Fitch revises Turkish banking outlook to ‘negative’ amid macro, political risks
“We expect heightened risks to political stability and the operating environment to put pressure on bank credit fundamentals and increase the potential for further currency and interest-rate volatility. High levels of short-term foreign-currency wholesale funding leave banks exposed to significant refinancing risks and swings in investor sentiment towards Turkish country risks,” Fitch stated on Dec. 7.
Political uncertainty, as demonstrated by July’s attempted coup, is likely to undermine Turkey’s longer-term economic performance and bank asset quality, according to Fitch.
“Foreign-currency lending makes up about a third of total loans and is at risk as the Turkish Lira has fallen sharply since 2013 and could fall further. Many borrowers are likely to be hedged only in the fairly short term or partially,” it added.
“SME lending is significant at about a quarter of the portfolio and is particularly sensitive to slower growth. Problems could also arise from relatively small segments, such as tourism, which has been hit by worsening security conditions, and energy, which has been under pressure from low energy prices and the weak lira,” said Fitch.
Fitch expects the sector’s non-performing loans ratio to increase only moderately to about 4 percent at end-2017 from 3.3 percent the end of the ninth month of 2016.
“The economy is still growing and the fairly long-term nature of most foreign-currency loans means they will season relatively slowly. Regulatory forbearance also supports a gradual increase in the bad debt ratio.
Nevertheless, performing ‘watch list’ loans that have been restructured are likely to continue to rise to reflect a weakening of asset quality. Single-name concentrations could also push up our non-performing loans ratio forecast,” noted Fitch.
Turkish banks rely heavily on short-term external funding, but this risk is long-standing and financing has been resilient in the aftermath of July’s attempted coup, according to Fitch.
“We believe Fitch-rated banks have the ability to raise sufficient foreign-currency liquidity to service their foreign debt for up to a year, although prolonged market closure would put pressure on their liquidity and on Turkey’s external finances more generally,” said the statement.