Fitch: Turkish banks still resilient to economic shocks

International credit rating agency Fitch Ratings expects Turkish banks to have continued resilience to economic shocks as they still retain reasonable capitalization and liquidity, Fitch Financial Institutions Director Lindsey Liddell said Tuesday.

Evaluating Turkish banks' outlook for Anadolu Agency, Liddell said the agency expects their performance to remain reasonable and for sector return on equity (ROE) to remain in the low double-digit range this year.

But Liddell warned that the banks will face some challenges amid a slower growth environment in the country.

"However, challenges remain given the slower growth environment compared to historical levels, margin pressure from competition, and likely further asset quality pressures as loans season," Liddell said. "Particularly considering the sector's high level of foreign currency lending and the sharp devaluation of the local currency in 2015."

Liddell said that Turkish bank's capital buffers (meaning mandatory capital) have fallen mainly as a result of the depreciation of the Turkish lira.

The Turkish lira has lost nearly 25 percent of its value against the U.S. dollar since 2014.

Consequently, "additional capital is likely to be required at some banks in the medium term. However, sector total capital adequacy currently remains adequate supported by generally solid pre-impairment profit, adequate reserve coverage of non-performing loans, and adequate internal capital generation." Liddell said.

"We expect sector loan growth in the mid double-digit range in 2016 but with the main focus on local currency as opposed to foreign currency-denominated loan growth."

The level of economic growth in Turkey is closely correlated to banking sector performance in terms of business volumes (both loans and fee income) and asset quality, according to Liddell.

"Certain segments, and notably SMEs, are more vulnerable to the slower growth environment," Liddell added.

The rating agency forecasts gross domestic products (GDP) growth of around 3.5 percent in 2016 and 2017, "which should support a moderate level of banking sector loan growth and profitability although we also expect some moderate asset quality weakening," Liddell said.

As the share of participation banks in the Turkish banking sector is currently limited at around 5 percent of sector assets as of the end of last year, Liddell said the government has a strategy to boost this share to 15 percent of sector assets in the medium to long term, which would increase sector diversification.

"Such a target would require rapid growth in the participation banking segment, likely driven by new entrants to the market and increasing penetration. However, the limited range of sharia-compliant instruments remains a constraint on Turkish participation banks' funding, investing, and lending while competition from both conventional and peer participation banks is also tough," Liddell added.