Moody's: Turkish banking system outlook remains stable

Moody's: Turkish banking system outlook remains stable

 

Global Credit Research - 24 Jan 2013

 

Frankfurt am Main, January 24, 2013 -- The outlook on the Turkish banking system remains stable, says Moody's Investors Service in a new Banking System Outlook published today. The key drivers of the outlook are (1) the rating agency's view that moderate economic growth and improving sovereign financial strength will create supportive operating conditions for banks, despite downside risks from the euro area crisis, volatile markets and investor risk aversion; and (2) banks' sufficient resources to absorb an expected gradual increase in non-performing loans (NPLs). These factors are partially offset by Moody's expectations that (1) banks' net profit margins will likely decline further amid low interest rates and rising competition; and

 

(2) bank funding profiles, while still sound, are becoming less robust with loan growth outpacing deposit growth.

 

The new report, entitled "Banking System Outlook: Turkey", is now available on www.moodys.com. Moody's subscribers can access this report via the link provided at the end of this press release.

Moody's expects sustained growth in Turkey's GDP of 3.8% in 2013, up from an estimated 3.0% in full-year 2012, but below the recent boom prior to the 2009 recession. This relatively moderate growth will create supportive conditions for banks, which also benefit from the improving financial strength of the Turkish government (Ba1 positive).

 

Following years of a surge in lending, Moody's expects credit expansion to moderate to around 12-15% in 2013 underpinned by increasing banking penetration, particularly in under-banked regions in Turkey. Downside risks include a renewed acceleration of the euro area crisis and a sudden increase in global investor risk aversion.

 

Asset quality will likely normalise gradually, with NPLs increasing moderately from very low current levels. After lending rose by a rapid 101% in the three years to 30 September 2012, delinquencies will increase as loan books season. Unsecured consumer loans and loans to small and mid-sized enterprises are most at risk and NPLs will rise only gradually, because economic growth still supports borrowers' payment ability. Importantly, banks have sufficient resources to cope with even worse-than-expected losses, given a system-average 14.5% Tier 1 ratio (Basel II) and Moody's-adjusted Tier 1 ratio (which reflects sovereign exposures in local-currency) at 12.0% as of 30 September 2012. Capital ratios have, however, decreased as asset growth outpaced capital growth.

 

Moody's expects net profit margins to weaken over the next 12-18 months, as banks confront an environment of moderating growth, heightened competition, and rising provisioning costs. Pre-provision margins are likely to stay flat, at best, as moderate economic growth limits revenue opportunities and competition for deposits dampen any positive impact from lower central bank rates on funding costs. A critical longer-term challenge for the system will be to preserve risk discipline despite intensifying competition and profitability pressures.

 

With loans having grown faster than deposits for many years, banks increasingly turn to wholesale markets or shift from liquid securities into loans. As a result, they are becoming more vulnerable to funding market volatility, although most banks still benefit from robust retail deposit franchises.