Fitch Ratings has assigned Kuwait Turkish Evkaf Finance House (KTEFH) Long-term foreign and local currency ratings of B+. The Outlook is Stable, according to a press release.
At the same time, Fitch has assigned Individual, National, Support and Short-term ratings of D/E, BBB+, 4, and B, respectively. The Outlook on the National rating is Stable.
The Long-term, Short-term and Support ratings reflect the high propensity of KTEFH's majority shareholder, Kuwait Finance House (KFH) to support the finance house in case of need but this might by constrained by the sovereign ceiling of Turkey. KTEFH is 62 percent-owned by KFH, a sizeable and well-positioned Islamic financial institution, which has been a source of capital and funding in the past.
The Individual rating reflects better profitability, which is balanced by KTEFH's relatively small size and difficult operating environment, weak, but improving, asset quality and potentially volatile liquidity and funding.
After sustaining below average profitability over the last two years, KTEFH recorded sound earnings of 13 trillion Turkish lira during the nine-month period ended September 30, 2003. Results benefited from improved fee and commissions as well as trading profits.
KTEFH maintains a high cost structure relative to similar-sized Turkish commercial banks. As the company does not pay a dividend, solid retained earnings bolstered its regulatory Tier 1 capital ratio to 15.38 percent at end-September from 13.58 percent at end-2002. Equity was enhanced by a $26 million cash injection in 2002.
Because of its size, KTEFH can be vulnerable to external economic shocks. During the crises of 2000 and 2001, the company lost 21 percent of its deposits because of uncertainty over special finance houses after the collapse of a competitor. KTEFH had sufficient liquidity to fund withdrawals without assistance from its shareholders. As economic conditions improved, the company downsized its liquid assets, a potentially dangerous strategy in light of the volatile nature of Turkey's economy.
KTEFH has weak, albeit improving, asset quality. Although problem loans declined moderately during 2003, non-performing credit equaled 16.75 percent of the portfolio at September 2003. KTEFH establishes provisions according to bank regulations; however, Fitch believes that current reserve coverage of 64 percent should be strengthened in light of the difficult operating environment. The deficient provisioning negatively affects the quality of capital.
KTEFH engages in 'non-interest bearing' banking, competing with commercial banks for secured financing of small- and medium-sized enterprises. The majority of its deposits are profit and loss sharing accounts where profits and losses on assets are theoretically divided between the account holder and the bank, typically on an 80 percent – 20 percent basis.
KTEFH holds approximately 24 percent of the assets of the five special finance houses in Turkey. However, these institutions have only two percent of the assets of the entire financial system. — (menareport.com)
© 2004 Mena Report (www.menareport.com)
