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RAM Ratings revises Kuveyt Turk's rating outlook to negative due to concerns on Turkey.

RAM Ratings has placed a negative outlook on the AA3/P1 financial institution ratings of Kuveyt Turk Katilim Bankasi AS (the Bank) and the AA3(s) rating of KT Kira Sertifikalari Varlik Kiralama AS's MYR 2.0 billion Islamic MTN Programme (2015/2025), triggered by a negative action on Turkey's rating (gBBB3(pi)/Negative).

The attempted coup in July 2016 has compounded our concerns on weaker growth prospects and external position. Although the Bank's ratings incorporate significant shareholder support from Kuwait Finance House KSCP (KFH), our sovereign-weight rating approach also necessitates a negative rating action on Kuveyt Turk, given its inextricable link to the Turkish economy.

Sovereign weights, which take into account country as well as transferability and convertibility (T&C) risks, are placed on entities that are rated above the sovereign ratings of their countries of domicile, which is the case for Kuveyt Turk. In our assessment, the T&C risk for Turkey is still low. Nonetheless, should Turkey's global long-term rating be downgraded or if its T&C risk escalates, the long-term ratings of Kuveyt Turk and KT Kira's Sukuk would also be downgraded as a consequence of applying relevant sovereign weights.

The tougher operating environment will keep Kuveyt Turk's asset quality under pressure. While the recent upheaval could temporarily affect Turkish banks' access to wholesale funding, Kuveyt Turk's Basel III liquidity coverage ratio of above 200 per cent and funding support from KFH are strong mitigating factors. Furthermore, the Turkish central bank has introduced a series of financial stability measures, including unlimited liquidity support for banks.

In times of need, we expect KFH to provide solid support to Kuveyt Turk, as demonstrated in the past through numerous capital infusions and provision of inter-bank funding. As the second-largest bank in Kuwait and its biggest Islamic bank, KFH is a systemically important entity. Being the largest subsidiary of KFH that contributes more than 30 per cent of its profit, Kuveyt Turk is strategically important to its major shareholder.

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Publication:CPI Financial
Date:Aug 11, 2016
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