Turkish banks can absorb currency loss on corporate loans: Fitch

“Banks’ internal capital generation is still solid, and several factors materially reduce the extent to which corporates are exposed to FC risk, in our view,” it noted. 

Fitch views the Turkish corporate sector as the most exposed to the exchange rate risk in the EMEA region because of currency mismatches on companies’ balance sheets. 

“Corporates generating strong FC export revenues, such as those operating in the clothing and textiles, automobiles and chemicals sectors, will be at least partially hedged against currency movements. But we have found that the country’s leading exporters are not the largest borrowers from domestic banks in FC. The largest FC loans extended by Fitch-rated Turkish banks tend to be to companies operating domestically, such as energy production and distribution, real estate development and construction companies,” said the agency.

This is a risk for the banks, but there are several mitigating factors, according to Fitch. 

“Currency risks for the energy and real estate sectors are moderately reduced because pricing on these markets is predominantly in foreign currency. Furthermore, corporate borrowers are often parts of larger, diversified corporate groups, and other group companies may be exporters, or simply have lower debt, which limits the impact on overall group leverage of the FC borrowing,” it noted. 

“Corporates very rarely fully hedge their FC positions, but based on our discussions with Turkish banks, we understand that a significant number of corporate borrowers operate with short-term hedges, which allow them to cover the next 12-24 months of payments falling due under their FC loans,” it added. 

In addition, some Turkish company owners are likely to hold FC deposits in banks both inside and outside of Turkey, Fitch also said.