OMG. Flash warning from a famous institution to Turkish Banks

S&P Global reported that Turkish banks are facing increased risk arising from imbalances in the economy.

International credit rating agency S&P Global reported that they believe Turkish banks are facing increased risk from imbalances in the economy.

S&P stated that imbalances are widening rapidly in an environment of hyperinflation caused by the increase in real estate prices and highly expansionary monetary policy. S&P pointed out that the accelerated loan growth in a highly negative interest rate environment further contributed to the increase in real estate prices.

S&P stated that rising housing prices have contributed to the asset quality of banks by increasing the value of real estate held as collateral. “We think the risk of a sharp correction is increasing. In our view, if house prices fall rapidly, this will sooner or later result in significant credit losses for the banking system.” said.

Expressing that they believe the macroeconomic environment will continue to worsen in the coming quarters, S&P said, “We do not expect GDP growth to decline slightly below 3 percent in 2023. We expect inflation to be above 40 percent on average next year. The Turkish lira will continue to be weak due to the hawkish stance of central banks in emerging markets. Turkish officials say they are very expansionary. “The fiscal stance and monetary policy risk further undermining confidence in the lira. The weakening lira is also eroding the credibility of Turkey’s corporate sector.” said.

Explaining that banks expect their loan losses to be 320 basis points per year in the 2022-23 period, S&P emphasized that they anticipate that non-performing loans, which was 2.4 percent on January 31, 2022, will remain in the range of 4-5 percent in 2023.

Stating that the banking sector risk trend is negative and Turkish banks are expected to continue to have access to external funding in the basic scenario, S&P also said that they expect external debt to continue to decrease gradually over the next few years if the government can control the balance of payments risks. “However, banks remain highly vulnerable to the negative market environment and risk perceptions.” S&P also stated that the combination of more expensive squared liquidity with increasing inflation and unpredictable monetary policy increases refinancing risks.