QNB FINANSBANK
Fitch Ratings has affirmed
The Outlooks are Positive. Fitch has also upgraded the bank's Viability Rating (VR) to 'b' from 'b-'. A full list of rating actions is below.
The VR upgrade reflects the upgrade of the Turkish operating environment score and Fitch's view that the bank's standalone credit profile is commensurate with the risks of the operating environment.
Key Rating Drivers
Intervention Risk Caps IDR: QNBF's LTFC and LTLC IDRs are driven by potential shareholder support, as reflected in its Shareholder Support Rating (SSR). The LTFC IDR is capped at 'B', one notch below Turkiye's LTFC IDR due to government intervention risk. The LTLC IDR is one notch above its LTFC IDR, reflecting lower intervention risk in LC. The Positive Outlooks mirror those on the sovereign. The bank's 'B' Short-Term IDRs are the only option mapping to LT IDRs in the 'B' category.
The VR considers QNBF's concentrated operations in the challenging, albeit improving, Turkish operating environment, moderate franchise, reasonable business profile and record of adequate profitability and asset quality, but also its only adequate core capitalisation and FC liquidity. It also reflects ordinary support from its parent.
Support Capped: QNBF's SSR reflects potential support from
Improving Operating Environment: The bank's operations are concentrated in the improving but challenging Turkish operating environment. The normalisation of monetary policy has reduced near-term macro-financial stability risks and decreased external financing pressures. Turkish banks remain exposed to high inflation, lira depreciation, slowing growth expectations, and multiple macroprudential regulations, despite the recent simplification efforts.
Moderate Franchise: QNBF is a mid-sized Turkish bank with a reasonable business profile, servicing corporate and commercial customers, small and medium-sized companies and retail customers, although its market shares are limited (4% of sector assets at end-2023, bank-only basis), resulting in limited competitive advantages.
Asset Quality Risks: QNBF's non-performing loan (NPL) ratio improved to 1.7% at end-2023 (end-2022: 2.5%) reflecting nominal loan growth (2023: 66%), but also collections (30% of end-2022 NPLs), write-offs (15bp of gross loans) and limited NPL inflows (NPL origination: 1.1% of average performing loans). Stage 2 loans were fairly high (10.1% and 17% average reserves coverage) and 33% were restructured. Credit risks are heightened by high FC lending (30% of gross loans), seasoning risks (given above sector-average growth in recent years) and slowing economic growth. Nonetheless, total reserves coverage of NPLs is solid (253%).
Margin Tightening: QNBF's operating profit/risk-weighted assets (RWA) ratio was fairly stable at 5.6% in 2023 (2022: 5.5%), as strong trading gains (customer-driven FX transactions and derivatives) and fees offset margin tightening (2023: 5.9%; 2022: 9.4%) amid the higher lira interest rate environment and still-stringent macroprudential regulations. We expect fees to continue to contribute to income growth in 2024, albeit to a lesser extent, as volumes decline, and its net interest margin to rise in 2H24 amid loan repricing. Performance remains sensitive to asset-quality, regulatory and macroeconomic developments.
Only Adequate Core Capitalisation: Core capitalisation (end-2023 common equity Tier 1 ratio: 9.7% net of regulatory forbearance; 8% minimum) is only adequate for its risk profile, growth appetite and sensitivity to lira depreciation. The total capital ratio (14.2%, excluding forbearance) is supported by FC subordinated debt, including
Nonetheless, total reserves fully covered NPLs, free provisions equalled 96bp of RWAs at end-2023 and pre-impairment operating profit (end-2023: 11% of average gross loans) provide a solid additional buffer. Our assessment also considers ordinary support from QNB.
Deposit-Funded, Adequate FX Liquidity: Deposits comprised 70% of total funding at end-2023. FC deposits (36% of total deposits at end-2023) and foreign-exchange (FX)-protected deposits (23%) remain significant, creating FC liquidity risks in case of sector-wide deposit instability. Wholesale funding comprised a high 30% of total funding at end-2023 (28% net of QNB subordinated debt). QNBF issued
Rating Sensitivities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
A downgrade of QNBF's LTFC IDR would follow a downgrade of both its SSR and the VR. A downgrade of the bank's LTLC IDR would follow a downgrade of the sovereign rating or an increase in our view of government intervention risk in LC.
A downgrade of Turkiye's sovereign rating or an increase in our view of government intervention risk would likely lead to a downgrade of QNBF's SSR, although this is not our base case. QNBF's SSR is also sensitive to Fitch's view of QNB's ability and propensity to provide support if needed.
QNBF's VR is sensitive to a downgrade of the operating environment, which could result from a sovereign downgrade, although this is not our base case given the Positive Outlook on the sovereign rating. The VR could also be downgraded due to a marked deterioration in the operating environment, particularly if this leads to a material erosion in FC liquidity buffers, for example, due to a prolonged funding-market closure or deposit instability, or of its capital buffers, if not offset by shareholder support.
The bank's Short-Term IDRs are sensitive to adverse changes in their respective Long-Term IDRs.
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
An upgrade of Turkiye's LT IDRs would likely lead to an upgrade of the bank's SSR and LT IDRs.
A material improvement in Turkiye's external finances or in its net FX reserves position, resulting in a reduction in our view of government intervention risk in the banking sector, could lead to an upgrade of the bank's SSR and LTFC IDR to the level of Turkiye's LTFC IDR.
An upgrade of the operating environment score for Turkish banks combined with the improvement of QNBF's core capitalisation while maintaining its FC liquidity buffers and business profile could lead to an upgrade of QNBF's VR.
The bank's Short-Term IDRs are sensitive to positive changes in their respective Long-Term IDRs.
OTHER DEBT AND ISSUER RATINGS: KEY RATING DRIVERS
QNBF's senior debt ratings are aligned with its IDRs as the likelihood of default on these obligations reflects that of the bank. The Recovery Rating of these notes is 'RR4', reflecting average recovery prospects in case of default.
QNBF's subordinated notes' ratings includes one notch for loss severity and zero notches for non-performance risk relative to its LTFC IDR anchor rating. The one notch for loss severity, rather than default two notches, reflects our view that shareholder support (as reflected in the bank's LTFC IDR) helps mitigate losses and incorporates the fact that the bank's LTFC IDR is already capped at 'B' by our view of government intervention risk. The Recovery Rating of these notes is 'RR5', reflecting below average recovery prospects in case of default.
The bank's 'AA(tur)' National Rating is driven by shareholder support and in line with foreign-owned peers.
OTHER DEBT AND ISSUER RATINGS: RATING SENSITIVITIES
QNBF's senior unsecured debt ratings are sensitive to changes in the bank's IDRs.
QNBF's subordinated debt rating is sensitive to a change in its LTFC IDR anchor rating. It is also sensitive to a revision in Fitch's assessment of potential loss severity in case of non-performance.
The National Rating is sensitive to changes in QNBF's LTLC IDR and its creditworthiness relative to other Turkish issuers.
VR ADJUSTMENTS
The operating environment score of 'b' for Turkish banks is lower than the category implied score of 'bb' due to the following adjustment reasons: sovereign rating (negative) and macroeconomic stability (negative). The latter adjustment reflects heightened market volatility, high dollarisation and high risk of FX movements in Turkiye.
The business profile score of 'b+' is below the implied 'bb' category implied score, due to the following adjustment reason: business model (negative). This reflects the bank's business model concentration in the high-risk Turkish market.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
Public Ratings with Credit Linkage to other ratings
QNBF has ratings linked to QNB's ratings.
ESG Considerations
The ESG Relevance Score for Management Strategy of '4' reflects an increased regulatory burden on most Turkish banks. Management ability across the sector to determine their own strategy and price risk is constrained by increased regulatory interventions and also by the operational challenges of implementing regulations at the bank level. This has a moderately negative impact on banks' credit profiles and is relevant to banks' ratings in combination with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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