OREANDA-NEWS. S&P Global Ratings said today it took the following rating actions on five Turkish financial institutions:

We lowered our long-term counterparty credit ratings on Turkiye Is Bankasi AS (Isbank), Garanti Finansal Kiralama A. S. (Garanti Leasing), Yapi ve Kredi Bankasi A. S. (YapiKredi), and Turkiye Vakiflar Bankasi TAO (VakifBank) to 'BB' from 'BB+'. At the same, we affirmed our 'B' short-term counterparty credit ratings on these entities. We lowered our long-term counterparty credit rating on Turkiye Garanti Bankasi A. S. (Garanti) to 'BB' from 'BB+'.We also lowered our long-term Turkey national scale ratings on Isbank, VakifBank, and YapiKredi to 'trAA-' from 'trAA+'. We affirmed our 'trA-1' short-term Turkey national scale ratings on these entities. The outlooks on all five financial institutions are negative.

The rating actions follow our downgrade of the Republic of Turkey (see "Republic of Turkey Foreign Currency Ratings Lowered To 'BB/B'; Outlook Negative," published July 20, 2016, on RatingsDirect). The downgrade reflects our view that following the attempted coup on July 15, Turkey's political landscape has fragmented further. We believe this will undermine Turkey's investment environment, growth, and capital inflows into its externally leveraged economy. In the aftermath of the failed coup, we believe that the risks to Turkey and Turkish banks' ability to roll over its external debt have increased.

Potential erosion of investor confidence in Turkey could affect banks' wholesale funding, which relies heavily on foreign financing sources, with a significant portion of external debt being short-term. Also, any marked weakening in economic growth could negatively affect Turkish banks' asset quality, earnings, and capitalization, in our view, although this is not our base-case scenario. Furthermore, an escalation of volatility in the Turkish lira could damage domestic corporate borrowers' repayment ability because they carry a large open position in foreign currency, in our opinion.

On the upside, decelerating credit growth to just 4.4% on a nonannualized basis in first-half 2016 has eased pressure on systemwide funding. We also view positively the authorities' recent proactive measures to support banks' liquidity if needed. Although the operating environment will likely become more difficult for Turkish banks, their sound asset quality, earnings, and capitalization provide a good buffer to absorb the elevated risks over the next 12 months, without dramatically damaging the banks' financial profiles.

The banks' stand-alone credit profiles (SACPs) remain unchanged at 'bb+'.

The negative outlooks on Garanti, Garanti Leasing, Isbank, VakifBank, and YapiKredi reflect the negative outlook on Turkey. In our opinion, Turkish banks' financial profiles and performance will remain highly correlated with the sovereign's creditworthiness, owing to their significant holdings of government securities and exposure to the domestic environment. Bank-specific factors that might lead us to revise our ratings on these five financial institutions are limited, and our future rating actions on these entities will be mainly contingent on our rating actions on Turkey. Therefore, a lowering of the foreign currency rating on the sovereign would trigger a lowering of the ratings on these five financial institutions.

We would not lower our ratings on Garanti, its core subsidiary Garanti Leasing, and YapiKredi if we revised downward our assessments of their SACPs, all other factors being equal, because we would start to take into account the likelihood of extraordinary support from their foreign parents.

We would very likely revise the outlooks on these entities to stable if we revised our outlook on the sovereign to stable.