S&P: Turk Eximbank Downgraded To 'BB/B' Following Similar Action On Turkey; Outlook Negative
The rating action follows 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). We equalize the ratingson Turk Eximbank with those on its sole owner, the Republic of Turkey. The ratings reflect our opinion that there is an almost certain likelihood that the Turkish government would provide timely and sufficient extraordinary support to Turk Eximbank in case of financial distress. Our rating approach for Turk Eximbank is based on our view of the bank's:
Critical role in supporting Turkish exports, which is a key focus of national economic development; and
Integral link with the Turkish government through the sovereign's sole ownership, government control of the board of directors, and the sovereign's guarantee on the ultimate recovery of losses on loans extendedby the bank.
Turk Eximbank is the official state export credit agency. Its mandate is to support foreign trade and Turkish contractors and investors operating abroad, through credit, guarantee, and insurance programs. The bank does not compete against commercial banks, but works closely with them, encouraging them to increase their support for the export sector. As well as offering direct lending, the bank also provides insurance and guarantees to Turkish exporters.
Outstanding loans extended by Turk Eximbank have increased by nearly 5x since 2011 to reach Turkish lira (TRY) 43.3 billion (US$14.8 billion) in 2015. Over the same period, total assets increased to 9.3x of total equity from 2.6x. Turk Eximbank's direct and indirect exposure to the Turkish banking sector is substantial. As of end-December 2015, about 12.2% of the bank's loans were to financial institutions and the rest were guaranteed by banks. A deterioration of the Turkish banking sector could weigh on Turk Eximbank's financial performance, in our opinion.
Various bodies govern Turk Eximbank. The highest ranked is the Supreme Advisory And Credit Guidance Committee, which is currently chaired by the economy minister. The committee is the main decision-making authority for developing the bank's strategy, and sets limits for credit, guarantees, and insurance transactions.
The state minister in charge of the bank's activities selects the board of directors. The bank's general manager is named by decree, signed by the minister in charge of the bank's activities, the prime minister, and the president.
In our opinion, the government has demonstrated its strong support for Turk Eximbank through its repeated capital contributions to the bank's equity base. These have been either directly paid-in capital or retained earnings that are managed by the bank and incorporated into its total shareholder funds. Furthermore, losses incurred by Turk Eximbank due to political risk under its credit, guarantee, and insurance programs are covered by the Turkish treasury.
As a 100% state-owned, wholesale bank, Turk Eximbank does not accept deposits. Funding from the Central Bank of the Republic of Turkey finances most of Turk Eximbank's operations; the remaining funding comes from market debt issuance, syndicated and bilateral loans, and loans from supranationals. Funding from the central bank is only in foreign currency. However, for rediscount facilities extended to exporters, Turk Eximbank borrows the foreign currency equivalent in Turkish lira from the central bank and repays these loans in foreign currency, thereby contributing to the accumulation of the country's foreign reserves.
We do not anticipate any changes to Turk Eximbank's underlying role for the national economy or in its close links with the Turkish state.
The negative outlook on Turk Eximbank mirrors that on Turkey. Any change to the ratings on Turkey will likely result in a similar rating action on Turk Eximbank. Conversely, any change in our assessment of Turk Eximbank's criticalrole for or integral link with the government could lead us to consider lowering the ratings on Turk Eximbank below those on Turkey.
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