S&p: The Incidents Surrounding Bank Asya Illustrate The Potential For Political Risks Into The Financial System

- June 7 elections in Turkey was not a particular source for the banks, but the incidents surrounding Bank Asya illustrated risks ento the financial system, according to the international rating company Standard And Poors (S&P).

"As for domestic political risks, we do not see the June 7 parliamentary elections as a particular source of risk for banks. However, the incidents in 2014 surrounding Bank Asya, which ended with the regulatory action against it in early 2015, illustrate the potential for political risks, or the perception of it, to directly or indirectly spillover into the financial system" S&P said in a report with "Turkish Banks Face More Regulation
And Greater Competition" headline released on Wednesday.

Turkey’s banking regulator seized control of Bank Asya, due to transparency concerns, according to the banking watchdog. The Savings Deposit Insurance Fund (TMSF) seized 63 percent of Bank Asya shortly after the Banking Regulation and Supervision Agency (BDDK) ruled in favour of its seizure, in early February.

"We expect domestic loan growth to reduce to 15percent in nominal terms, decreasing pressure on funding and capitalization" the S&P said in the report, reminding the regulatory measures implemented in 2014 aiming to curb the rapid growth of unsecured lending were causing Turkish banks to put the brakes on lending.

"On the external front, we expect monetary decisions by the Fed and the ECB to offset each other, minimizing their impact on the availability and pricing of foreign funding. Domestic monetary policy and falling oil prices will shape Turkish banks' interest margins and might slow the ongoing margin squeeze" the rating company added.

Balance sheet optimization would be a key priority for Turkish banks in 2015, due to the new rules the
regulator had introduced, through the days of rapid growth, particularly in unsecured consumer lending, were over and authorities would be scrutinizing fees and commissions to protect clients, the company said. "Our ratings outlook on Turkish banks is negative and mirrors the outlook on our sovereign ratings. Therefore, rating actions on Turkish banks would by and large hinge upon any on the sovereign."

Regulation was forcing banks to shift into a lower gear in Turkey, the S&P stated, and said, "We view this less aggressive loan growth as positive for banks, especially from an asset quality perspective, because
loan books are still seasoning, following a four-year period during which the domestic credit stock as a percentage of GDP increased by seven percentage points annually, on average."

Active asset management was becoming more critical, the S&P warned, stressing that the new rules were not only forcing banks to put the brakes on unsecured lending but were also eating into bottom-line earnings through both lower interest margins and lower fee and commission income.