NEWS Finance        09/09/2020

Fitch sees increased risk to Turkish banks’ asset quality as a result of coronavirus pandemic

International credit ratings agency Fitch Ratings has published on its website an insight into the Turkish banking sector. In this report, the agency sees the coronavirus pandemic as weakening the asset quality of the Turkish banking sector. It further notes that Turkey’s loan classification rules, which will continue until the end of 2020,  “means that Stage 3 loans are now classified as 180 days overdue rather than 90, and Stage 2 loans as 90 days rather than 30”. The agency adds that Turkey's loan deferral scheme, “enabling customers to defer interest or principal payments for three months”, “will delay reported NPL increases until around 1Q21.”

 

Fitch Ratings report is as follows:

 

Coronavirus Will Weaken Turkish Banks' Asset Quality

 

Turkish banks' underlying asset quality will weaken due to the coronavirus pandemic, but this will be more apparent in their income statements than their reported asset-quality metrics in 2020, Fitch Ratings says. Asset quality is a key rating sensitivity for Turkish banks, alongside foreign-currency liquidity. It is closely linked to their operating environment and the macro-economic backdrop, which have weakened this year due to the pandemic.

However, reported non-performing loans (NPLs) will be flattered by regulatory forbearance and loan growth. A relaxation of loan classification requirements, scheduled to last until end-2020, means that Stage 3 loans are now classified as 180 days overdue rather than 90, and Stage 2 loans as 90 days rather than 30. Together with Turkey's loan deferral scheme, enabling customers to defer interest or principal payments for three months, this will delay reported NPL increases until around 1Q21.

While the share of restructured loans in Stage 2 loans could rise, many large corporate exposures were already restructured following the 2018 lira crisis. This could limit new restructurings in the near term.

Rapid loan growth driven by local-currency lending (total sector loans grew 16%, foreign-exchange-adjusted, in 1H20) has largely been a function of government stimulus policies. Demand for foreign-currency loans has remained weak, exacerbated by lira volatility. We calculate that loans made under the Credit Guarantee Fund (CGF) rose to 10% of total sector loans at end-1H20 from 6% at end-2019. By early August, CGF loans had contributed 44% of the increase in sector loans since end-March. Unsecured retail lending also contributed a growing share of recent loan origination, partly to meet pent-up credit demand post-lockdown and following the sharp reduction in policy interest rates, while state banks also moved to boost mortgage lending.

However, new CGF lending has been limited since end-1H20, while rising effective interest rates and regulatory measures, including the easing of the asset-ratio requirement and the lowering of the maximum maturity for certain retail loans, signal slower loan growth in 2H20.

We forecast real GDP growth of 5.0% and 4.6% in 2021 and 2022, respectively. If GDP growth continues to recover in line with our updated forecasts this could offset some of the hit to asset quality caused by the earlier slump, and support loan collections and recoveries.

Treasury guarantees limit the asset-quality risk from SME loans under the CGF and our discussions with banks suggest that new loan deferral requests since end-1H20 have fallen sharply. But the economic impact of the pandemic and the range of sectors affected will damage underlying asset quality. Banks' pre-existing balance sheet risks, notably from foreign-currency lending, exacerbate the risks, particularly given that the lira has come under more pressure against the dollar in recent weeks. Unsecured retail lending is also sensitive to a sizeable fall in employment, while recent rapid loan growth against a challenging macro backdrop brings seasoning risks.

Fitch expects that loan impairments will continue to weigh on profitability as banks provision for increased risks in accordance with IFRS 9, in part due to weaker GDP and employment inputs, irrespective of the easing of loan classification under forbearance. Banks' ability to absorb losses through income statements, which has generally remained reasonable, could weaken as growth slows, margins tighten and effective interest rates rise. We expect banks' cost of risk this year to remain high and interest receipts relative to interest accrued could also fall in the short term due to payment deferrals and grace periods on loans.”

 

 



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