BCN-25 Moody’s downgrades Turkish banks over ‘downside scenario’ risk

ZCZC

BCN-25

TURKEY-ECONOMY-FOREX-BANKING

Moody’s downgrades Turkish banks over ‘downside scenario’ risk

ISTANBUL, Aug 29, 2018 (BSS/AFP) – Ratings agency Moody’s on Tuesday
downgraded its credit ratings on 20 Turkish financial institutions due to the
increased risk of a “downside funding scenario” after the collapse of the
lira.

Moody’s said the downgrade affected 18 banks and two finance companies. It
comes amid persistent concerns over the health of the Turkish economy,
especially the banking sector, after the lira lost a third of its value this
month alone.

The downgrades prompted a new slide in the lira, which lost 2.2 percent
against the dollar to trade at 6.3.

Moody’s, along with fellow ratings giant Standard and Poor’s, had earlier
this month already cut the debt rating of the Turkish government deeper into
junk on the same concerns.

The assessment of 14 banks was downgraded Tuesday by one notch and of four
— including major lenders Denizbank and Is bank — by two notches.

“There is a heightened risk of a downside funding scenario, where a
deterioration in investor sentiment limits access to market funding,” Moody’s
said, explaining the sharp downgrades.

It noted Turkish banks are highly reliant on foreign currency funding and
had market funds of around $186 billion denominated in foreign currency in
June 2018, equivalent to 75 percent of their total wholesale funds.

“This makes the banking system particularly sensitive to potential shifts
in investor sentiment, as these foreign currency liabilities must be
refinanced on an ongoing basis,” it said.

It said that in the next 12 months around $77 billion of foreign currency
bonds and syndicated loans need to be refinanced.

It said if investor sentiment shifted further, banks could need funding
from the government or central bank.

The deterioration in the Turkish economy is “fuelling inflation and
undermining growth”, said Moody’s, forecasting growth of just 1.5 percent in
2018 and 1.0 percent in 2019

It added that the outlook for all Turkish financial institutions was
negative to “reflect the risk that prolonged volatility of the foreign
currency exchange rate, or a sudden drop in investor confidence, could lead
to significant stress on the banks’ foreign currency funding and deposits.”

Anxiety over the coherence of domestic economic policy coupled with
sanctions announced by the United States generated panic selling of the lira
earlier this month and raised fears of economic crisis in Turkey.

Despite a respite in the last days, analysts say that the same factors that
at one point drove the lira above seven to the dollar for the first time in
history remain in place.

BSS/AFP/HR/1050