Global Credit Research – London 25 Mar 2015

For the second consecutive year, Moody’s Investors Service says its outlook for Turkey’s banking outlook is negative, owing to subdued economic growth and currency volatility, which will reduce growth opportunities for banks and impair borrowers’ ability to service their loans. Alongside moderate asset-quality erosion, the system’s reliance on capital markets funding exposes it to international investor confidence and potential spikes in funding costs in light of the upward pressure on USD benchmark rates.

“We expect problem loans to rise, albeit from low levels, with loans to consumers and SMEs bearing the brunt. Corporate loans, which have so far proved resilient to the economic slowdown, are still vulnerable to exchange-rate volatility because this segment has a high level of foreign-currency lending. We estimate that loans to companies with no underlying FX cash-flow represent about 10%-12% of total corporate and SME loans,” says Irakli Pipia, a Moody’s Vice President – Senior Analyst and author of the report.

“These challenges will pressure banks’ asset quality and profitability over our outlook horizon, and we expect problem loans to reach 3%-4% of total assets. We do acknowledge that the banks are still well capitalised; sector-wide, Tier 1 capital stood at 14.0% of risk-weighted assets at end-2014, up from 13.0% at end 2013. But, we need to balance this against slower lending growth and the country’s persistently high inflation that will weaken banking profits; these had already started to decline in the second part of 2014.”

“Turkish banks will also face pressure from narrowing net interest margins due to rising borrowing costs in capitalmarkets and the short-term nature of their liabilities; these will require frequent refinancing, probably on less favourable terms.” adds Mr. Pipia.

Weighing increasingly negatively on the risk profile of the system is its funding structure and vulnerability to shiftsin international investor sentiment, in the context of subdued economic growth that will curb demand for banking services and foster only moderate credit growth of 14%-17% in 2015 (20%-30% over 2011-14).

Moody’s says that rapid loan growth in Turkey since 2009 has exceeded  the banks’ capacity to fund their lending from customer deposits alone and they have increasingly turned to international investors to make up the difference.