Turkey's banking sector performance is weathering challenging conditions reasonably well, Lindsey Liddell, director of financial institutions at Fitch Ratings, said Wednesday.
On the banking sector, Liddell told Anadolu Agency in an exclusive email interview: "Performance has held up reasonably to date despite slower loan growth due to the reduction in the Credit Guarantee Fund stimulus."
"In the absence of further significant government stimulus, we expect sector profitability to normalize in 2018, resulting in more moderate internal capital generation capacity, although we expect this broadly to be sufficient to fund sector growth given banks' more moderate growth targets," she added.
On the outlook for the sector, she said: "Banking sector performance has held up despite the challenging Turkish operating environment with average sector return on equity rising steadily over the past three years. ROE (return on equity) reached about 15 percent in 2017, albeit this partly reflected uplift from the Credit Guarantee Fund stimulus."
Liddell said that Fitch expects Turkey's banking sector performance in 2018 to be slightly below that of 2017, but more significant risks remain given the volatile operating environment, loan seasoning, and higher funding costs.
"Risks to sector asset quality, performance and capitalization remain, given high foreign currency lending [in light of Turkish lira depreciation], potential further asset quality weakening and rising funding costs," Liddell said.
Saying that the refinancing risks, resulting from material short-term foreign currency wholesale funding liabilities, are also high, Liddell added: "However, Turkish banks have continued to access external funding markets despite operating environment pressures. Sector foreign currency liquidity also remains broadly adequate to cover maturing foreign currency wholesale funding falling due within a year."
However, she said banks' foreign currency liquidity could come under pressure in the event of a prolonged market closure.
"Margins could also come under pressure as a result of higher funding costs," she warned.
Noting that Turkey's banking sector total sector capital adequacy rose to 16.9 percent at end of 2017 boosted by solid returns, she said: "Nevertheless, we believe sector capitalization could come under pressure considering banks' risk profiles, potential non-performing loan growth, the high share of foreign currency loans in the sector and significant single-name concentration risks.
"However, if economic growth remains quite strong and banks do not suffer shocks to asset quality or funding access, then the sector should be able to continue earning ROE of 10-15 percent over the near to medium term while also expanding balance sheets and business volumes."
