Moody’s upgrades outlook for Turkish banks

LONDON

Moody’s Investors Service has changed its outlook to stable for Turkish banks, saying that for the Turkish banking system is stable as operating conditions improve following the elections.

The government’s initial steps to return to orthodoxy in policymaking following the elections in May is supportive of operating conditions for Turkish banks, the rating agency said in a new report.

Profitability will normalize from the peaks recorded in 2022, but nevertheless remain strong, according to the report.

The combined net profit of Turkish banks climbed to 250 billion Turkish Liras in the first six months of 2003 from 169 billion liras from the same period of last year, according to the latest data from the Banking Regulation and Supervision Agency (BDDK).

But it warned that cost pressures will remain as inflation continues to weigh on operating costs and provisioning expenses will remain high in the context of expected asset quality pressures.

“The banks’ external funding position and dollarization levels have improved, and we expect liquidity, particularly foreign currency, to remain adequate,” said the report.

Despite economic volatility, Turkish banks' funding and liquidity positions improved markedly, particularly in foreign currency, it added, noting that reduction in short-term foreign currency external borrowings, improving loan-to-deposit ratio and strengthening of liquidity coverage ratios over recent years is relieving the pressure on bank’s funding profile.

The report also underlined that problem loans will rise owing to pressures from high inflation and expected slowdown in real GDP growth.

Moody’s expects Türkiye's economic performance to slowdown with real GDP growth expected at 4.2 percent in 2023, down from 5.6 percent in 2022 and inflation remaining high at 51 percent in 2023, down from 72 percent in 2022.