Global Credit Research Credit Opinion 20 DEC 2007

Transcription

1 Page 1 of 10 Global Credit Research Credit Opinion 20 DEC 2007 Credit Opinion: Turk Ekonomi Bankasi AS Turk Ekonomi Bankasi AS Istanbul, Turkey Ratings Category Moody's Rating Outlook Positive(m) Bank Deposits -Fgn Curr B1/NP Bank Deposits -Dom Curr Baa1/P-2 Bank Financial Strength D+ Parent: BNP Paribas Outlook Stable Bank Deposits Aa1/P-1 Bank Financial Strength B Issuer Rating Aa1 Senior Unsecured Aa1 Subordinate Aa2 Jr Subordinate -Dom Curr Aa2 Preferred Stock Aa3 Other Short Term -Dom Curr P-1 Contacts Analyst Phone George Chrysaphinis/Limassol Mardig Haladjian/Limassol Key Indicators Turk Ekonomi Bankasi AS [1] Avg. Total Assets (US$ million) [2]16.94 Shareholders' Equity (US$ million) [2]14.14 Return on Average Assets Recurring Earnings Power [3] Net Interest Margin Cost/Income Ratio (%) [4]

2 Page 2 of 10 Problem Loans % Gross Loans Shareholders' Equity % Assets [1] As of June 30. [2] Compound annual growth rate. [3] Preprovision income % average assets [4] Non-Interest Epense % Operating Income Opinion SUMMARY RATING RATIONALE Moody's assigns a bank financial strength rating (BFSR) of D+ to Turk Ekonomi Bankasi (TEB), which translates into a Baseline Credit Assessment of Baa3. The rating derives from the bank's moderately -sized, though rapidly epanding commercial banking franchise, its robust financial metrics and relatively conservative risk profile. TEB's long -term global local currency (GLC) deposit rating is at the Baa1 level, based on a high likelihood of support from one of the bank's controlling shareholders - BNP Paribas - and by a high likelihood of systemic support. This rating thus enjoys a two-notch uplift from the bank's Baa3 Baseline Credit Assessment. Credit Strengths - Strong asset quality track record, currently supported by high economic growth in Turkey - Low eposure to market risk relative to most rated peers in Turkey - Strong profitability profile based on healthy interest margins and adequate fee income-generating capability - Healthy capital ratios, despite rapid loan growth - Rapid business growth places the bank solidly among the second tier of Turkish commercial banks - Sound liquidity profile, notwithstanding rapid loan growth - High likelihood of parental support provides uplift to the global local currency rating Credit Challenges - Emerging retail banking business is much smaller than that of higher -rated peers - High single-party eposure to local conglomerates and the Turkish government through the bank's holdings of government securities constrains the overall risk positioning - The bulk of the loan portfolio has not been tested under adverse economic conditions given the recent very high loan growth and robust economic epansion in Turkey Rating Outlook

3 Page 3 of 10 The outlooks on TEB's D+ BFSR and Baa1 local currency deposit outlook are positive. The outlook on the B1/Not- Prime rating is stable. What Could Change the Rating - Up TEB's BFSR is at the upper end of the D+ category. There could be positive pressure on the rating in the event of (i) evidence that TEB's franchise diversification initiatives will lead to a profitable and defensible retail banking business, (ii) further improvements in the bank's efficiency ratios, and/or (iii) solid indications that current profitability will survive a lower interest rate environment. There could also be positive pressure on the rating if there is evidence that current asset quality is resilient to a cyclical downturn in the economic environment. What Could Change the Rating - Down There could be negative pressure on the BFSR if (i) asset quality deteriorates more than epected during the net credit cycle downturn, (ii) capital growth fails to keep pace with asset growth and/or (iii) competitive pressures lead to a material reduction in current profitability. Recent Results and Developments TEB posted 9-month 2007 consolidated BRSA net profits of YTL114.1 million (US$84.5 million) up 36% year-onyear. Adjusted Net Interest Income rose to YTL349.5 million, up 59% from the previous year, and fee and commission income rose by 54% to YTL120.5 million. Operating epenses also grew rapidly by 63% reflecting continued branch network growth. The number of branches had reached 253 by the end of September 2007, up from 170 at the start of the year. Loans and Trade receivables for the quarter increased by 26% year -to-date to YTL8.0 billion, led by a strong increase in SME, Small Business and retail lending, while deposits rose at a similar rate to YTL8.3 million, mainly led by corporate and small business deposits. Meanwhile Marketable Securities decreased by 10%% to YTL1.4 billion, compared to a total asset increase of 25% to YTL12.8 billion. DETAILED RATING CONSIDERATIONS Detailed considerations for TEB's currently assigned ratings are as follows: Bank Financial Strength Rating Moody's D+ BFSR for TEB is supported by its profitable and rapidly growing mid-sized commercial banking franchise. It also reflects the bank's relatively low market risk appetite, strong asset quality track record, sound liquidity and adequate capitalisation metrics. Key elements constraining the BFSR are the bank's high single-party eposure to local conglomerates and to the Turkish government, together with an untested credit environment. As a point of reference, the assigned BFSR is one notch lower than the C - outcome of Moody's bank financial strength scorecard. Moody's committee concluded that although rapidly growing and showing good promise,teb's retail banking franchise is less well developed compared with the C- rated banks in Turkey and makes a smaller contribution to overall income, a distinction that is not adequately captured in the scorecard. In assigning a positive outlook to TEB's BFSR, Moody's recognises the comprehensive steps that the bank is taking to further develop its franchise with the support of BNP Paribas - one of the bank's two controlling shareholders, along with the Colakoglu group.

4 Qualitative Factors (70%) Page 4 of 10 Factor 1: Franchise Value Trend: Improving Moody's assessment of TEB's franchise value takes into account the size, quality and diversity of its market positions, as well as the sustainability of its earnings. In terms of size, TEB lies within the second tier of Turkish commercial banks, with market shares in loans and deposits of about 2.0% and 1.7%, respectively, and higher market shares in selected businesses such as trade finance. The bank has traditionally focused on corporate and commercial banking, which together account for about 80% of its lending business. Its foray into the equally competitive retail banking and SME sectors is more recent and was initiated following the acquisition of a controlling stake (jointly with the Colakoglu Group) by BNP Paribas. In developing a retail banking franchise, TEB has launched a range of new products and is also pursuing an aggressive network epansion programme. Moody's notes that in developing its retail banking activities TEB will encounter growing competition from other domestic banks, including banks with strong retail franchises, which have also accelerated their network epansion plans. Notwithstanding the intensifying competition, Moody's acknowledges the know -how and resources available to TEB and believes that the bank will succeed in creating a meaningful retail banking business over the medium term. The bank's current BFSR takes into account the preponderance of corporate, commercial and treasury revenues which, because they are generated on a less granular customer base, do not fully support overall earnings quality. The D+ scorecard outcome is broadly in line with our view on this factor Factor 2: Risk Positioning Trend: Neutral Moody's assessment of TEB's risk positioning is supported by its competent risk management, adequate liquidity profile and modest market risk appetite. It is constrained, however, by high single -party eposure to the Turkish government and to local conglomerates. TEB has established a strong asset quality track record over a number of years. It has ehibited better asset quality metrics than its peers, particularly during times of economic stress in Turkey, resulting from a more conservative credit risk appetite and robust credit risk managing practices. The bank's overall credit risk profile remains constrained by the high single-party eposure to local conglomerates and to the Turkish government (through its holdings of Turkish government securities), although such eposure is significantly lower than at other Turkish banks. Moody's assessment of TEB's credit risk profile also takes into consideration the fact that its loan portfolios are relatively young and have not been tested in a cyclical downturn. TEB's risk positioning is also supported by a comfortable liquidity profile, notwithstanding recent rapid loan growth. The bank has traditionally held very large liquid asset balances (primarily cash and bank deposits), though it has more recently been investing in higher -yielding government securities. TEB effectively hedges its fied rate government securities and housing loans and this reduces its eposure to market risk to very low levels. The economic impact of the May-June 2006 financial markets turbulence in Turkey was lower than at peer banks.

5 Page 5 of 10 We consider that notwithstanding a concentrated ownership structure and a board that is dominated by employees or associates of the two largest shareholders, the bank applies sound corporate governance profile. We take into account that BNP's presence in joint control of the bank minimises the potential for conflict of interest. We also note the bank's adherence to sound corporate governance principles and its commitment to transparency. The scorecard outcome of D+ for Risk Positioning is largely in line with our overall view on this factor. Factor 3: Regulatory Environment Trend: Improving Moody's notes material progress in the Turkish regulatory environment over the past few years. The Bank Regulation and Supervision Agency (BRSA) is the independent regulator and supervisor that was set up in Its mandate has been strengthened by the 2005 Banking Law, which also harmonises Turkish Banking Law with European Union laws. The BRSA has overseen the improvement in corporate governance practices and the introduction of certain risk limits (in the area of foreign currency open positions and related-party loans) that have contributed to the improved health of the Turkish banking sector. In most respects Turkish regulations approach the best international standards, although in some cases, such as the classification of credit card loans, they require further refinement. Additional challenges include further reinforcement of the supervisory function and also the establishment of a risk-based approach to supervision. Although the BRSA has managed to address previous, clearly identified weaknesses in the banking sector, it has not yet put into place a comprehensive infrastructure to effectively assess the riskiness of the banking sector and to enable it to take pre-emptive action. Factor 4: Operating Environment Trend: Improving The overall D operating environment assessment for Turkey is a blended score that takes into account economic stability (GDP growth volatility), integrity and corruption scores (as calculated by the World Bank) and also an assessment of the effectiveness of the legal system (based on the ease with which property can be foreclosed). Quantitative Factors (30%) Factor 5: Profitability Trend: Neutral TEB displays strong profitability numbers, characterised by good earning capacity, net interest income and fee income and very low credit costs. Both earnings and operating epenses are growing rapidly, reflecting strong business growth and investments in network epansion. Moody's also notes that relative to some of its peers TEB maintains higher liquidity buffers that constrain its overall profitability, but which support its liquidity profile. Over the medium term we would epect TEB to maintain its overall profitability as competitive pressure on margins and fees is compensated by higher volumes and better operating epense leverage. Moody's has adjusted TEB's profitability metrics for a 100% risk weight on government securities (rather than the

6 Page 6 of 10 regulator's 0%). This results in a scorecard outcome for profitability that is slightly lower than the published A score. Factor 6: Liquidity Trend: Weakening The bank has adequate liquidity within the Turkish operating environment. Inherent systemic risks are the shortterm deposits profile and the confidence-sensitivity of the sector (although the latter has improved since 2001). The bank mitigates these risks by having an adequate percentage of liquid assets, mostly held in cash and cash equivalents. The bank's rapid asset growth means that bank's loan-to-deposit ratio is gradually getting tighter. We do not consider this to be a major source of concern given the bank's part-ownership by BNP Paribas, which enhances the bank's ability to borrow internationally at long tenors. The scorecard outcome of B reflects the bank's sound liquidity management practices and liquidity metrics. Factor 7: Capital Adequacy Trend: Weakening The bank maintains adequate capitalisation ratios, notwithstanding rapid asset growth. It recently received a subordinated loan to support its capital base. Moody's has applied a higher the risk weight on government securities (see section on profitability, above) in the calculation of adjusted capitalisation metrics. The adjustment does not change the published scorecard outcome of A for this factor, though rapid loan growth has meant that 2006 figures are significantly lower than the three-year average used in the calculation of Moody's financial metrics. Factor 8: Efficiency Trend: Improving The bank's efficiency is average, with operating epenses rising as it rapidly epands its branch network. The network had grown to 253 at the end of September 2007, up from 170 at the end of Moody's epects the efficiency metrics to improve over the medium term as the bank leverages its new infrastructure. The C scorecard outcome for this factor reflects these average efficiency metrics. Factor 9: Asset Quality Trend: Neutral TEB has a long track record of very strong asset quality and this is reflected in a scorecard outcome of B+. The credit risk profile is rapidly changing through diversification into SME and retail lending and through the general rapid pace of loan growth. Moody's concerns with regard to the effect on asset quality of a cyclical deterioration in the Turkish economy are mitigated by TEB's strong credit risk management practices and conservative credit risk appetite.

7 Page 7 of 10 Global Local Currency Deposit Rating (Joint Default Analysis) Moody's assigns a global local currency deposit rating of Baa1 to Turk Ekonomi Bankasi. The rating is supported by (i) TEB's Baseline Credit Assessment of Baa3, (ii) a high likelihood of parental support, (iii) BNP Paribas' Aa3 Baseline Credit Assessment, (iv) a high likelihood of systemic support, and (v) Turkey's A3 local currency deposit ceiling. Moody's assessment of the high likelihood of systemic support is based on TEB's moderately high importance to the domestic financial system and also on the Turkish financial authorities' track record of providing support to domestic banks in case of difficulty. Moody's assumptions with regard to the high likelihood of support from BNP Paribas in the event of need are based on the latter's joint control of the bank and also the significant brand association of TEB with BNP Paribas. Foreign Currency Deposit Rating TEB's B1/Not Prime foreign currency deposit rating is constrained by the B1/Not Prime foreign currency deposit ceiling for Turkey. ABOUT MOODY'S BANK RATINGS Bank Financial Strength Rating Moody's Bank Financial Strength Ratings (BFSRs) represent Moody's opinion of a bank's intrinsic safety and soundness and, as such, eclude certain eternal credit risks and credit support elements that are addressed by Moody's Bank Deposit Ratings. BFSRs do not take into account the probability that the bank will receive such eternal support, nor do they address risks arising from sovereign actions that may interfere with a bank's ability to honor its domestic or foreign currency obligations. Factors considered in the assignment of BFSRs include bank - specific elements such as financial fundamentals, franchise value, and business and asset diversification. Although BFSRs eclude the eternal factors specified above, they do take into account other risk factors in the bank's operating environment, including the strength and prospective performance of the economy, as well as the structure and relative fragility of the financial system, and the quality of banking regulation and supervision. Global Local Currency Deposit Rating A deposit rating, as an opinion of relative credit risk, incorporates the BFSR as well as Moody's opinion of any eternal support. Specifically, Moody's Bank Deposit Ratings are opinions of a bank's ability to repay punctually its deposit obligations. As such, they are intended to incorporate those aspects of credit risk relevant to the prospective payment performance of rated banks with respect to deposit obligations, which includes: intrinsic financial strength, sovereign transfer risk (in the case of foreign currency deposit ratings), and both implicit and eplicit eternal support elements. Moody's Bank Deposit Ratings do not take into account the benefit of deposit insurance schemes which make payments to depositors, but they do recognize the potential support from schemes that may provide assistance to banks directly. According to Moody's joint default analysis (JDA) methodology, the global local currency deposit rating of a bank is determined by the incorporation of eternal elements of support into the bank's Baseline Credit Assessment. In calculating the Global Local Currency Deposit rating for a bank, the JDA methodology also factors in the rating of the support provider, in the form of the local currency deposit ceiling for a country, Moody's assessment of the probability of systemic support for the bank in the event of a stress situation and the degree of dependence

8 between the issuer rating and the Local Currency Deposit Ceiling. Page 8 of 10 National Scale Rating National scale ratings are intended primarily for use by domestic investors and are not comparable to Moody's globally applicable ratings; rather they address relative credit risk within a given country. A Aaa rating on Moody's National Scale indicates an issuer or issue with the strongest creditworthiness and the lowest likelihood of credit loss relative to other domestic issuers. National Scale Ratings, therefore, rank domestic issuers relative to each other and not relative to absolute default risks. National ratings isolate systemic risks; they do not address loss epectation associated with systemic events that could affect all issuers, even those that receive the highest ratings on the National Scale. Foreign Currency Deposit Rating Moody's ratings on foreign currency bank obligations derive from the bank's local currency rating for the same class of obligation. The implementation of JDA for banks can lead to high local currency ratings for certain banks, which could also produce high foreign currency ratings. Nevertheless, it should be noted that foreign currency deposit ratings are in all cases constrained by the country ceiling for foreign currency bank deposits. This may result in the assignment of a different, and typically lower, rating for the foreign currency deposits relative to the bank's rating for local currency obligations. Foreign Currency Debt Rating Foreign currency debt ratings are derived from the bank's local currency debt rating. In a similar way to foreign currency deposit ratings, foreign currency debt ratings may also be constrained by the country ceiling for foreign currency bonds and notes; however, in some cases the ratings on foreign currency debt obligations may be allowed to pierce the foreign currency ceiling. A particular mi of rating factors are taken into consideration in order to assess whether a foreign currency bond rating pierces the country ceiling. They include the issuer's global local currency rating, the foreign currency government bond rating, the country ceiling for bonds and the debt's eligibility to pierce that ceiling. About Moody's Bank Financial Strength Scorecard Moody's bank financial strength model (see scorecard below) is a strategic input in the assessment of the financial strength of a bank, used as a key tool by Moody's analysts to ensure consistency of approach across banks and regions. The model 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. Rating Factors Turk Ekonomi Bankasi AS Rating Factors [1] A B C D E Total Score Trend Qualitative Factors (70%) D Factor: Franchise Value D+ Improving

9 Page 9 of 10 Market Share and Sustainability Geographical Diversification Earnings Stability Earnings Diversification [2] Factor: Risk Positioning D+ Neutral Corporate Governance [2] - Ownership and Organizational Compleity - Key Man Risk - Insider and Related-Party Risks Controls and Risk Management - Risk Management - Controls Financial Reporting Transparency - Global Comparability - Frequency and Timeliness - Quality of Financial Information Credit Risk Concentration - Borrower Concentration - Industry Concentration Liquidity Management Market Risk Appetite Factor: Operating Environment D Improving Economic Stability Integrity and Corruption Legal System Financial Factors (30%) B+ Factor: Profitability A Neutral PPP % Avg RWA 4.36% Net Income % Avg RWA 2.69% Factor: Liquidity B Weakening (Mkt funds -Liquid Assets) % Total Assets % Liquidity Management Factor: Capital Adequacy A Weakening Tier 1 ratio (%) 12.16% Tangible Common Equity % RWA 12.09% Factor: Efficiency C Improving

10 Page 10 of 10 Cost/income ratio 59.73% Factor: Asset Quality B+ Neutral Problem Loans % Gross Loans 0.91% Problem Loans % (Equity + LLR) 5.88% Lowest Combined Score (9%) B Economic Insolvency Override Neutral Aggregate Score C- Assigned BFSR D+ [1] - Where dashes are shown for a particular factor (or sub-factor), the score is based on non public information [2] - A blank score under Earnings diversification or Corporate Governance indicates the risk is neutral Copyright 2008, Moody's Investors Service, Inc. and/or its licensors including Moody's Assurance Company, Inc. (together, "MOODY'S"). All rights reserved. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY COPYRIGHT LAW AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY'S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY'S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, such information is provided "as is" without warranty of any kind and MOODY'S, in particular, makes no representation or warranty, epress or implied, as to the accuracy, timeliness, completeness, merchantability or fitness for any particular purpose of any such information. Under no circumstances shall MOODY'S have any liability to any person or entity for (a) any loss or damage in whole or in part caused by, resulting from, or relating to, any error (negligent or otherwise) or other circumstance or contingency within or outside the control of MOODY'S or any of its directors, officers, employees or agents in connection with the procurement, collection, compilation, analysis, interpretation, communication, publication or delivery of any such information, or (b) any direct, indirect, special, consequential, compensatory or incidental damages whatsoever (including without limitation, lost profits), even if MOODY'S is advised in advance of the possibility of such damages, resulting from the use of or inability to use, any such information. The credit ratings and financial reporting analysis observations, if any, constituting part of the information contained herein are, and must be construed solely as, statements of opinion and not statements of fact or recommendations to purchase, sell or hold any securities. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY'S IN ANY FORM OR MANNER WHATSOEVER. Each rating or other opinion must be weighed solely as one factor in any investment decision made by or on behalf of any user of the information contained herein, and each such user must accordingly make its own study and evaluation of each security and of each issuer and guarantor of, and each provider of credit support for, each security that it may consider purchasing, holding or selling. MOODY'S hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MOODY'S have, prior to assignment of any rating, agreed to pay to MOODY'S for appraisal and rating services rendered by it fees ranging from $1,500 to approimately $2,400,000. Moody's Corporation (MCO) and its wholly-owned credit rating agency subsidiary, Moody's Investors Service (MIS), also maintain policies and procedures to address the independence of MIS's ratings and rating processes. Information regarding certain affiliations that may eist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually on Moody's website at under the heading "Shareholder Relations - Corporate Governance - Director and Shareholder Affiliation Policy."