Moody’s says outlook for Turkey’s banking sector negative

LONDON

Ratings agency Moody’s gave a negative outlook on Turkey’s banking sector for the second straight year on late March 25, citing subdued economic growth and currency volatility.

“For the second consecutive year, Moody’s Investors Service says its outlook for Turkey’s banking outlook is negative, owing to subdued economic growth and currency volatility, which will reduce growth opportunities for banks and impair borrowers’ ability to service their loans. Alongside moderate asset-quality erosion, the system’s reliance on capital markets funding exposes it to international investor confidence and potential spikes in funding costs in light of the upward pressure on USD benchmark rates,” it said.

The agency said it expects problem loans to rise, albeit from low levels, with loans to consumers and SMEs bearing the brunt.

“Corporate loans, which have so far proved resilient to the economic slowdown, are still vulnerable to exchange-rate volatility because this segment has a high level of foreign-currency lending. We estimate that loans to companies with no underlying forex cash-flow represent about 10 percent-12 percent of total corporate and SME loans,” said Irakli Pipia, a Moody’s Vice President, Senior Analyst and author of the report.

These challenges will pressure banks’ asset quality and profitability over our outlook horizon, according to the agency.

“We expect problem loans to reach 3 percent-4 percent of total assets. We do acknowledge that the banks are still well capitalized; sector-wide, Tier 1 capital stood at 14 percent of risk-weighted assets at end-2014, up from 13 percent at end 2013. But, we need to balance this against slower lending growth and the country’s persistently high inflation that will weaken banking profits; these had already started to decline in the second part of 2014,” it added.

“Turkish banks will also face pressure from narrowing net interest margins due to rising borrowing costs in capital markets and the short-term nature of their liabilities; these will require frequent refinancing, probably on less favorable terms,” said Pipia.

Moody’s said that rapid loan growth in Turkey since 2009 has exceeded the banks’ capacity to fund their lending from customer deposits alone and they have increasingly turned to international investors to make up the difference.