Turkish banks strong on moderate shocks: Fitch

LONDON

Turkish banks are able to withstand moderate shocks to the quality of their assets and performance, largely due to their capacity to absorb losses, Fitch Ratings said on March 13.

“The rating for Turkish banks continues to be stable despite the recent sharp decline of the value of the Turkish Lira against the dollar and interest rate hikes that will make 2014 a relatively tough year,” the agency said in a statement.

In January, the Turkish Central Bank raised all of its key interest rates in a dramatic move in an emergency policy meeting to defend a crumbling currency that is among the most vulnerable to another sell-off.

Fitch said Turkish banks were able to maintain healthy capital ratios under a two-year stress scenario.
“This scenario assumes slower asset growth from lower economic growth and profit contraction, largely from squeezed margins and mounting impairment charges. Capital and profit generation have long been a key strength for most Turkish banks,” it added.

Debt risks

The U.S. Fed’s tapering program is dampening investor sentiment towards some emerging markets - including Turkey - due to its dependence on short-term capital inflows to support a large current account deficit.

“This leaves Turkish lira exchange rates vulnerable, raising asset quality risks for banks’ foreign currency lending, which accounts for around a quarter of total bank loans. The bulk of this lending has been extended to corporates, not all of which is well-hedged,” it stated.

Fitch also said that corporates that have borrowed in lira from local banks may face stress as a result of foreign currency borrowing from abroad.

The statement added that higher interest rates in the country would raise debt-servicing costs and could lower economic growth, both of which may lead to a rise in non-performing loans, particularly for small-medium enterprises.“Margin pressure will also be inevitable as loans reprice more slowly than deposits. We expect pressure on margins, asset quality, growth and refinancing costs to make 2014 a relatively tough year for Turkish banks,” Fitch added.