Jun 19 2019

Moody’s highlights credit weaknesses of two Turkish state-run banks

Ratings agency Moody’s highlighted the deteriorating credit profiles of two state-run Turkish banks after they increased lending to the economy.

The baseline credit assessments (BCAs) of Ziraat Bank and Vakifbank were downgraded by two notches, Moody’s said, compared with one notch for the other 16 Turkish banks it covers.

“The larger downgrade reflects the unseasoned risk that the banks have built via recent higher-than-average loan growth,” the ratings agency said in a report late on Tuesday.

Ziraat Bank and Vakifbank have formed a backbone of the government’s efforts to flood the economy with cheap credits for consumers and businesses. The two banks have helped restructure billions of dollars in troubled loans and credit card debt. On Tuesday, they started offering mortgages to home buyers at below market rates to help reverse a slump in housing sales.

Moody’s published the report, which included assessments of all 18 Turkish banks it covers, five days after downgrading Turkey’s sovereign debt rating further into junk territory. It cut the ratings of the 18 banks to reflect the sovereign action, a routine move.

The ratings agency said the downgrades of Turkish banks reflected a significant increase in external vulnerability for the country and a higher risk of more extreme government policy measures, including restricted access for depositors to foreign currency.

Moody’s said the probability of government support for Ziraat Bank and Vakifbank had now increased, reflecting the wider gap between the banks BCAs and the sovereign rating.

Turkey’s government is seeking to stimulate economic growth after the country entered a recession in the second half of last year. A surge in loan growth helped the economy expand by 1.3 percent quarter-on-quarter in the first three months of this year, but many analysts are now predicting that the economy will shrink again from the second quarter.

The ratings agency also lowered its expectations for affiliate support for non-government bank Garanti to low from moderate. There was now a decreased likelihood of extraordinary support from BBVA, the bank’s Spanish parent, it said.

Consequently, Moody’s raised the likelihood of government support for Garanti to high from moderate, considering the bank’s large size in the financial system.

Turkey’s banks have been rocked by a currency crisis that peaked in August last year. The weaker lira has caused companies and consumers to default on their debts or seek to restructure the borrowing at more favourable terms.

The currency crisis, which saw the lira lose 28 percent of its value against the dollar last year, has also restricted banks’ access to funding from abroad.