Turkish Lira depreciation affects domestic banks’ credit profiles
The Turkish Lira’s steep decline in recent months will likely imply worsening asset quality and growth in riskweighted assets (RWAs) that will become pressure points for Turkish financial institutions, Moody’s Investors Service said on Tuesday.
“Lira depreciation will affect Turkish banks’ asset quality. About 30% of system-wide loans are foreigncurrency denominated, so the currency’s decline in value will result in rising loan repayments on these loans, and this is likely to result in increased delinquencies. We expect that this factor will contribute to an increase in the system-wide NPL ratio to around 3.5%-4.0% during 2015, from 2.8% at year-end 2014” explained Irakli Pipia, a Moody’s Senior Analyst.
The Moody’s report also said that the growth of RWAs will put pressure on capitalisation, such that the lira equivalent risk weight of foreign-currency loans will increase relative to Core Tier 1 capital that is mostly held in lira, so the depreciation could pressure Core Tier 1 levels. According to Moody’s estimates, a 5% depreciation of the lira versus the US dollar lowers Core Tier 1 capital by approximately 15 basis points (bps). Depending on the bank, the impact varies between 5-25 bps (up to 1.6% of Core Tier 1).
“As a result of worsening trends and high dependence on external wholesale funding the risk premiums that Turkish issuers must pay on their external borrowing over the coming 12-18 months could increase, although some leading banks have comfortable liquidity resources to weather the pressure” said Pipia.
The rating agency report noted that the pressures on the banks will not be uniform in terms of refinancing needs. However, despite the uneven pressure on individual banks, the system-wide trends are expected to be negative and contribute to challenging operating environment which Moody’s expects will prevail in the Turkish banking system for the rest of 2015.
The funding structure of this system and its inherent vulnerabilities to volatile investor sentiment will remain a contributing factor informing the negative outlook currently assigned to the majority of Moody’s bank ratings in Turkey.