key driver #2 Solvency Asset Risk Problem Loans / Gross Loans 4.% ba2 Single name concentration Non lending credit risk Capital TCE / RWA 17.% a1 a1 Risk-weighted capitalisation Nominal leverage Profitability Net Income / Tangible Assets.% ba ba2 Earnings quality Combined Solvency Score Liquidity Funding Structure Market Funds / Tangible Banking Assets 17.1% ba1 Deposit quality Liquid Resources Liquid Banking Assets / Tangible Banking Assets 26.4% Quality of liquid assets Combined Liquidity Score Financial Profile Business Diversification Opacity and Complexity Corporate Behavior Total Qualitative Adjustments Sovereign or Affiliate constraint: Scorecard Calculated BCA range Assigned BCA Affiliate Support notching Adjusted BCA Balance Sheet Other liabilities Deposits Preferred deposits Junior Deposits Senior unsecured bank debt Dated subordinated bank debt Equity Total Tangible Banking Assets 7 1% baa1 in-scope (EUR million) 1,,49 2, ,81 baa Aaa baa1-baa - % in-scope 21.% 69.% 51.% 18.% 5.% 1.%.% 1% at-failure (EUR million) 1,72,7 2, ,81 % at-failure 28.4% 62.% 48.7% 1.5% 5.% 1.%.% 1%

8 Debt class Counterparty Risk Assessment Deposits De Jure waterfall De Facto waterfall Notching LGF Assigned Additional Preliminary LGF notching Rating Instrument Sub- Instrument SubDe Jure De Facto Notching Guidance notching Assessment volume + ordination volume + ordination vs. subordination subordination Adjusted BCA a2 (cr) 4.% 9.4% a Instrument class Counterparty Risk Assessment Deposits Loss Given Failure notching 2 Additional Preliminary Rating Notching Assessment a2 (cr) a Government Support notching Local Currency Rating A2 (cr) A Foreign Currency Rating -A Source: Moody's Financial Metrics Ratings Exhibit 4 Category GARANTIBANK INTERNATIONAL N.V. Outlook Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Moody's Rating Negative A/P-2 A2(cr)/P-1(cr) PARENT: TURKIYE GARANTI BANKASI A.S. Outlook Bank Deposits -Fgn Curr Bank Deposits -Dom Curr NSR Bank Deposits Baseline Credit Assessment Adjusted Baseline Credit Assessment Counterparty Risk Assessment Senior Unsecured Subordinate Other Short Term Negative Ba2/NP Ba1/NP Aa1.tr/TR-1 ba2 ba1 Baa(cr)/P-(cr) Ba1 Ba (hyb) (P)NP Source: Moody's Investors Service 8

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