* Last week's rate hikes to hit banks' profit margins -
* Sharp monetary tightening may curb economic growth, it
* Says rate hikes may harm credit quality of existing loans
ISTANBUL, Feb 3 Turkey's sharp interest rate
hike will squeeze the profitability of its banking sector
through higher funding costs and worsen the quality of bank
assets, ratings agency Moody's said on Monday.
Last week Turkey's central bank dramatically hiked all its
key interest rates at an emergency midnight policy meeting as it
fought to defend the country's crumbling
For months, the ruling Justice and Development (AK) Party
had publicly discouraged a rate hike, wary of its impact on
growth in the run-up to local elections in March.
"CBRT's (the central bank) measures will constrain banks'
revenue generation and profitability," Moody's said in a sector
"We expect that downside risks to Turkey's economic growth
from the sharp monetary tightening will harm the credit quality
of existing loans and limit opportunities for lending growth,"
Unsecured consumer loans and loans to small and medium-sized
enterprises are most vulnerable because of their short terms and
floating interest rates, the ratings agency said.
Moody's said Turkish banks' profitability indicators have
been among the strongest since 2008 versus selected regional and
global peers but still the recent rate moves were likely to
negatively affect their asset quality.
The agency cited a structural mismatch in loan maturities in
the banking sector; with the banking system funded by short-term
deposits maturing within three months versus assets with
"Because of the structural maturity mismatch, banks' margins
will contract from the sudden increase in funding costs,"
Turkish Economy Minister Nihat Zeybekci downplayed the risks
on economic growth because of the rates hikes. He said on Monday
he did not see any risk to the 4 percent end-year growth target.
Moody's also said lira depreciation will affect borrowers'
ability to repay loans, as around half of corporate lending is
denominated in foreign currency.
Istanbul's banking stocks index, which is heavily
weighted in the main index, hit a 52-week low last
Wednesday, the first day of trading after the rates hikes.