The volume of bad loans on Turkish banks’ books can be expected to approximately double over the next 12-18 months to around 6%, rating agency S&P Global said on December 3 in a new report.
The lenders’ total credit losses will at the same time grow to as much as 2.5% from the recent average of 1.4%, it predicted.
S&P based its projections on the Turkish economy—hit by a currency crisis and a major fall in consumer demand ahead of what is widely expected to be a steep recession—contracting in 2019 before seeing growth of 3-4% growth in 2020.
“We expect the [banking] sector’s reported non-performing loan (NPL) ratio will double within the next 12-18 months, to about 6 percent from 3.5 percent as of September 2018,” S&P said.
However, it also noted, using a wider definition of problem loans that includes restructured loans, that NPLs already exceeded 10% of total loans and could move up to 20% over the next year under the rating agency’s base-case scenario amid the country’s credit crunch.
“This is because we expect the economic slowdown, deleveraging, continued lira depreciation, and increased interest rates will start weighing on asset quality over the next 12-18 months,” S&P said.
The rating agency said that the key factors that supported its assessment of Turkey's economic risk are the country's economic volatility, vulnerable asset quality, increased private sector leverage, and relatively low wealth level.
It added: “Turkish banks' high reliance on short-term external debt compared with peers is key to our assessment of Turkey's industry risk. This reliance exposes the industry to conditions in external debt and capital markets. Despite adequate banking regulation and supervision, along with the banks' ability to adequately price risks, Turkish banks' strained performance in the next 12-18 months will weaken industry stability. We will continue to monitor the president's interference in the central bank and the regulator, which has affected our assessment of Turkey's institutional framework.”
Among the major strengths of the Turkish banking industry, S&P listed adequate corporate governance and transparency among private banks as well as granular and well-diversified loan books.
Looking at perceived major weakenesses, it said the banks' funding positions were overstretched because of low domestic savings and the high reliance on short-term foreign debt, while there was moderate per capita income in Turkey amid high inflation.
Other big weaknesses were indirect credit risks stemming from a high level of commercial loans denominated in foreign currency; an unanticipated erosion of institutional checks and balances and governance standards in Turkey in recent years and possible uncertainty arising from geopolitical risk, and negative government intervention in the banking system.