Moody's: Turkish Lira Depreciation Affects Domestic Bank's Credit Profiles

- The Turkish Lira's steep decline in recent months will likely imply worsening asset quality and growth in risk-weighted assets that will become pressure points for Turkish financial institutions, according to Moody's.

"Lira depreciation will affect Turkish banks' asset quality. About 30 percent of system-wide loans are foreign-currency 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" said Irakli Pipia, a Moody's Vice President and Senior Analyst. "We expect that this factor will contribute to an increase in the system-wide NPL ratio to around 3.5 percent-4.0 percent during 2015, from 2.8 percent at year-end 2014."

Moody's report also said that the growth of risk-weighted assets would put pressure on capitalisation, such that the lira equivalent risk weight of foreign-currency loans would increase relative to core measure of a bank's financial strength that is mostly held in lira, so the depreciation could pressure core measure of a bank's financial strength levels.

"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" added Pipia.

Moody's report notes that the pressures on the banks would not be uniform in terms of refinancing needs, he said. "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 the Turkish banking system and its inherent vulnerabilities to volatile investor sentiment would remain a contributing factor informing the negative outlook currently assigned to the majority of Moody's bank ratings in Turkey, he added.