Fitch Ratings has hiked the ratings of Ziraat Bank, Vakifbank (VAKBN) and TSKB (TSKB) by one notch to BB- (three notches below investment grade), with stable outlooks, the rating agency said on November 17.

Fitch also upgraded Arap Turk Bankasi (A&T Bank) by one notch to B+ (four notches below investment grade), with a stable outlook.

The rating firm also upgraded the support-driven rating of Ziraat Katilim, Ziraat’s Islamic lending unit, to BB- from B+, with a stable outlook.

Turkey’s sovereign ratings, meanwhile, stand at three notches below investment grade, with stable outlooks. Major banks have ratings in line with the sovereign.

Sovereign upgrades

The upgrades reflect Fitch's improved assessment of the Turkish operating environment in addition to the banks' stable business and financial profiles. Recently, Fitch revised the operating environment score for Turkish banks to bb-/stable from b+/positive.

Fitch has also upgraded the government support ratings of state-owned Ziraat and Vakifbank as well as privately-owned development bank TSKB to 'bb-' from 'b+'.

This reflects Fitch’s assessment of the Turkish authorities' improved ability to support the banking sector in foreign currency in line with the sovereign's improved FX reserves position.

Stronger monetary policy

The upward revision of Fitch's assessment of the Turkish operating environment reflects the normalisation and stronger record of monetary policy.

This has reduced refinancing risks while improving external market access, policy credibility and consistency, while also ensuring exchange rate stability despite financial market volatility.

However, the banks remain exposed to still high (albeit declining) inflation, slowing economic growth, domestic political volatility and multiple macroprudential regulations, despite simplification efforts.

Reasonable external market access

The ratings of Ziraat and Vakifbank reflect their strong domestic franchises, diversified business profiles and reasonable external market access as the largest state-owned banks in Turkey in addition to their below sector average core capitalisation and higher risk profiles.

Fitch considers TSKB's standalone credit profile as commensurate with Turkish operating environment risks, given its niche policy role and development focus, fairly consistent performance and adequate capitalisation and foreign currency liquidity, balanced by its highly dollarised balance sheet.

Policy roles

Turkey’s government has a high propensity to provide Ziraat and Vakif with support given their state ownership, systemic importance, policy role (Ziraat) and record of capital support.

TSKB also has a policy role, strategic importance to the state, development lending expertise and a significant share of Turkish Treasury-guaranteed development financial institution funding.

Subordinated papers

Fitch also upgraded its ratings of the subordinated Tier 2 notes issued by Ziraat and Vakifbank to B from B-. The subordinated notes' ratings are notched twice from their anchor ratings for loss severity, reflecting Fitch’s expectation of poor recoveries in case of default.

The credit rating agency has also upgraded its ratings on the AT1 notes sold by Vakifbank and TSKB to B- from CCC+. The notes are rated three notches below the banks’ ratings, comprising two notches for loss severity, given the notes' deep subordination, and one notch for incremental non-performance risk, given their full discretionary, non-cumulative coupons.

Low ESG

The low ESG relevance scores for management strategy, meanwhile, reflect an increased regulatory burden on all Turkish banks. Management ability across the sector to determine their own strategy and price risk is constrained by the regulatory burden and also by the operational challenges of implementing regulations at the bank level.

This has a moderately negative impact on the banks' credit profiles and is relevant to the banks' ratings in combination with other factors.

Additionally, state-owned commercial banks Ziraat, Vakifbank and Ziraat Katilim have low scores for their governance structure due to potential government influence over their boards' effectiveness and management strategy in the challenging Turkish operating environment.

Ziraat Katilim's governance structure score also reflects its Islamic banking nature, where its operations and activities need to comply with sharia principles and rules. This entails additional costs, processes, disclosures, regulations, reporting and sharia auditing.