Turkish banking still resilient, faces tougher conditions

The Turkish banking system is continuing to exhibit healthy profitability and mostly solid asset quality on the back of a growing though slowing economy, Moody's Investors Service said in its new Banking System Outlook for Turkey.
However, Turkey's vulnerability to global financial market shocks and weakening economic conditions could have an adverse impact on domestic banking conditions, with the degree of deterioration in asset quality and profitability dependent on the magnitude and duration of the economic weakening.
As a result, Moody's fundamental credit outlook for the Turkish banking system is now stable-to-negative.
"Turkish banks generally remain in a relatively healthy condition: profitability, capitalisation and asset quality are all currently at strong levels and their liquidity positions are adequate. The largest banks have grown rapidly and aggressively in recent years as branches typically become profitable very quickly, while expansion strategies are now more targeted. In addition, the participation of foreign banks in the capital of many Turkish banks has reaped benefits in terms of franchise development and risk management," explained George Chrysaphinis, a Moody's Senior Analyst and author of the report.
As a result of the progress the sector has made since 2002, Moody's is confident that the Turkish banks' business models and franchises will prove resilient to financial market turbulence, with the domestic market still offering considerable potential for growth. Nonetheless, the rating agency anticipates that the global credit crunch and weakening economic conditions in most of Europe could spread into Turkey, possibly sooner rather than later, with Turkish real GDP growth expected to slow in 2008 and further in 2009.
"As the domestic economy slows down and loan growth eases, we would expect a moderate deterioration in asset quality over the coming months. However, if the Turkish economic environment were to weaken more severely than we currently anticipate and the availability of credit to Turkish companies become significantly restricted, banks could face more substantial asset quality problems," said Chrysaphinis.
Moody's base scenario is for only a moderate increase in non-performing loans that would be well within the banks' ability to provision. Nonetheless, given continuing turbulence on the global financial markets, the situation could change rapidly, in which case Moody's could incorporate a more severe scenario into its analysis, with possible negative rating consequences for the Turkish banks.