Fitch warns Turkish banks of growing risks

Risks for Turkish banks are increasing due to a steep decline in the value of the Turkish lira against the US dollar, a financial challenge which hurts the lendersand’ asset quality, capitalization and foreign currency liquidity positions, global rating agency Fitch said on Friday.
Yet, the financial measurement mechanism is well preserved, indicating that banks would be able to recover losses over time, the agency added.
The Turkish lira has lost almost one-third of its value compared to the US dollar this year alone against the backdrop of political instability, an economic slowdown and expectations for a rise in US interest rates. This has increased the risk exposure of Turkish banks, which depend highly on foreign currency (FC) lending and funding. Additionally, the Turkish private sector bears a high volume of unhedged liabilities, which bring additional indirect risks because banksand’ customers are likely to find it increasingly difficult to meet FC loan repayments, Fitch remarked.
and”We expect banks to take losses on their FC loans but maturity profiles can be fairly long, meaning that banks will be able to absorb losses over time. We also believe the volume of losses should be manageable, given banksand’ margin and capital buffers and the fact that some FC borrowers are reasonably hedged.and”
The volume of consumer and small and medium-sized enterprise (SME) loans that have been impaired in real value is rising, however, Fitch added, noting that impairments still represent less than 4 percent of the banksand’ total loans.
Even though the depreciation of the lira erodes bank capital ratios because foreign currency assets, inflated when translated into the lira, represent a higher multiple of lira-denominated equity, Fitch said: and”Banks in Turkey wishing to open new branches must operate with a 12 percent minimum regulatory capital ratio, meaning that banks still have significant capacity to absorb the direct hit to capital from further moderate depreciation.and” The corresponding ratio stood at 14.8 percent at the end of August.
The agency also touched upon the Nov. 1 snap election, underlining its importance for the recuperation of political stability in the country, which ultimately may boost confidence and support growth.