Fitch places Turkey’s Şekerbank on ‘rating watch negative’

Credit rating agency Fitch has downgraded Turkey’s Şekerbank and placed it on a rating watch negative (RWN), meaning it might further downgrade the bank’s credit rating in the near future, due to its weakened capital position during the economic fallout from the COVID-19 pandemic, the agency said in a statement on Friday. 

“Fitch Ratings has placed Şekerbank T.A.S.'s 'B-' Long-Term Issuer Default Ratings (IDRs) and 'b-' Viability Rating (VR) on Rating Watch Negative (RWN),” Fitch said. “The bank's subordinated notes' rating has been downgraded by one notch to 'CCC' from 'CCC+', and removed from Under Criteria Observation (UCO). It has also been placed on RWN.”

“The RWN reflects the bank's weakened capital position amidst the coronavirus fallout, and uncertainty surrounding the sufficiency and timeliness of core capital strengthening measures,” Fitch said. 

Fitch said that a decision on the size and timing of a potential capital increase is set to be made at Şekerbank’s extraordinary shareholder meeting, which has been delayed until June 18, 2020 due to the pandemic.

The agency said it expected to resolve the RWN once the size and timing of any capital injection is determined. “We would not expect resolution of the RWN to extend beyond the usual six-month period for review given the bank's pressured capital position,” Fitch said. 

Fitch said that the risks to Şekerbank’s credit profile were already significant following the depreciation of the Turkish lira in 2018 and Turkey’s economic slowdown in 2018 and 2019. 

Fitch forecasts that Turkey's economy will contract by 3 percent in 2020 following the COVID-19 fallout, but is expected to mount a sharp recovery of 5 percent growth in 2021. 

However, the agency warned that a greater than expected weakening in economic growth and a weaker recovery in 2021 “would add to existing pressure on the bank's credit profile and could result in a downgrade even if capital is replenished in the near term”.

Şekerbank’s core capital ratios compare weakly with those of its peers. Its leverage is high and above the sector average, and the bank was loss making in 2019, Fitch said.

The bank’s exposure to the risky small to medium enterprises (SMEs) and micro-SME segments, which are highly sensitive to the downturn from the pandemic, means asset quality risks at the bank are significant, Fitch said. Şekerbank also has exposure to high-risk sectors such as construction (18 percent of gross loans at the end of the first quarter of 2020) and agriculture (11 percent of gross loans). 

The bank’s foreign-currency lending is also high at 33 percent of the loan book at end of the first quarter of 2020, but is below the sector average in Turkey. 

Şekerbank was established in Eskişehir on October 12, 1953 under the name of "Pancar Kooperatifleri Bankası A.Ş." to support local development, sustainable production and agricultural industries, according to its website. Şekerbank has 238 branches across Turkey.