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Pile of problem loans to grow. Moody's added that it expected “that the macroeconomic challenges will lead to an increase in the stock of problem loans of Turkish banks. A higher inflow of problem loans will lead to higher provisioning costs, reducing the profitability of Turkish banks that is, on average, strong. Some weaker banks will not have sufficient pre-provision profits to offset a spike in loan-loss charges”. Despite a reduction in profitability, Moody's said it anticipated that capital will remain stable for most Turkish banks, adding: “Nevertheless, due to the still high level of assets in foreign currency, the capital of Turkish banks is still susceptible to a material currency deterioration.” The larger BCA downgrades applied to Ziraat Bankasi and Vakifbank reflected “the unseasoned risk that the banks have built via recent higher-than-average loan growth”. The other 16 banks downgraded are Akbank, Alternatifbank, Denizbank, Export Credit Bank of Turkey (Turk Exim), HSBC Turkey, ING Turkey, Nurol Investment Bank, Odea Bank, QNB Finansbank, Sekerbank, Turk Ekonomi Bankasi, Turkiye Garanti Bankasi, Turkiye Halk Bankasi, Turkiye Is Bankasi, Turkiye Sinai Kalkinma Bankasi (TSKB) and Yapi ve Kredi Bankasi.
Istanbul and Izmir closely linked to sovereign. In explaining its downgrading of the ratings of the Istanbul and Izmir municipalities, Moody’s said: “Due to their close institutional, financial and operational linkages with the Turkish government, metropolitan municipalities, including Istanbul and Izmir, cannot act independently of the sovereign and do not have enough financial flexibility to permit their credit quality to be stronger than that of the sovereign. Therefore, Istanbul and Izmir are rated on par with the Turkish government bond rating of B1 negative. “Moody's assessment of both cities' baseline credit assessments (BCAs) is unchanged at b1, reflecting the two cities' robust operating performance, predictable shared taxes paid by the government and representing the vast majority of their revenue, and their large and diversified economic bases. In Moody's view, these factors counterbalance their limited cash reserves and significant exposure to foreign currency debt.” Istanbul's B1 rating reflected its large and diversified economy, continuing robust operating performance, high self-funding capacity and valuable asset base, which provides fiscal flexibility to accommodate increasing capital spending and a strong likelihood that the Turkish government would provide support if the city was to face acute liquidity stress, Moody’s said. It added: “On the other hand, Istanbul's rating is constrained by its relatively high debt burden, which will remain elevated during 2019-20 and facing upward pressure on debt servicing costs given the city's significant exposure to foreign currency debt.” Looking at Izmir, Moody’s said its B1 rating reflects its very high and stable operating balance, exceeding 50% of operating revenue in 2018. “Izmir's credit profile benefits from the third-largest economic base in the country and a moderate likelihood that the Turkish government would provide support if the city was to face acute liquidity stress,” said Moody’s, adding: “At the same time, the rating is constrained by the moderately high indirect debt of municipal-related entities and the city's high exposure to foreign currency debt.”
Ankara limited risk of rating downgrade by injecting capital into state banks: Fitch. Turkey’s move earlier this year to inject capital into its state banks demonstrated that Ankara is willing to support the financial sector and thus limits the risk of a rating downgrade, credit rating agency Fitch said on June 11. In a conference call on Turkey’s economy, Fitch added that it saw weaker growth in the Turkish banking sector this year compared to previous years, according to Reuters. The day also saw Fitch comment on the high level of deposit dollarisation in Turkish banks. The rating agency observed that it might put pressure on lenders’ foreign exchange liquidity in the event of a forex deposit outflow. Another concern centred on the use of the Turkish central bank’s reserves in making exchange rate interventions. During the conference call, Fitch added that it foresaw a worsening of non-performing loans (NPL) ratio in the Turkish banking sector. They stood at 4.1% at the end of April.
Moody’s under fire. Meanwhile, Moody’s Investors Service’s recent surprise downgrade of Turkey’s sovereign rating, which was followed by the
63 TURKEY Country Report July 2019 www.intellinews.com