Turkish banking sector will have trouble refinancing debt: analysis

The Turkish banking sector’s performance is expected to deteriorate in 2018, Indosuez Wealth Management said in a report on Sunday, adding that the more immediate concern is the banks’ ability to refinance foreign debt.

“The recent turmoil surrounding Turkey, which led to a number of rating downgrades by all three major credit rating agencies for the Turkish sovereign as well as the corporate sector, continues to threaten the credit profiles of the banking sector,” said Aabid Hanif, senior credit analyst at Indosuez.

“Turkish lira depreciation, slowing economic growth, and higher interest rates pose material risks to banks' asset-quality, performance, capitalization, as well as funding and liquidity,” he added.

The lira’s sharp fall has hampered the private sector’s ability to repay its debt, a large portion of which is in foreign currency and owed to Turkish banks.

During H1 2018, several corporates restructured a large number of loans, the report said. As a result, the share of “Stage 2” loans (impaired but not classified as non-performing) as a proportion of total loans increased to 7 percent according to latest figures, the highest level in a decade.

Noting that a number of Turkish banks have to complete annual USD loan syndications by the end of the year, Hanif said: “The more immediate test for the Turkish banking sector will be the refinancing of foreign currency wholesale funding in our view.”

“Our expectation is for banks to be able to raise funding albeit at a higher cost. However, with continued pressure on the lira and the Turkish growth outlook significantly weakened, this may change sentiment with investors and overseas banks to review what were previously expected rollovers of syndicated loans,” he added.