The credit assessment agency Fitch Ratings has said in its latest monthly report that Turkish banks have enough buffers in place to manage near-term challenges like the risk of lower economic growth, a further depreciated lira and higher interest rates. Fitch noted the possibility of a moderate deterioration of the credit profiles of the banks in Turkey given a weaker operating environment. The assessment indicated, however, that the high capital ratio among Turkish banks makes a perfect buffer to cushion short-term risks. Thanks to strong discipline imposed by the Banking Regulation and Supervision Agency (BDDK) on the financial sector, the capital adequacy ratio is around 16 percent in Turkey and the capital is mostly Tier 1 class.

Furthermore, the report noted that the “solid pre-impairment profitability provides an additional defense and has ensured that capital is built up through retained earnings.” It mentioned non-performing loans -- an average of 2.8 percent -- saying that this rate also plays a role in allowing banks to achieve considerable profit while providing capital cushions against potential losses. It said slower economic growth will “inevitably weaken asset quality as portfolios [that have expanded rapidly] season.” The lira's recent depreciation and higher interest rates will increase borrowers' vulnerability, the report noted, adding that the non-performing loans will likely edge up by some level between 100 basis points and 200 basis points by the end of 2014. According to the report, small and medium-sized enterprise (SME) lending, consumer finance and foreign-currency corporate lending could be considered possible risk factors that may trigger higher increases in the non-performing loans.

Regarding possible loan performance, Fitch said there are a number of opportunities for loan size to grow, such as a growing economy, sustainable levels of corporate and household debt, limited real house price growth and the absence of foreign-currency consumer lending.

But the banks may suffer lower profit margins in the period ahead as interest rates have risen recently amidst market volatility fueled by ambiguities in the international markets. “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,” the report asserted.

Fitch indicated that a slowdown in the economy at a rate worse than expected, further weakening of the lira and excessively rising interest rates are the primary sources of threats for the banks.

Fitch will present its outlook for Turkish banks in a series of conferences, "Emerging Europe 2013" on Oct. 2, 3 and 4 in Frankfurt, Paris and London.

Cihan