Moody's: Negative Outlook For Turkey's Banking System

- International rating company Moody's, said its outlook for Turkey's banking system was negative, owing to subdued economic growth and currency volatility, which would reduce growth opportunities for banks and impair borrowers' ability to service their loans.

"Alongside moderate asset-quality erosion, the system's reliance on capital markets funding exposes it to international investor confidence and potential spikes in funding costs in light of the upward pressure on USD benchmark rates, the company said in its announcement. "We expect problem loans to rise, albeit from low levels, with loans to consumers and SMEs bearing the brunt."

Corporate loans, which had so far proved resilient to the economic slowdown, were still vulnerable to exchange-rate volatility because the segment had a high level of foreign-currency lending, it said in the announcement. "We estimate that loans to companies with no underlying FX cash-flow represent about 10 percent-12 percent of total corporate and SME loans" said Irakli Pipia, a Moody's Vice President - Senior Analyst and author of the report.

The challenges mentioned would pressure banks' asset quality and profitability over the company's outlook horizon, due to the expectations on the problem loans to reach 3 percent-4 percent of total assets, he added. "Turkish banks will also face pressure from narrowing net interest margins due to rising borrowing costs in capital markets and the short-term nature of their liabilities; these will require frequent refinancing, probably on less favourable terms."