RAM Ratings: Concerns on Turkey lead to negative outlook on Turkiye Finans

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1. 8 /10/2016 Latest Announcement - (News ID : 2016081000023) Latest Announcement Subject : Turkiye Finans Katilim Bankasi AS News ID : 2016081000023 Turkiye Finans Katilim Bankasi AS Organisation Name: RAM RATING SERVICES BERHAD News Type: RATING ANNOUNCEMENT Reference Site: None Embargo Date: 10/08/2016 Embargo Time: 05:56 PM Expiry Date: 09/09/2016 Priority: Medium Summary: RAM Ratings: Concerns on Turkey lead to negative outlook on Turkiye Finans Attachments: No attachment available. Disclaimer: The user, including a user who is also a FAST Participant, expressly agrees that the use of this website which is accessible at https://fast.bnm.gov.my/ is at the user's sole risk. The information contained in this FAST website is compiled by MyClear Sdn. Bhd. (MyClear) and is provided on an "as is" basis without any representations or warranties of any kind, either expressed or implied. 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Although the Bank's ratings incorporate significant shareholder support from Saudi-based The National Commercial Bank (NCB), our sovereignweight rating approach also necessitates a negative rating action on Turkiye Finans, given its inextricable link to the Turkish economy. Sovereign weights, which take into account country as well as transferability and convertibility (T&C) risks, are placed on entities that are rated above the sovereign ratings of their countries of domicile, which is the case for Turkiye Finans. In our assessment, the T&C risk for Turkey is still low. Nonetheless, should Turkey's global long-term rating be downgraded or if its T&C risk escalates, the long-term ratings of Turkiye Finans and TF Varlik's sukuk would also be downgraded as a consequence of applying relevant sovereign weights. Turkiye Finans' pre-tax profit had slipped to TRY323.6 million in fiscal 2015 (fiscal 2014: TRY391.0 million) on account of higher credit costs, which was evident in its uptick in non-performing-financing ratio to 4.2% as at end-December 2015 (end-December 2014: 2.4%). However, the Bank still recorded a broad net financing margin of 4.5% in fiscal 2015, given its sizeable exposure to the lucrative SMEs and commercial clients. In an effort to address its deteriorating asset quality in this tougher operating environment, the Bank has revamped its management team and growth strategy while tightening its underwriting standards. In times of need, we expect NCB to provide solid support to Turkiye Finans, as demonstrated in the past through numerous capital infusions and broad oversight on the Bank's operations. Majority-owned by the Government of Saudi Arabia, NCB is the largest bank in Saudi Arabia, with a sturdy credit profile. Turkiye Finans is deemed strategically important to NCB as it represents the latter's largest strategic investment outside Saudi Arabia. However, Turkiye Finans is becoming increasingly reliant on wholesale borrowings to fund its growth, which may pose a refinancing risk in times of prolonged stress. Its financing-to-deposits ratio stood at a relatively high 132% as at end-December 2015, above the concerning banking industry average of 117%. While the recent upheaval could temporarily affect Turkish banks' access to wholesale funding, the Turkish central bank has introduced a series of initiatives to ensure financial stability, including unlimited liquidity support for banks. Furthermore, Turkiye Finans is able to tap an emergency liquidity line from NCB, if needed. For further information, please refer to our press release and credit rating rationale on Turkey (published in August 2016) and methodology paper, Transferability and Convertibility Assessment (published in January 2013), available on www.ram.com.my. Media contact Chew Wei Li (603) 7628 1025 weili@ram.com.my Wong Yin Ching, CFA (603) 7628 1117 yinching@ram.com.my The credit rating is not a recommendation to purchase, sell or hold a security, inasmuch as it does not comment on the security's market price or its suitability for a particular investor, nor does it involve any audit by RAM Ratings. The credit rating also does not reflect the legality and enforceability of financial obligations. RAM Ratings receives compensation for its rating services, normally paid by the issuers of such securities or the rated entity, and sometimes third parties participating in marketing the securities, insurers, guarantors, other obligors, underwriters, etc. The receipt of this compensation has no influence on RAM Ratings' credit opinions or other analytical processes. In all instances, RAM Ratings is committed to preserving the objectivity, integrity and independence of its ratings. Rating fees are communicated to clients prior to the issuance of rating opinions. While RAM Ratings reserves the right to disseminate the ratings, it receives no payment for doing so, except for subscriptions to its publications. Similarly, the disclaimers above also apply to RAM Ratings' credit-related analyses and commentaries, where relevant. 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