The U.S.-based credit rating agency Fitch has assessed the 2017 outlook of the Turkish banking sector. According to a statement released by the agency yesterday, Fitch moved the Turkish banking system's 2017 outlook from stable to negative.
The statement read that heightened risks related to political stability and the operating environment are expected to put pressure on bank credit fundamentals and will increase the potential for further currency and interest-rate volatility. Fitch's statement suggested that high levels of short-term foreign-currency wholesale funding is exposing banks to significant refinancing risks and is turning investor attention toward the country's risks.
Fitch pointed out in its statement that political uncertainty caused by the attempted coup in July is likely to weaken Turkey's long-term economic performance and bank asset quality.
The statement on the Turkish banking sector's 2017 outlook also indicated that foreign-currency lending constitutes about a third of total loans, and this situation poses a risk since the Turkish lira has fallen sharply since 2013 and is likely to fall further.
Stressing that small and medium-sized enterprise (SME) lending, which makes up about a quarter of the portfolio, is at significant levels and is particularly sensitive to slowdown in growth. Fitch stated that problems can also arise from relatively small sectors, such as tourism, which has been affected by worsening security conditions, or energy, which has been under pressure due to low energy prices and the weak Turkish lira. It is also noted that the Turkish banking sector's non-performing loans ratio will moderately increase to about 4 percent at the end of 2017 from 3.3 percent previously recorded at the end of Sept. 2016.
"The economy is still growing and the fairly long-term nature of most foreign-currency loans mean they will season relatively slowly," the statement said.
It also added that the risk has been present for a long period and financing has shown resistance following the attempted coup in July. Fitch said that funding costs can increase further in 2017, depending on investor perspective and the country's risk perception.
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