September 30 (SeeNews) - Fitch Ratings said on Monday that Turkish banks have robust buffers able to suppress near-term challenges from lower economic growth, a weaker lira and higher interest rates.
The ratings agency expects the credit profiles of Turkish banks to be only moderately affected in the coming quarters by a weaker operating environment, it said in a statement.
Fitch said also in the statement:
"A key reason for credit resilience is that Turkish banks have strong loss-absorption cushions. The sector's capital ratio, despite having fallen over the last few years, remains a solid 16% and comprises mostly Tier-1 capital. Solid pre-impairment profitability provides an additional defence, and has ensured that capital is built up through retained earnings. NPLs - currently a low 2.8% - tend to be well provisioned, which leaves the banks with considerable profit and capital cushions against potential losses.
Slower economic growth will inevitably weaken asset quality as portfolios (which have expanded rapidly) season. The lira's recent depreciation and higher interest rates will increase borrowers' vulnerability, and so we expect non-performing loans to rise by a moderate 100bp-200bp by end-2014. SME lending, consumer finance and foreign-currency corporate lending are likely to be the key sources of risk.
A economy which is still growing, together with moderate corporate and household debt, limited real house price growth and the absence of foreign-currency consumer lending, should support loan performance, despite the rapid credit growth since 2006.
Margins are likely to be under pressure from the interest-rate hikes and market volatility. Banks have encountered little difficulty in rolling over funding, although future financing is likely to prove more expensive. We expect the squeeze on margins to be short-lived as lira loans typically have short-term repricing maturities, and good efficiency should offset some of the pressures on profitability.
Our stable outlook for Turkish banks could be threatened if the economic slowdown is worse than anticipated, with further pressure on the lira and further interest-rate hikes. This could put greater-than-expected pressure on banks' asset quality, potentially resulting in negative rating action."