NEWS Finance        07/12/2020

Fitch expects Turkish banks’ provisions to be adequate to absorb expected losses

International credit ratings agency Fitch Ratings has published its Turkish Banks Datawatch report for 3Q20, covering 13 banks comprising 82% of system assets. The report assesses key data from the banks' regulatory financial statements and disclosures, and unconsolidated regulatory financial statements and disclosures have been sourced primarily from the Banking Regulation and Supervision Agency (BDDK).


Fitch expects provisions made by Turkish banks to be adequate to absorb expected losses, assuming an economic recovery in 2021. However, it expects “the sector’s cost of risk, which spiked in 1Q20, before receding in 2Q20-3Q20, to remain above historical levels in 2021”. The Turkish government’s easing of loan classification is planned to be discontinued as of 2020 yearend and this will ensure that the cost of risk will continue to be high in 2021.


Fitch’s summary of its datawatch report is as follows:

“Turkish banks have continued to provide against loans in 3Q20 as if there were no regulatory forbearance in respect of the easing of loan classification, reflecting the front-loaded provisioning policies of banks. Forbearance is scheduled to be withdrawn at end-2020 and we expect cost of risk (3Q20: 2.7% of average gross loans at banks covered in the report; annualised basis) to remain high as credit losses feed through amid operating environment pressures. The sector non-performing loan ratio fell to 4.1% at end-9M20 as regulatory forbearance continues to flatter the banks' reported asset quality metrics.


Banking sector loan growth eased in 3Q20 reflecting higher effective interest rates and the easing of the Asset Ratio (AR) requirement as stimulus policies were unwound. The banking regulator has announced the AR will be discontinued at end-2020 signalling a move to normalise bank lending.


Pre-impairment profit remained solid and core capital ratios are adequate at most banks. However, risks to capitalisation remain high given asset-quality pressures, sensitivity to lira depreciation and market volatility.


Refinancing risks are high considering volatile market conditions, but Turkish banks have retained reasonable access to external funding markets during the pandemic. Rollover rates in the syndicated loan market have remained above 75% since 1Q20, and pricing was only marginally higher in 4Q20. The banking sector's foreign-currency liquidity is sufficient to cover banks' short-term market-sensitive external financing requirements. However, banks' access to FC liquidity has become highly reliant on the Central Bank.”


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