TÜRKIYE VAKIFLAR BANKASI TÜRK ANONIM ORTAKLIGI
Fitch Ratings has downgraded
The Outlook on the covered bond ratings is Negative, reflecting the Negative Outlook on the LTLC IDR of Turkiye.
KEY RATING DRIVERS
The covered bonds' rating is based on VakifBank's 'B+' LTLC IDR, a three-notch uplift granted to the programme and on the 22.5% minimum committed over-collateralisation (OC) between the cover assets and the covered bonds.
The covered bonds are rated two notches above the bank's LTLC IDR, out of a maximum achievable uplift of three notches, consisting of a resolution uplift and a payment continuity uplift (PCU) of zero notches as well as a recovery uplift of three notches. Only two of the three notches of recovery uplift granted are used, as since the downgrade of the sovereign LTLC IDR to 'B', the 'BB' rating is at the cap for covered bond and structured finance ratings in Turkiye, three notches above the 'B' LC IDR of the sovereign. The 22.5% OC commitment provides protection that is in line with Fitch's 'BB' break-even OC of 22.5%. The Negative Outlook on the covered bonds' rating reflects the Negative Outlook on Turkiye's LTLC IDR, as the covered bonds rating is at the cap for covered bond ratings in Turkiye of 'BB'.
Covered Bonds' Rating Based on VakifBank's LTLC IDR
Fitch uses VakifBank's 'B+'/Negative LTLC IDR instead of the Long-Term Foreign-Currency IDR of 'B'/Negative as a starting point for its analysis because the asset and covered bond cash flows are denominated in Turkish lira.
Uplifts
The zero-notch resolution uplift reflects that the Turkish bank resolution framework does not include a bail-in tool for senior liabilities from which covered bonds would be exempt. In Fitch's view, a resolution of VakifBank, should it happen, is likely to result in the direct enforcement of the recourse against the cover pool.
The zero-notch PCU reflects Fitch's view that investors could be exposed to interest payment interruption when recourse to the cover pool is enforced. The cover pool contains liquid assets (TRY255 million of Turkish government bonds, rated 'B'), but these may not protect timely interest payments on the covered bonds in stress scenarios higher than 'B'. This drives the ESG relevance score of '4' for transaction & collateral structure. The soft-bullet covered bonds benefit from 18 months of principal payment protection in the form of an 18-month maturity extension.
The maximum recovery uplift of three notches has been granted to the programme as the timely payment rating level of the covered bonds, equivalent to VakifBank's LTLC IDR, is in the non-investment-grade category, and Fitch did not identify any material downside risks to recovery expectations. Notably, both assets and covered bonds are lira-denominated.
'BB' Break-even OC
Fitch's 'BB' break-even OC of 22.5% (increased from the 20.5% break-even OC previously supporting the 'BB+' rating) offsets both the credit risk on the cover pool in a 'BB' stress scenario, and the risk of borrowers setting off deposit amounts held with VakifBank against their mortgage loans upon an insolvency of VakifBank. As such, it allows for up to three notches of recovery uplift above VakifBank's 'B+' LTLC IDR. The break-even OC for the rating has increased due to an increased sizing for the risk of borrowers setting off their deposits, reflecting the trend of increasing borrower deposit amounts associated with the cover pool.
Cover Pool Credit Quality
The TRY31.6 billion cover pool as of
Fitch analysed VakifBank's updated vintage cumulative default data, and given their low observed historical levels, Fitch applied the 'High' multiple under its Originator Specific Residential Mortgage Analysis Rating Criteria to derive foreclosure frequency (FF) assumptions. This resulted in a 'B' FF of 2.3%.
As set out in its Structured Finance and Covered Bonds Country Risk Rating Criteria, Fitch applies higher stresses if assets are located in countries with increased risk of macroeconomic volatility or event risk. Thus, Fitch applied rating multiples associated with an 'A' rating scenario, two rating categories above the 'BB' maximum achievable covered bonds ratings in Turkiye. These were further subject to a 'Medium' multiplier for expected performance deterioration, reflecting Fitch's expectations that the operating environment for Turkish banks is becoming increasingly challenging. This is in light of spiralling inflation and unorthodox monetary policy; the central bank has maintained its policy rate at 14% since
Fitch adjusted recoveries downwards to apply a 10% floor on the 'BB' expected loss for the cover pool, to account for idiosyncratic risks, in line with its criteria.
Sizing for Set-off Risk
Fitch sized for the risk of borrowers setting off deposits held at VakifBank against their mortgage loans upon an insolvency of the bank. Using a forward-looking approach, Fitch sized for a higher deposit exposure amount of 8.5% than under the previous approach. The latter was based on the highest observed deposit amount since mid-2020 (7.1% in
Fitch does not give credit to the Turkish deposit guarantee scheme in a rating scenario above the sovereign IDR of 'B'. Given that about half of mortgage customer deposits are denominated in US dollars and euros, Fitch applied foreign-currency stress assumptions to the residual foreign-exchange (FX) exposure, and then capped the set-off exposure at each respective outstanding loan balance amount. Fitch also gave a 20% recovery benefit to the set-off exposure due to the pledge of deposits included in mortgage loan agreements. This resulted in a set-off exposure sized at 8.5% of the cover pool in a 'BB' stress scenario. This was added to the 10% floored loss on the assets, leading to a total modelled loss of 18.5% for the pool, equivalent to a 'BB' break-even OC of 22.5% when rounded to the nearest 50bp and expressed as a percentage of the bonds.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Turkish covered bond ratings are capped at three notches above the sovereign LTLC IDR, in accordance with Fitch's Structured Finance and Covered Bonds Country Risk Rating Criteria. Given that the covered bond ratings are in line with the maximum rating above the cap, VakifBank's covered bonds' rating could only be upgraded if the sovereign LTLC IDR is upgraded, or if the structured finance country cap for Turkiye is increased to four notches (or more) above the Turkish sovereign's LTLC IDR.
An upgrade to the covered bonds' rating would be subject to the relied-upon OC providing sufficient protection in line with the break-even OC at a higher rating level. Due to the cap at three notches above the sovereign LTLC IDR, an upgrade to VakifBank's LTLC IDR would not result in an upgrade to the covered bond ratings.
The covered bonds could also be upgraded if stronger liquidity protection mechanisms in relation to interest payments are introduced, allowing for a PCU greater than zero notches, as long as the relied-upon OC for the programme remains above the break-even OC for the corresponding rating scenario, and only if the sovereign LTLC IDR is also upgraded or the structured finance country cap for Turkiye is increased to four notches (or more) above the Turkish sovereign's LTLC IDR.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
The covered bonds' rating has a single-notch of buffer against an IDR downgrade. This means that the covered bonds would be vulnerable to a downgrade on a two-notch downgrade of VakifBank's LTLC IDR to 'B-' or below.
A downgrade to the sovereign LTLC IDR would result in a corresponding downgrade to the covered bonds' rating.
The ratings would also be vulnerable to a downgrade if the OC that Fitch relies upon in its analysis decreases below the 22.5% 'BB' break-even OC.
If deposits held at VakifBank increase substantially for borrowers in the cover pool, this could lead to an increase to Fitch's break-even OC for the rating. Moreover, this could also occur if the lira equivalent of the foreign-currency portion of the deposits increases (for example, due to further depreciation of the lira), all else being equal. Should the 'BB' break-even OC exceed the minimum committed OC, this could result in a downgrade of the covered bonds' rating.
If VakifBank issues non-lira-denominated covered bonds, Fitch would reduce the recovery uplift granted to the programme to one notch from the current three notches, as this would constitute a material downside risk to recovery given default expectations. This would result in a one-notch downgrade of the covered bonds' rating to 'BB-', as currently only two of the three notches of recovery uplift granted are being used.
Fitch's break-even OC for the covered bond rating will be affected, among other factors, by the profile of the cover assets relative to outstanding covered bonds, which can change over time, even in the absence of new issuance. Therefore, the break-even OC to maintain the covered bonds' rating cannot be assumed to remain stable over time.
Fitch has conducted a global exercise to assess the vulnerability of ratings to a plausible, but worse-than-expected, adverse scenario associated with the
In this adverse scenario, negative pressure on asset performance would also increase. Fitch performed a downside sensitivity scenario stress by applying a 'severe stress' performance deterioration into its modelling of the cover pool's probability of default. The additional stress nevertheless did not worsen the cover pool expected loss level, due to a cushion between the expected loss prior to Fitch's application of the 10% portfolio loss floor for Turkish mortgage assets and the floor.
Best/Worst Case Rating Scenario
International scale credit ratings of Financial Institutions and Covered Bond issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
CRITERIA VARIATION
Fitch has applied a variation from its Originator-Specific Residential Mortgage Analysis Rating Criteria by using its analysis of historical defaults by vintage despite a substantial increase in VakifBank's mortgage book in recent years (more than 10% a year and higher than the market average). Fitch nevertheless deemed the historical data representative of the cover pool's future performance. This is because loan characteristics have remained stable, and the increase in mortgage loan origination is more a result of monetary policy and negative real interest rates than a change in the issuer's underwriting practices. As such, Fitch applied the criteria to extrapolate vintage data to derive the expected loss levels. Without this variation to criteria, the rating on the covered bonds would be one notch lower.
A variation was applied to Fitch's Foreign-Currency Stress Assumptions for Residual Foreign-Exchange Exposures in Covered Bonds and Structured Finance - Supplementary Data File. We applied the criteria to size for the residual FX risk from set-off of deposits in euros and dollars despite the absence of currency pairs between liras and euros or between liras and dollars included within the criteria. We applied the most conservative category (Category 4 stress) to account for the historical volatility of the lira. Without this variation to criteria, the rating on the covered bonds would be one notch lower.
Fitch has applied a variation to its Covered Bonds Rating Criteria as part of the assessment of OC for recoveries given default. Programmes are expected to experience outstanding recoveries where OC credited by Fitch' analysis roughly offsets stressed credit-loss levels implied by the agency's static model output. However, in the case of VakifBank's covered bond ratings, Fitch combined the output from our asset model with a separate sizing for set-off risk to calculate our stressed credit-loss level. This is because we deem the risk of borrowers setting off their deposits a primary risk driver of the programme, due to the exposure to foreign-currency deposits (around 50% of deposits are denominated in euros or US dollar) combined with the sharp depreciation of the Turkish lira. This causes volatility in the deposit amounts when converted back to Turkish lira. This variation to the criteria has had no impact on the rating.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
PUBLIC RATINGS WITH CREDIT LINKAGE TO OTHER RATINGS
The covered bonds' rating is linked to VakifBank's and Turkiye's LTLC IDRs.
ESG Considerations
VakifBank has an ESG Relevance Score of '4' for transaction & collateral structure due to the programme's weakness in mitigating interest payment continuity risk, which has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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