Fitch says lira depreciation heightens risks for Turkish banks

LONDON

The sharp fall in the Turkish Lira this month heightens risks for Turkey’s banks, and a marked reduction in banks’ ability to refinance, protracted large deposit outflows or significantly deteriorating asset quality could lead to further negative rating actions, Fitch Ratings has said.

“Turkish banks are particularly exposed to refinancing risk, given their reliance on external funding,” Fitch said in a statement on Aug. 30, adding that much of this is short-term, with $102 billion maturing in the next 12 months.

“However, net of funding that we consider more stable [e.g., from parent banks and offshore Turkish corporates], we estimate the refinancing requirement for the next 12 months to be significantly less, at about $55 billion,” the rating agency also noted.

Turkish banks generally have access to sufficient foreign-currency liquidity to comfortably cover this amount (primarily foreign currency placed with the central bank, and short-term currency swaps with foreign counterparties), mitigating the near-term impact of a potential loss of market access, it added.

“Nevertheless, a scenario in which banks have to pay down foreign debt would reduce the central bank’s foreign-currency reserves and add to pressure on the lira, policy interest rates and economic growth,” Fitch said.

Lira depreciation will weaken banks’ asset quality, given their high, concentrated foreign-currency lending, with many borrowers unlikely to be well hedged, according to Fitch.

“Loan migration to the non-performing loan category will be influenced by the new framework to facilitate loan restructuring, recently announced by the Turkish authorities. This and other regulatory forbearance measures to support the corporate sector could understate and delay banks’ recognition of asset-quality problems, reducing the transparency of their reporting,” Fitch noted.

Fitch downgraded 24 banks’ long-term foreign-currency issuer default ratings and 12 banks’ viability ratings (VRs) on July 20, in most cases by two notches.