February 4, 2016 / 1:28 PM / 4 years ago

Fitch: Mixed Creditor Implications From New Turkish Risk Weights

(The following statement was released by the rating agency) LONDON, February 04 (Fitch) Changes to risk-weighted assets applicable to Turkish banks from March 2016 have mixed implications for creditors, says Fitch Ratings. Relaxation of risk weights on consumer loans, combined with lower provisioning requirements, could mean inadequate coverage of risks in retail portfolios. We consider the higher weighting of foreign-currency (FC) deposits placed with Turkey's central bank (CBT) more prudent. The changes will bring Turkey more into line with the Basel Committee's guidelines, allowing more direct comparison with international banks. But lower retail risk weights may be less suitable for Turkey because default rates are higher than in more developed markets, portfolios are less seasoned and interest rates generally more volatile. Residential mortgage loans will attract a minimum 35% risk weight (currently 50%) and unsecured consumer portfolios will be weighted at 75% (currently 75%-250%). Positively, FC CBT deposits will attract a 50% risk weight, up from 0%. We think this makes sense because the CBT's ability to release FC to banks could be constrained in a stressed scenario such as a market shutdown. The 50% weighting is in line with the Basel framework, which allows supervisors discretion to set low - generally 0% - risk weights on domestic-currency exposures to their sovereigns and central banks. But FC exposures should be weighted according to a matrix. For Turkey, rated 'BBB-', this means a 50% risk weight. Macroprudential measures in Turkey are sometimes used to support government general economic targets. For example, provisioning levels, risk weights, and limits based on payments, maturities and incomes were used to control growth in consumer lending from 2013. Turkey's bank regulators say Basel compliance is driving the latest risk-weight changes. But a secondary objective may be to stimulate consumption and support economic growth generally. Retail loans rose moderately by 8% in 2015, in line with inflation, but below non-retail loan growth of 14% (adjusted for exchange-rate effects). We do not expect the new regulations to cause a rapid increase in retail lending because rated banks are monitoring the build-up of impaired loans in unsecured retail portfolios and because of the sensitivity of retail lending to slower economic growth. But proposals to reduce the high general reserve requirements on retail loans, up to 8% on certain consumer portfolios, would free up capital and could entice banks to renew their drive into consumer loans. New regulations forcing deduction of free provisions from banks' capital and changing the amortisation schedule for non-compliant Basel 3 subordinated debt are also coming in, but we think them likely to have a modest negative impact on sector capital adequacy ratios. We believe sector capitalisation remains reasonable, albeit declining. The immediate impact of the new risk weights is likely to be at best a modest lift to sector capital ratios, as the benefit from lower retail risk weights (about 130bp, we estimate) should outweigh the charge's impact on FC reserves (about 80bp). But the gradual introduction of Basel 3 could spur equity-raising and Tier 2 issuance as banks build up buffers, particularly while weaker profitability may weaken underlying internal capital generation. Our outlook for the Turkish banking sector is stable; further details are available by clicking on the link below. <a href="https://tools.fitchratings.com/creditdesk/reports/report_frame_render.cfm? rpt_id=875024">Click here to view "2016 Outlook: Turkish Banks". Contact: Lindsey Liddell Director, Financial Institutions +44 203 530 1008 Fitch Ratings Limited 30 North Colonnade London E14 5GN Janine Dow Senior Director, Fitch Wire +44 20 3530 1464 Media Relations: Elaine Bailey, London, Tel: +44 203 530 1153, Email: elaine.bailey@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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