Challenging Environment For Banks In 2014

BMI View: Slowing real GDP growth, higher funding costs and lira depreciation will have a negative impact on growth and profitability in the Turkish banking sector, where we expect both supply and demand-side constraints to drive a pronounced deceleration in lending in 2014. We forecast client loan growth of 14.0%, down from 33.6% in 2013.

Rising US yields and waning demand for emerging market assets led to severe disruptions in Turkish financial markets in H213 and early 2014, forcing the Central Bank of Turkey (CBRT) to more than double its main policy rate in January, from 4.5% to 10.0%. After record-low interest rates and accelerating real GDP growth drove a rapid expansion of credit in 2013, we now expect weakening domestic demand, rising funding costs and political instability to make for a challenging operating environment for Turkish banks.

While relatively robust capital adequacy levels and low exposure to non-performing loans imply few inherent risks to stability, asset quality remains vulnerable to exchange rate volatility due to the banking sector's reliance on foreign borrowing to finance aggressive domestic loan growth. This dependence on non-traditional loan financing is illustrated by the loan-to-deposit ratio, which has seen a rapid rise since 2009, coinciding with a surge in foreign borrowing and domestic FX lending to the Turkish corporate sector. Total FX lending represented 26.5% of total loans in January, compared to 10.8% in Q308. The loan-to-deposit ratio surpassed 1.00 in early 2013, reaching an all-time high of 1.09 in January 2014.

Foreign Borrowing Funds Domestic Lending
Turkey - Banks' Foreign Liabilities, FX Lending And Loan-To-Deposit Ratio

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Geography: Turkey

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