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Moody's Investors Service has today upgraded the long-term local and foreign-currency deposit ratings of Burgan Bank A.S. (Burgan-AS, formerly Eurobank Tekfen) to Ba2, with a stable outlook, from Ba3. At the same time, Moody's confirmed the bank's standalone bank financial strength rating (BFSR) of D-, with a negative outlook, which is equivalent to a ba3 standalone credit assessment.
The upgrade follows the change of ownership that became effective on 21 December 2012. The bank changed its name, effective 28 January 2013.
Burgan-AS is now majority owned by Kuwait-based Burgan Bank SAK (Burgan-SAK: deposits A3, stable; D+/ba1, stable).
Today's rating actions conclude Moody's review of Burgan-AS's ratings initiated on 30 March 2012.
--- UPGRADE OF DEPOSIT RATINGS POST OWNERSHIP CHANGE
The upgrade of Burgan-AS's local and foreign-currency deposit ratings to Ba2/Not-Prime follow the change of ownership to Burgan-SAK. The Ba2 ratings are supported by Moody's assessment of a high probability of parental support from its new majority shareholder. This support provides uplift from Burgan-AS's ba3 standalone credit assessment. The rating agency's parental support assumptions reflect the importance of Burgan-AS to its new parent, underpinned, amongst other considerations, by (1) Burgan-SAK's 99.26% ownership of the Turkish bank; (2) the strategic importance that Burgan-SAK places on regional expansion and the relative size of Burgan-AS within the parent banking group (14% of Burgan-SAK's consolidated assets as at September 2012); and (3) the very strong brand affiliation between the subsidiary and its parent, and the presence of Burgan-SAK in the subsidiary's board of directors.
When assessing the likelihood of parental support for foreign subsidiaries, Moody's typically uses the parent's unsupported rating as the anchor rating of the support provider, which is at ba1 for Burgan-SAK. The rating agency's parental support assumptions result in a one-notch uplift for Burgan-AS's ratings to Ba2 from the bank's ba3 standalone credit assessment.
--- CONFIRMATION OF THE STANDALONE CREDIT ASSESSMENT
At the same time, Moody's confirmed Burgan-AS's D-/ba3 standalone credit strength. The rating action reflects the bank's marginal franchise size in the Turkish banking system. Burgan-AS's capitalisation is good and its asset-quality indicators are moderate, in line with the sector average when compared by loan book segment. Moody's also notes that the bank's liquidity is currently adequate. However, Moody's says that Burgan-AS's profitability and efficiency are weak, although the rating agency acknowledges that both metrics have improved slightly, as the bank continues to further exploit the potential of its recently expanded branch network, now that its ownership change has been finalised.
The bank's modest franchise is skewed towards corporate and even more so towards SME banking, which we view as high-margin growth segments in Turkey that hold cross-selling opportunities. Burgan-AS has maintained stable market share in loans and deposits in the high-growth Turkish banking system. However, despite the recent ownership change, Moody's believes that the strategic benefits will only materialise over the medium term. These benefits might include synergies or further diversification into retail banking business that could reflect positively on Burgan-AS's franchise.
RATIONALE FOR THE STABLE OUTLOOK ON THE LONG-TERM RATING AND NEGATIVE OUTLOOK ON THE BFSR
The stable outlook on Burgan-AS's local and foreign-currency deposit ratings is aligned with the stable outlook on Burgan-SAK's standalone credit assessment and reflects Moody's high parental support assumptions, in case of need.
The negative outlook on Burgan-AS's BFSR reflects the challenges that lie ahead, whereby fierce competition in the market amongst larger Turkish banks with stronger balance sheets and a wider customer reach are likely to further challenge the bank's future growth plans and profitability. In addition, the bank's weak profitability and moderate asset-quality indicators could experience further downwards pressure on the back of slower economic growth in Turkey, as projected by Moody's for 2013.
WHAT COULD MOVE THE RATINGS UP/DOWN
Moody's says that there is no upwards pressure on Burgan-AS's BFSR, captured by the negative outlook; nor is there any upwards pressure on the local-currency deposit ratings in the short term, captured by the current stable outlook. The current negative outlook on Burgan-AS's BFSR could be changed to stable if there is any evidence of improvement in the bank's overall franchise and profitability, without compromising risk appetite and underwriting standards.
Downwards pressure could develop on Burgan-AS's BFSR if significant changes in the bank's strategy or management cause adverse developments in its performance. Downward pressure could be exerted on the bank's deposits ratings if (1) its parent's credit or franchise profile weakens, in turn exerting downwards pressure on Burgan-SAK's standalone credit assessment; or (2) if Moody's considers that the likelihood of parental support has diminished, leading to a reduction in the rating uplift incorporated in Burgan-AS's ratings.
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