Rapid credit growth and higher external debt have increased downside risks affecting major Turkish banks in case of extremely stressed market conditions, Fitch Ratings said.
The four largest private banks—Akbank, Garanti, Isbank and Yapi ve Kredi—have solid capital buffers, although these have weakened steadily, the ratings agency said 20 August 2014 in its Peer Review: Large Private Turkish Banks.
Foreign liabilities have increased, particularly at the short-end, as loan demand has outpaced deposit growth. Increased short-term borrowings and uncertainty over the ability to monetise foreign-currency assets in a stress scenario leave banks more vulnerable to downside risks. The banks have limited foreign currency cash and unencumbered foreign securities, so they would have to draw down on central bank reserves to service external debt.
The combined loans of the four banks expanded around 2.5x since end-2008. While reported loan quality metrics are healthy, rapid growth partly helps to mask performance deterioration. There was a slowdown in 1H14 with sector loan growth up a moderate 7.3% and we believe total loan growth will be around 15%-20% for the year, below its recent historical pace.
Sharp interest rate changes and a fluctuating lira against major currencies are likely to persist in Turkey. The credit profiles of the four large private banks are sensitive to the volatile operating environment. The banks’ broad and diversified franchises are a source of credit strength.
Capital is still comfortable by international standards with all four banks reporting Fitch Core Capital ratios in excess of 10%. But the buffers have been eroded since 2010. Growth, tougher regulatory demands and the impact of lira depreciation on foreign currency assets have pushed down regulatory capital ratios. Weaker and volatile capital markets also depressed capital in 2013 where securities are marked-to-market through equity.