International credit ratings agency Fitch Ratings sees the requirement for Turkish banks to maintain an asset ratio of at least 100% from May 1st, 2020 as “moderately credit negative”. The agency says on its website that the new target introduced by Turkey's Banking Regulation and Supervision Authority (BDDK) on April 18th 2020 has come at a time when the operating environment has weakened because of the coronavirus pandemic. It will therefore be difficult for banks with a ratio shortfall to increase loans portfolios in such an environment.
Fitch’s entry on its website relating to the new asset ratio target is as follows:
“Asset Ratio Requirement Credit-Negative for Turkish Banks
The requirement for Turkish banks to maintain an asset ratio of at least 100% from 1 May is moderately credit negative, Fitch Ratings says. It will force some banks to increase lending at a time when the operating environment has weakened, with heightened risks to borrowers' repayment capacity and therefore to banks' credit profiles. Banks failing to meet the target are likely to face a fine based on their ratio shortfall. But many banks will not be affected as they already meet the requirement. Turkey's Banking Regulation and Supervision Authority announced the move on 18 April to stimulate lending to support the economy amid the coronavirus pandemic.
Some banks with lower asset ratios may be unable to reach the target in such a short timescale purely with loan growth, particularly if customer deposits continue to grow. We therefore expect some banks to increase their holdings of government securities or FX swaps with the Central Bank of the Republic of Turkey (CBRT), which count towards the target. Unlike loans, however, these are subject to haircuts in the asset ratio calculation. Purchases of Turkish sovereign debt have already increased since the target was announced.
If banks increase FX swap transactions with the CBRT, this will boost the CBRT's gross FX reserves, but not its net holdings of foreign-currency (FC) assets. Recently tightened limits on banks' FX swaps with foreign counterparties have increased incentives for lenders to enter into swaps with the CBRT, and the new asset ratio adds to these incentives.
Some banks may deleverage deposits to achieve the 100% ratio, though at the risk of losing market share. They would probably focus on reducing FC deposits, given that these represent a high 51% of total deposits (end-2019) and have a higher weight than lira deposits in the asset ratio calculation, thereby eroding FC liquidity buffers. Some banks may also try to replace or restructure some of their deposit funding with debt issuance, which is not captured in the asset ratio denominator, if pricing and market conditions allow.
Most state-owned and larger privately-owned banks already meet or are likely to be close to meeting the ratio requirement, according to our calculations. Smaller privately-owned banks will typically be more affected, along with Islamic banks. The latter have a lower, 80% ratio requirement but they are typically starting with lower loans-to-deposits ratios. Moreover, they have less opportunity than conventional banks to boost their ratios though loan growth, or the secondary securities market given their sharia regulatory constraints.
Turkish Banking Sector Asset Ratios
|
TRY millions |
State-owned banks |
Privately-owned banks |
Islamic banks |
|
Performing loans |
1,112,872 |
1,433,339 |
166,094 |
|
Securities |
332,093 |
350,566 |
60,023 |
|
Turkish lira deposits |
594,449 |
692,616 |
103,497 |
|
Foreign-currency deposits |
445,376 |
876,212 |
147,163 |
|
Asset ratio* |
1.18 |
0.95 |
0.73 |
Data as at 10 April 2020
*Excluding swaps with central bank (data unavailable), which would lead to marginally higher asset ratios
Source: Fitch Ratings, CBRT
Government loan support packages to combat the effects of the pandemic on various parts of the economy should act as a stimulus for loan growth. These include an expanded Credit Guarantee Fund (CGF) facility whereby banks providing loans to certain borrowers benefit from a Turkish Treasury guarantee. The guarantee covers each bank for defaults on CGF-backed loans up to a certain cap. However, lending limits for privately-owned banks' under the scheme are unclear.
Other measures introduced by the authorities in response to the pandemic could hinder banks' appetite for new lending. These include the option for borrowers affected by the pandemic to delay principal and interest payments for three months. We also expect increased loan restructurings due to operating environment pressures, and given the generally supportive approach of the authorities towards loan restructurings.
Uncertainty over the severity and duration of the pandemic and its impact on borrowers' finances makes it harder for banks to price risk, and above-market-average loan growth or other signs of a marked increase in risk appetite could put downward pressure on banks' standalone ratings. Regulatory forbearance and stimulus measures should support asset quality and capital metrics in the near term but may merely delay, rather than prevent, asset quality deterioration.”