Turkish banks face tough year

The Turkish banking sector faces a difficult year in 2009, with economic weakness causing earnings pressure on the back of rising non-performing loans and narrowing margins, according to Capital Intelligence, the international credit rating agency.
The global financial crisis (and subsequent economic pressure) is adversely impacting the Turkish economy and growth has fallen sharply in recent months following contraction in both consumption and investment. Reflecting weakness in key trading markets, particularly the EU, Turkish exports, including textiles, white goods and iron and steel, have weakened significantly.
In order to address the deteriorating outlook, the Central Bank of Turkey reduced the overnight borrowing rates by 200bp to 13% in January 2009, and by a further 150bp to 11.5% more recently.
Capital Intelligence said that further easing is expected in 2009. Nonetheless, this is unlikely to prevent economic contraction of around 1% this year.
The central bank also decided to provide greater liquidity flow in the interbank foreign exchange market. It extended from one month to three months the maturity of US dollar and euro deposits borrowed from the foreign exchange deposit markets, and the corresponding maturity of the matched interbank transactions. The central bank's lending rates were cut from 7% to 5.5% for the dollar and from 9% to 6.5% for the euro.
Despite the severe conditions in the international markets, Turkey and its banks have so far retained access to international wholesale markets with the majority of maturing debt being rolled over. This reflects the currently sound condition of the banking sector with capital ratios, loan asset quality, earnings and liquidity metrics generally of good standard. The foreign currency position of the banking sector is also currently well balanced.
However, access to international markets could become more difficult if either domestic or global conditions deteriorate further. Accordingly, a successful conclusion to the new IMF loan programme will be beneficial to Turkey's debt position with total central government debt stock at YTL 380 bln at end December 2008 and private sector long-term debt stock at approximately USD 137 bln (of which USD 31 bln owed by the banking sector).
Pressure on banks' loan asset quality is already being felt. At the end January, the banking sector's NPLs to gross loans ratio was 3.7% against 3.4% in December 2008. The rise was seen across most loan categories, including credit cards, consumer and commercial loans. Currently, the loan loss reserve coverage for the sector remains adequate at 80%. Loan growth continues to weaken across the banking sector as the downturn bites. Nonetheless, in January the year-on-year loan growth was still high at 28% although this is expected to fall noticeably.
Turkish banks' returns and profitability are expected to weaken due largely to the downturn in lending. In addition, the cost of risk is expected to rise as non-performing loans increase. Margins are also expected to contract due to both higher funding costs, including the rising weight in the deposit base from Turkish lira deposits, and the need to make higher provisions to address asset quality problems.
Currently, the Turkish banking sector has a sound level of capitalisation, reasonable liquidity and profitable operations. However, a deeper and prolonged economic downturn would put downward pressure on ratings.