Fitch warns Turkish lenders about rising risks

Fitch Ratings-London/Dubai-16 November 2022: Turkish banks’ refinancing risks have increased further as macroeconomic imbalances rise, with the sector’s short-term (ST) external foreign-currency (FC) borrowings remaining high, Fitch Ratings says in a new report.

Sector FC liquidity (USD90 billion) is sufficient to cover a short-lived market closure and a moderate FC deposit outflow, although high-quality FC liquid assets (cash and unencumbered placements in foreign banks and FC swaps with foreign counterparties) are much lower (end-1H22: USD27 billion). Liquidity could quickly come under pressure following adverse market developments, raising the risk of government intervention.

We estimate about half of banking sector FC liquidity comprises placements with the Central Bank of Turkiye (CBRT), mainly as FX swaps, and almost 25% represents unpledged Turkish sovereign Eurobonds. Turkish banks’ ability to use this liquidity in a stress scenario is uncertain as withdrawals from the CBRT would pressure the latter’s FX reserves, and Turkish government Eurobonds could become significantly less liquid at times of heightened market volatility.

We expect sector external debt to continue falling and shifting towards ST borrowings (up to one year) in 2023 due to lender risk aversion, unattractive pricing and further FC loan deleveraging. Banks’ external debt fell to USD125 billion in the year to end-1H22, but ST external debt remained high (end-1H22: USD83 billion).

The shift towards shorter-term borrowing reflects banks’ efforts to maintain balance-sheet flexibility amid market volatility, more restricted market access and the prohibitive cost of longer-term issuance. ST external debt was 66% of total external debt at end-1H22.

Sizeable FC deposits represent a potential call on sector FC liquidity, and material FC deposit outflows would test banks’ FC liquidity. The share of sector FC deposits (end-3Q22: 54%) has decreased since end-2021 due to the FX-protected deposit scheme. Only 29% of customer funding comprises unhedged lira deposits, with 17% under the FX-protected scheme.