The overall outlook for rated Turkish banks remains stable-to-positive as they benefit from favourable profitability and franchise development dynamics, Moody’s Investors Service said in its new Banking System Outlook for
At the same time, further upside on the ratings would be halted if risk appetite increases.
Moody’s noted that the rapid business growth since 2003 has generally been undertaken within the context of fairly conservative risk policies and a sound regulatory regime. Capitalisation and asset quality metrics have improved over this period, contributing to upgrades of one or more notches for most banks.
“We believe that within the context of the currently favourable profitability dynamics and the projected growth of the Turkish banking market, banks can continue to prosper without altering their risk profiles,†said George Chrysaphinis, a Moody’s AVP/Analyst and author of the new report.
“The operating environment remains risky, however, and banks will need to maintain modest risk appetites if ratings are to rise beyond their current levels,” the analyst cautions.
According to Moody’s, the financial markets turbulence in Turkey in May and June of last year shows how vulnerable the country is to external financial shocks, and at the same time demonstrates how violently economic and financial parameters (interest rates, exchange rates, equity markets) can respond.
Nevertheless, Turkish banks survived the turbulence relatively unscathed.
The economic cost of the market shifts was limited to about 10%-15% of Tier 1 capital for most banks, reflecting healthy capital levels and banks’ moderate exposure to market risk — primarily interest rate risk.
The banks benefited from the fact that both the YTL/US$ exchange rate and ISE equity index recovered most of the 20%-30% declines by the end of the year.
Although interest rates have remained high following a sharp 400 basis point hike in overnight rates to 17.5%, and although this led to a pronounced slowdown in consumer spending, overall economic growth remained robust. This has allowed banks to maintain business growth and asset quality metrics, says Moody’s
However, an area of concern remains the large short open position in foreign currency of the Turkish corporate sector that could expose the banks to significant asset quality problems in the event of another sharp devaluation.
“Additional factors that we will be monitoring include (i) possible rapid asset growth into products or customer groups that is not matched by banks’ risk management capabilities, (ii) increased reliance on confidence-sensitive market funding, (iii) a build-up of capacity and cost bases that cannot be supported by banks’ systems or that surpass market potential, (iv) taking on more interest rate mismatches than can be effectively hedged, and (v) banks outgrowing their capital resources,” the analyst concluded.
Notwithstanding these concerns, Moody’s noted the current financial health of the banking sector, and the strong franchise fundamentals and good management of Turkish banks that can form the basis for further profitable growth. The rating agency holds a positive view the strategic stakes of strong foreign banks in the capital of Turkish banks, in that they can steer the banks towards more healthy competition, can help tide them over short-term market volatility and can speed up the process of risk management upgrade.
All Turkish bank ratings were reviewed within the context of Moody’s revised BFSR methodology and the introduction of Joint Default Analysis (JDA) in April 2007 and this resulted in a rise in most banks’ BFSRs, with the weighted average now at D+ (up from D prior to the review). The  local currency and foreign currency deposit ratings remain capped at A3/P-2 and B1/Not Prime, respectively.
