Feb 26 2019

Moody’s joins S&P in warning Turkey about banks

Ratings agency Moody’s joined Standard & Poor’s in warning the Turkish government about the measures it is taking regarding the country’s banking industry.

Moody’s said on Monday that decisions leading to Turkey’s three biggest state-run banks lending at below market rates and under current levels of inflation were credit negative for the banks.

A decision last week by VakıfBank to reduce rates on general consumer loans, car loans and mortgages to below current inflation rates of about 20 percent was one area of concern, Moody’s said. Ziraat Bank and Halkbank were participating in similar plans to restructure credit card debts, it said.

The government’s requests for banks to sustain lending also “add unseasoned risk and negatively affect margins,” Moody’s said in a statement.

Turkish banks are coming under political pressure to restructure loans to consumers and businesses that were approved prior to a currency crisis last year, which led to a surge in inflation and interest rates along with economic contraction. Some leading Turkish companies have reneged on their commitments to creditors, raising concern among analysts that banks may need recapitalising.

The government is seeking to cut interest rates in Turkey by persuading state-run banks to reduce the cost of borrowing, pressuring other banks to follow suit and by curbing the amount of local debt sold by the Treasury available for purchase by financial institutions.

Last week, Standard & Poor’s warned about rising bad loans in Turkey’s banking industry. The Turkish authorities have yet to lay out concrete plans to deal with asset quality problems, it said, advising the government against further ad hoc measures.

S&P’s criticisms drew a rebuke from the country’s main banking association, whose leadership is now dominated by officials of state-run banks and former public servants. Turkish lenders are taking the necessary risk measures and the sector is strong, it said.

Both ratings agencies have cut Turkey's sovereign debt rating further into junk territory recently.

On Tuesday, the nation’s banking regulator announced more measures to restructure the loans of indebted consumers across the industry. They may now renegotiate many debts such as car loans, mortgage arrears and general-purpose loans over five years. Loans taken out for educational purposes and others used to buy mobile phones, tablets and computer equipment were also included in the package, the watchdog said.

Turkish Treasury and Finance Minister Berat Albayrak said this week that the steps the authorities are undertaking meant that interest rates in Turkey would decline, helping the economy. He said rates have already fallen from levels seen in August and September, when the currency crisis peaked.

The Turkish lira fell by 28 percent against the dollar last year, reaching a record low of 7.22 per dollar in August. It has partially recovered to trade at around 5.3 per dollar, but is still almost a third weaker than it was in January 2018.

The government is accelerating measures to help consumers and businesses ahead of local elections on March 31. President Recep Tayyip Erdoğan pressed on with a whirlwind tour of Turkish cities this week, promising more investment and calling on businesses to support the economy.