UAE, GCC banks’ Turkish units to benefit from macroeconomic shift

The UAE and other Gulf banks with Turkish subsidiaries should benefit from Turkey's macroeconomic adjustment and its shift to more conventional and consistent economic policies, Fitch Ratings said.

The rating agency upgraded Turkey's sovereign rating to ‘B+' Positive from ‘B' Stable on the back of increased confidence in the durability and effectiveness of the policies implemented since June 2023. The positive outlook of Turkey reflected Fitch's expectation that the country's overall macroeconomic policy stance would be consistent with a significant decline in inflation, as well as a continued reduction in external vulnerabilities.

Due to strong growth prospects, it upgraded 18 Turkish banks in March alone, including many Gcc-owned subsidiaries.

“Disinflation should reduce the subsidiaries' net monetary losses, and slower Turkish lira depreciation should reduce the adverse capital impact from currency translation losses,” Fitch said.

The Turkish subsidiaries of GCC banks' net monetary losses were $2.6 billion in 2023 as compared to $.9 billion in 2022, with Turkish inflation averaging 53 per cent over the year.

“This eroded the banks' operating profit/riskweighted assets ratios by 50bp. Emirates NBD (ENBD) and Qatar National Bank (QNB) were the worst-affected, with net monetary losses reducing their ratios by 60bp–70bp,” Fitch analysts said.

Fitch expects net monetary losses to increase to about $2.8 billion in 2024 before falling to about $1.4 billion in 2025, assuming Turkish CPI averages 58 per cent in 2024 and 29 per cent in 2025.

“If disinflation is at least in line with our expectations and continues after 2025, GCC banks will probably stop using hyperinflation reporting from 2027.”

GCC banks with Turkish subsidiaries adopted hyperinflation reporting in the first half of 2022 under the accounting standard IAS 29, as cumulative Turkish inflation had exceeded 100 per cent over the past three years. IAS 29 requires banks to restate non-monetary assets and liabilities to reflect the impact of hyperinflation, leading to net monetary losses in their income statements.

The global ratings agency said sustained market and exchange-rate stability, sustainable disinflation and further easing of macroprudential regulations could lead to a further upgrade of the domestic operating environment score for Turkish banks, and potentially to the Viability Ratings (VRS) of some GCC banks with Turkish subsidiaries.