Fitch: Turkish Banks Are Resilient to Moderate Financial Stress

Thu Mar 13, 2014 12:14pm EDT

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(The following statement was released by the rating agency) Link to Fitch Ratings' Report: Turkish Banks: Resilient Loss Absorption Capacity here LONDON, March 13 (Fitch) Turkish banks are able to withstand moderate shocks to their asset quality and performance, largely due to their loss-absorption capabilities, Fitch Ratings says. This is why rating Outlooks for Turkish banks continue to be Stable despite recent sharp currency and interest rate shocks that will make 2014 a relatively tough year. Most of the country's banks are 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. Only four banks failed to preserve a minimum Fitch Core Capital/risk weighted assets ratio of 10% in our capital stress scenario. But the banks - Alternatifbank, Denizbank, TEB and ING - are all foreign owned, have subordinated debt from their parents to support regulatory capital ratios, and would be likely to receive further capital injections from shareholders if needed. Among the country's largest banks, Yapi Kredi and VakifBank have somewhat tighter capital ratios than peers, but these are currently still reasonable. The US Fed's tapering programme is dampening investor sentiment towards some emerging markets including Turkey, as it is dependent 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. In addition, corporates that have borrowed in lira from local banks may face stress as a result of foreign currency borrowing from abroad. Commercial banks most exposed to foreign-currency lending are BankPozitif, Kuveyt Turk and Garanti Bank. Turkish banks' foreign-currency wholesale funding represents a moderate 16% of banking sector liabilities, and refinancing risks have been contained as a result of strong relationships with foreign lenders and the secured nature of some facilities, such as repos. Foreign-currency deposits were fairly high at 37% of total deposits at end-2013, although reserve requirements on US dollar deposits are also fairly high at 15%, and the central bank can release some of this US dollar liquidity back to banks, if required. Higher interest rates make a return to the rapid credit growth seen during the first half of 2013 less likely. This should allow banks to take stock of asset quality as portfolios season. However, higher rates will raise debt-servicing costs and could lower economic growth, both of which may lead to a rise in non-performing loans, particularly for SMEs. 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. For more details, see "Turkish Banks: Resilient Loss Absorption Capacity" published today. Contact: Janine Dow Senior Director Financial Institutions +44 20 3530 1464 Fitch Ratings Limited 30 North Colonnade London E14 5GN Cynthia Chan Senior Director Fitch Wire +44 20 3530 1655 Media Relations: Hannah Huntly, London, Tel: +44 20 3530 1153, Email: hannah.huntly@fitchratings.com. The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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