International credit ratings agency S&P Global has presented its “Global Banks Country by Country 2021 Outlook Report, titled “Toughest Test For Banks Since 2009”. In the page of this report dedicated to Turkey, S&P sees non-performing loan (NPL) ratio reaching around 11% by the end of 2021 and problematic loans (NPLs plus restructured loans) exceeding 20% of total loans. The agency also expects Turkey's GDP to decline by 2.5% in 2020 before recovering by 4% in 2021.
The agency notes that Turkish banks are exposed to high financing risk, and that “as of August 2020, banks had USD 84.6 billion of external debt to roll over by July 2021, including about USD 38 billion of non-resident deposits.” The agency expects banks “to roll over about 80%-90% of their debt, at rising costs, and the lira to depreciate by about 20% versus the U.S. dollar in 2020.”
S&P Global’s Turkey page on its outlook report is as follows:
Refinancing External Debt And Asset Quality Are Key Risks
− The Turkish banking sector will remain sensitive to shifts in investor sentiment and emerging market capital flows due to high reliance on short-term external funding.
− Increasing deposit dollarization is exacerbating pressure on the funding profile.
− Asset quality will continue to deteriorate, further straining profitability and capital.
Key credit drivers
Banks are exposed to high refinancing risk. As of August 2020, banks had $84.6 billion of external debt to roll over by July 2021, including about $38 billion of non-resident deposits. In our central scenario, we expect banks to roll over about 80%-90% of their debt, at rising costs, and the lira to depreciate by about 20% versus the U.S. dollar in 2020.
Profitability and capitalization are under pressure. We expect banks' capitalization to weaken because of increased credit losses, strong lending growth, and the weaker Turkish lira. The change in calculating regulatory capital adequacy ratios will likely neutralize the effect of the weaker lira in the short term, but banks will have to strengthen their capital afterward. Given their strong lending growth, public banks are likely to have to reinforce their capitalization.
Large credit stimulus contributes to lending expansion. Domestic credit expanded by 34% through October 2020, compared with the beginning of the year. We expect full year expansion to total 40% in 2020. Although the lira's weaker exchange rate explains some of this rapid rise--more than a third of domestic loans are denominated in foreign currencies--we consider the main driver to be a strong government lending stimulus, mainly administered through the public banks. The government offered guarantees and implemented measures incentivizing private banks to lend more, which also contributed. In our view, the speed and size of the credit growth has underpinned the re-emergence of the economic imbalances that have frequently characterized the Turkish economy in the past. For example, the current account deficit has substantially widened this year. In addition, we think that the divergence between the expansion in lending by public and private banks is distorting the banking sector's competitive dynamics.
Economy will contract in 2020. We forecast that Turkey's GDP will decline by 2.5% in 2020 before recovering by 4% in 2021. The recession in 2020 follows an already weak economic performance in 2019, when output expanded by just 0.9% in real terms.
Credit growth will decelerate. In our baseline scenario, we expect credit growth to slow down throughout the rest of 2020 and in 2021. In real terms, we expect it to expand by close to 5% in 2021.
What to look for over the next year/rest of the year
We expect asset quality to deteriorate because of the economic recession and weaker lira. That said, forbearance measures and loan moratoriums might delay the point when the deterioration becomes apparent. We expect the non-performing loan (NPL) ratio to reach around 11% by the end of 2021 and problematic loans (NPLs plus restructured loans) to exceed 20% of total loans. We forecast the cost of risk will rise to 390 bps in 2020, from an already high 270 bps in 2018-2019.
Banks might suffer from the general decrease in confidence. Greater risk aversion from international investors might affect banks' ability to roll over their external debt. Domestic depositors could increasingly convert their savings into foreign currency, increasing the pressure on the banking sector.”