OREANDA-NEWS. Fitch Ratings has affirmed the Long-term foreign currency Issuer Default Ratings (IDR) of Denizbank T.A.S. (Denizbank) at 'BB+' and of Turk Ekonomi Bankasi A.S. (TEB) and ING Bank A.S. (INGBT) at 'BBB'. The Outlooks are Stable. At the same time, the agency has maintained the 'BBB-' Long-term IDRs of Finansbank on Rating Watch Positive (RWP).

Parental support drives the IDRs of TEB and INGBT, whereas the IDRs of Denizbank and Finansbank are currently driven by their intrinsic strength, as reflected in their Viability Ratings. The RWP on Finansbank reflects its expected acquisition by Qatar National Bank (QNB; AA-/Stable), after which its ratings are likely to be driven by parental support.

The support-driven ratings of Deniz Finansal Kiralama A.S. (Deniz Leasing), Joint-Stock Company Denizbank Moscow (Denizbank Moscow) and Finans Finansal Kiralama (Finans Leasing), which are equalised with those of their parents, have also been affirmed. A full list of rating actions is available at the end of this commentary.

KEY RATING DRIVERS
IDRS, NATIONAL RATINGS AND SUPPORT RATINGS OF ALL BANKS; SUPPORT RATING FLOOR OF FINANSBANK
The four banks are second-tier mid-sized Turkish banks, majority-owned by their respective foreign bank shareholders. Together they represented around 12% of total banking sector assets at end-2015. In Fitch's opinion, the subsidiaries are all strategically important to their parents. However, institutional support drives the IDRs and National ratings only of TEB and INGBT.

INGBT is fully owned by ING Bank N.V. (A/Stable). TEB is 55%-owned by TEB Holding, a holding company in which BNP Paribas (A+/Stable) holds a 50% stake. In addition, BNP Paribas owns directly a further 44.8% stake in TEB. The Long-term foreign currency IDRs of TEB and INGBT are capped by Turkey's 'BBB' Country Ceiling. Their Long-term local currency IDRs of 'BBB+' also take into account Turkish country risks.

The upgrade of INGBT's and TEB's Short-term foreign currency IDRs reflects a reassessment by Fitch of potential liquidity support from the banks' respective parents.

The ratings of Denizbank (majority owned by Sberbank of Russia, BBB-/Negative) and Finansbank (majority owned by National Bank of Greece, RD) are driven by the banks' standalone creditworthiness. At their current level, Denizbank's ratings are also underpinned by potential support from Sberbank.

Deniz Leasing's, Deniz Moscow's and Finans Leasing's support-driven IDRs and National ratings are equalised with those of their parents reflecting their close integration, including sharing of risk assessment systems, customers, branding and management resources.

The RWP on Finansbank's IDRs and National Rating reflects Fitch's view that once its acquisition by QNB (expected in 2Q16) is complete, Finansbank will benefit from parental support, should this be required. Finansbank's '3' Support Rating and 'BB-' Support Rating Floor continue to reflect Fitch's view of a moderate probability of support from the Turkish government if required, given the bank's systemic importance as a second tier bank. In the event that Finansbank's ratings become driven by support from QNB, the SRF will be withdrawn since Fitch does not assign SRFs to banks whose IDRs are driven by institutional support.

VRS
The VRs of all four banks reflect their exposure to the volatile Turkish operating environment and the banks' only moderate, but stable, franchises and limited scale. Performance weakened in 2015, with the exception of TEB whose return on equity (ROE) remained broadly flat in 2015, largely due to a rise in loan impairment charges and foreign currency swap costs, although headline performance and asset quality ratios generally remain reasonable. TEB and Finansbank reported a slight increase in their reported net interest margins (pre-swap costs) in 2015 while those of INGBT and Denizbank saw a moderate tightening.

Capitalisation is a key driver of Finansbank's 'bbb-' VR. The bank's Fitch core capital (FCC)/ weighted risks ratio of 11.8% at end-2015 compared favourably with peers. Tier 2 capital comprises USD910m of subordinated loans from NBG (of which only USD651m equal to 2.5% of risk-weighted assets is eligible for inclusion in the bank's regulatory capital adequacy calculations) and Fitch understands from management these will be transferred to QNB should the acquisition go ahead. However, the bank's capital ratios should be considered in light of its fairly high risk appetite and loan exposures to SMEs (35% of the portfolio at end-2015) and retail customers (39%, largely unsecured). Non-performing loans also remain higher than peers' and the sector average.

Denizbank's 'bb+' VR reflects the bank's solid earnings and reasonable asset quality. The bank's loans/deposits ratio is also lower than the sector average and peers, although it remains fairly high; around a third of the deposit base is sourced through the bank's Austrian subsidiary.

However, asset quality ratios could weaken, in Fitch's view, given the bank's SME focus, expansion into the potentially high-risk agro segment, material foreign currency loan exposure which is above the sector average (45% of gross loans, including foreign currency indexed loans), exposure to the potentially high-risk tourism sector and some Russian risk in the loan book (end-2015: 3%). Furthermore, capital ratios are modest (FCC: 8.3%); while the bank is budgeting for TRY750m of new capital from Sberbank in 2H16; this will likely be absorbed by planned asset growth of around 20% in 2016.

TEB's 'bbb-' VR reflects the bank's consistently sound performance and asset quality track record, driven by its more moderate risk appetite and tighter underwriting standards compared with peers. However, capitalisation is only moderate for the operating environment and internal capital generation, although reasonable, is typically below the bank's level of loan growth. Furthermore, based on the bank's growth targets and in view of the implementation of Basel III, TEB's capital adequacy ratios are budgeted to decline moderately by end-2016. However, the bank's loan exposures are somewhat lower-risk than peers', in Fitch's view, while pre-impairment profit provides a solid buffer to absorb unexpected losses. Net non- performing loans (NPLs)-to-equity are also low.

INGBT's 'bb+' VR continues to be one notch lower than those of Finansbank and TEB, reflecting the bank's weaker earnings profile and a funding structure that is still heavily dependent on its parent, as reflected in the bank's high loans/deposits ratio (end-2015: 187%). The bank's franchise also lags that of its peers, as reflected in its lower deposit share of 1.9%, below those of Denizbank (3.7%), TEB (3.6%) and Finansbank (3.9%).

Impaired loans rose at all four banks in 2015, adjusted for NPL sales. Nevertheless, impaired loans remain reasonable, although still highest at Finansbank (6.1%). NPL reserves coverage is only adequate at TEB (67%) and INGBT (63%), but higher at Denizbank (72%) and Finansbank (80%). However, Fitch considers net NPL-to-FCC ratios at all four banks to be acceptable (at 6%-11%), particularly given the portion of lending backed by tangible collateral.

Funding at all four banks is sourced primarily from customer deposits. However, wholesale funding has become more significant. At end-2015 all four banks' loans/deposit ratios were in excess of 100%, with the ratio at INGBT (187%) significantly above those of Finansbank (134%), TEB (125%) and Denizbank (113%).

RATING SENSITIVITIES
IDRS, NATIONAL RATINGS AND SUPPORT RATINGS OF ALL BANKS; SUPPORT RATING FLOOR OF FINANSBANK
TEB's and INGBT's IDRs are sensitive to a change in Turkey's Country Ceiling. Their ratings could also be downgraded if there is a multi-notch downgrade of either BNPP or ING Bank N.V. (not currently anticipated by Fitch given the Stable Outlooks on the banks' ratings), or a sharp reduction in their propensity to their subsidiaries (not Fitch's base case).

The Long-term IDRs of Denizbank could be upgraded in case of a material strengthening of its standalone profile, reflected in an upgrade of the VR, or an upgrade of Sberbank (currently unlikely, given the Negative Outlook on the parent's ratings) . The Long-term IDRs would only come under pressure in case of a weakening of both the bank's standalone profile and potential parental support.

Following the expected acquisition by QNB, Finansbank's foreign currency Long-term IDR is likely to be upgraded to 'BBB', the same level as Turkey's Country Ceiling, and its Long-term National Rating to 'AAA(tur)'. The bank's Support Rating will likely be upgraded to '2' from '3'. Fitch expects to withdraw Finansbank's Support Rating Floor (SRF) of 'BB-' following the acquisition, as institutional support will become the more likely source of external support for the bank.

The IDRs of Deniz Leasing, Denizbank Moscow and Finans Leasing are sensitive to changes in their respective parents' IDRs.

VRS
An upgrade of the banks' VRs is unlikely in the foreseeable future due to the still challenging operating environment, the banks' limited franchises and their already quite high rating levels relative to the Turkish sovereign (BBB-/Stable).

Downward pressure on VRs could arise from heightened asset quality pressures, resulting in pressure on performance and capitalisation. Performance is likely to remain under some pressure in 2016, considering margin pressure from intense competition and loan impairment charges that could remain significant.

Finansbank's VR is also sensitive to possible changes in strategy, risk appetite and capitalisation following the expected acquisition. As a result of the recent moderate weakening of asset quality, profitability and capitalisation ratios, the VR is at risk of a downgrade if solvency and performance are not strengthened under the new shareholder.

A Turkish sovereign downgrade could also lead to a downgrade of banks' VRs but this is not our base case in light of the Stable Outlook on the sovereign rating.

The rating actions are as follows:

Denizbank, Deniz Finansal Kiralama and Joint-Stock Company Denizbank Moscow
Long-term foreign and local currency IDRs: affirmed at 'BB+'; Stable Outlook
Short-term foreign and local currency IDRs: affirmed at 'B'
Viability Rating (Denizbank only): affirmed at 'bb+';
Support Ratings: affirmed at '3'
National Ratings: Denizbank and Deniz Finansal Kiralama affirmed at 'AA(tur)'; Stable Outlook and CJSC Denizbank Moscow affirmed at 'AA+(rus)'; Stable Outlook

Finansbank:
Long-term foreign and local currency IDRs: 'BBB-'; Rating Watch Positive maintained
Short-term foreign and local currency IDRs: 'F3', Rating Watch Positive maintained
Viability Rating: affirmed at 'bbb-'
Support Rating: '3'; Rating Watch Positive maintained
National Rating: 'AA+(tur)'; Rating Watch Positive maintained
Support Rating Floor: affirmed at 'BB-'
Senior unsecured long-term debt: 'BBB-'/'F3', Rating Watch Positive maintained

Finans Finansal Kiralama:
Long-term foreign and local currency IDRs: 'BBB-'; Rating Watch Positive maintained
Short-term foreign and local currency IDRs: 'F3'; Rating Watch Positive maintained
Support Rating: affirmed at '2'
National Rating: 'AA+(tur)'; Rating Watch Positive maintained

ING Bank A.S.:
Long-term foreign currency IDR: affirmed at 'BBB'; Stable Outlook
Long-term local currency IDR: affirmed at 'BBB+'; Stable Outlook
Short-term foreign currency IDR: upgraded to 'F2' from 'F3'
Short-term local currency IDR: affirmed at 'F2'
National Long-term rating: affirmed at 'AAA(tur)'; Stable Outlook
Viability Rating: affirmed at 'bb+'
Support Rating: affirmed at '2'

Turk Ekonomi Bankasi:
Long-term foreign currency IDR: affirmed at 'BBB'; Stable Outlook
Long-term local currency IDR: affirmed at 'BBB+'; Stable Outlook
Short-term foreign currency IDR: upgraded to 'F2' from 'F3'
Short-term local currency IDR: affirmed at 'F2'
National Long-term rating: affirmed at 'AAA(tur)'; Stable Outlook
Viability Rating: affirmed at 'bbb-'
Support Rating: affirmed at '2'
Senior unsecured long-term debt: affirmed at 'BBB'
Senior unsecured short-term debt: upgraded to 'F2' from 'F3