OREANDA-NEWS. Fitch Ratings has affirmed Arap Turk Bankasi A.S.'s (A&T Bank) Long-term local and foreign currency Issuer Default Ratings (IDRs) at 'BB-' with a Stable Outlook. A full list of rating actions is available at the end of this rating action commentary.

KEY RATING DRIVERS - IDRS, VR, and NATIONAL RATING
The IDRs and National Rating are driven by A&T Bank's standalone strength, as measured by the 'bb-' Viability Rating (VR). The VR is constrained by the dependence of A&T Bank's business model on deposit funding from its majority shareholder, Libyan Foreign Bank (LFB), and on trade flows between Libya and Turkey. The ratings are also held down by the limited franchise of the bank within the Turkish banking sector, its specialist focus on the volatile MENA region and high concentrations on- and off-balance sheet. The VR benefits from A&T bank's track record of consistently reasonable financial performance.

A&T Bank has developed significant expertise in cross-border trade financing and is the primary Turkish bank conducting business between Turkey and MENA countries, in particular Libya. A&T Bank has also grown its domestic lending portfolio, mainly towards large well-known Turkish corporates. Loan concentration is high, reflecting A&T bank's small size and customer base, but the bank has a long track record of low impaired loans (around 1% of gross loans) which compares well among international trade finance peers.

LFB funding, which is extended at favourable rates, has represented around 40%-50% of total funding since 2011, presenting significant funding concentration. However, this has been fairly stable over the years and has supported A&T bank's operations within the region. Other sources of funding consist of bank borrowings, of which a high proportion is from related LFB affiliates, and repos. Loans are typically short-term, working capital loans, which support A&T Bank's liquidity.

Fitch considers the capital adequacy ratios of A&T Bank as adequate (Fitch Core Capital/risk weighted assets 14.8% at end-9M15) given its risk profile, but the small size of capital and high loan concentrations make it vulnerable to one-off risks. Capitalisation is supported by A&T Bank's reasonable earnings performance, reduced foreign-currency lending and generally high reserve coverage.

KEY RATING DRIVERS - SUPPORT RATING
The bank's '5' Support Rating and 'No Floor' Support Rating Floor reflect Fitch's view that support cannot be relied upon either from the Turkish authorities or from the shareholders. Fitch believes that support cannot be relied upon from the Turkish authorities, given A&T bank's limited systemic importance.

Given the uncertain economic and political environment in Libya, LFB's ability to provide support cannot be relied upon despite a track record of past support for the Turkish bank's operations. LFB has over time shown a high propensity to support A&T Bank, underlining the importance of the bank to the former's international strategy. As well as providing funding to A&T Bank at favourable prices, LFB appoints key senior management and plays a vital role in introducing business to its Turkish subsidiary.

RATING SENSITIVITIES- IDRS, VR and NATIONAL RATING
The bank's IDRs and National Rating are sensitive to a change in the VR. The bank's VR could be downgraded if A&T Bank's strategic importance to LFB is reduced, through a substantial loss or withdrawal of funding or business, which could happen, for example, as a result of a change in the regime in Libya. An increase in funding or lending concentrations could also result in a downgrade of ratings. However, these scenarios do not represent Fitch's base case.

Upside potential for the ratings is limited given the bank's niche franchise, high reliance on parent funding and exposure to the Libyan market. However, diversification of A&T Bank's funding profile and business model and significant improvements in Libya's operating environment could bring upside rating potential.

RATING SENSITIVITIES - SUPPORT RATING
The Support Rating could be upgraded if Fitch considers LFB is able to provide extraordinary support to A&T Bank in case of need. This would be contingent on a more stable regime in Libya while maintaining the importance of A&T Bank to LFB.

The rating actions are as follows:

Long-term FC and LC IDR affirmed at 'BB-'; Stable Outlook
Short-term FC and LC IDR affirmed at 'B'
Viability Rating affirmed at 'bb-'
Support Rating affirmed at '5'
Support Rating Floor affirmed at 'No Floor'
National Long-term Rating affirmed at 'A+(tur)'; Stable Outlook.