Turkey banks pressured as Fitch warns of Zarrab case fallout

Shares of Turkish banks came under renewed pressure on Thursday after Fitch said their ratings could be hurt should they be found complicit in a case of alleged money laundering through the U.S. banking system.

The banking index in Istanbul slumped 2.8 percent to 152.778,38 points at the close of trading. The main BIST-100 index dropped 0.9 percent.

“Given the noise around the U.S. investigations, if there was a case of reputational damage resulting in diminished access to market or a large fine that wasn’t offset by state support, it could result in negative rating pressure,” Lindsey Liddell, director of financial institutions at Fitch Ratings, said at a conference in London.

Prosecutors in New York have charged Hakan Atilla, deputy chief executive of state-run lender Halkbank, with conspiring with Iranian-Turkish businessman Reza Zarrab to funnel hundreds of millions of dollars through the U.S. financial system on behalf of Iran’s government and other Iranian institutions. Zarrab, though still remaining in federal custody, has been released from a Manhattan lockup, raising speculation he has turned state’s witness.

As well as Halkbank, analysts say five other Turkish banks could be found complicit and be charged by U.S. regulators. The banks include another state-owned lender and a small, publicly-listed private bank that is foreign owned. Fitch rates Turkey and its banks BB+, junk status.

Turkish banking stocks slumped last month after Habertürk newspaper said several faced billions of dollars of fines, citing senior banking sources. Turkish officials including Deputy Prime Minister Mehmet Şimşek have sought to calm investor nerves, saying only one bank is currently under investigation by U.S. authorities.

Süleyman Arslan, ex-chief executive officer of Halkbank, and Zafer Cağlayan, a former economy minister for the governing Justice and Development Party (AKP), have been indicted in the case but remain outside the country. Cağlayan was last seen in public at a ceremony with President Recep Tayyip Erdoğan in August.

Fitch also lowered its forecast for economic growth in Turkey next year to 3.9 percent from 4.1 percent, citing “some easing of government stimulus measures.”