NEWS Finance        10/12/2020

Fitch warns that Turkish banks face a challenging operating environment in 2021

International credit ratings agency Fitch Ratings, in its introductory summary to its “2021 Outlook Report for Turkish Banks”, has emphasized that the operating environment for Turkish banks will remain challenging in 2021.


Fitch comments as follows in its summary:


“Sector Outlook: Stable.

 The operating environment is likely to remain challenging for banks in 2021 despite the stronger growth outlook and recent steps towards improving monetary policy credibility (which could signal a period of greater stability). This reflects waning government stimulus and (from 2H20) regulatory forbearance, uncertainty over the ultimate impact of the pandemic and the higher lira interest rate environment, which we expect to weigh moderately on asset quality, growth and margins. Rating Outlook: Negative Fitch-rated Turkish banks are almost entirely on Negative Outlook, except for one on Rating Watch Negative (RWN). This reflects risks to banks’ standalone credit profiles or Viability Ratings (VRs), due to the pandemic. It also reflects the risk of government intervention in the banking sector, given Turkey’s weak external finances, and constraints on the ability of the authorities to provide support in foreign currency (FC), given the sovereign’s weak foreign-exchange (FX) reserves. Eleven banks, including six of Turkey’s seven domestically systemically important banks, have Issuer Default Ratings (IDRs) driven exclusively by their VRs. The IDRs of 17 other lenders are either driven or underpinned by support, mainly from banks’ shareholders.”


In a separate commentary on its website relating to its outlook report, Fitch stated the following:


“Waning government stimulus packages and regulatory forbearance, as well as higher lira interest rates, will weigh on banks' asset quality. The uncertain path of the coronavirus pandemic and weaknesses in Turkey's external finances are additional risks for the sector. However, the economic recovery, combined with greater monetary policy predictability and lira stabilisation, should support banks' credit profiles.


Asset quality pressures are significant despite low non-performing loans (NPLs) and improving asset quality metrics reported in 9M20. The sector NPL ratio was 4.1% at end-3Q20 (end-2019: 5.3%) and the Stage 2 loan ratio also fell. But metrics have been flattered during the pandemic by loan deferrals, forbearance on loan classification and rapid loan growth fuelled by the government's Credit Guarantee Fund (CGF) stimulus.


We expect asset quality metrics to weaken in 2021 due to decreasing government stimulus, waning regulatory forbearance, higher lira interest rates and maturing loan deferrals. Credit risks are heightened by banks' exposure to SMEs and unsecured retail segments, which are sensitive to GDP growth and the weakening unemployment outlook, respectively. Lending to SMEs has increased rapidly during the pandemic, although much is carried out under the CGF, mitigating the risks for banks.


We expect the sector NPL ratio to increase moderately to 6%-6.5% at end-2021. But NPLs do not fully capture underlying asset quality weakness and the recent extension of regulatory forbearance to end-1H21 will delay the recognition of problems further. We also consider Stage 2 loans (10.5% of sector loans at end-3Q20) and restructured loans (45% of Stage 2 loans) when assessing asset quality. If market conditions remain challenging, the proportion of restructured loans could become even higher, widening the gap between the headline NPL ratio and underlying asset quality.”



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