- Prolonged political uncertainty in Turkey, which could aggravate tensions over economic policy, would create additional risks for the country's banks, said Fitch Ratings in a statement released on Friday.
"Slower economic growth, lira depreciation, higher interest rates and weaker investor sentiment towards Turkey could all weigh on banks' credit profiles" Fitch said, adding that its base case was that the deterioration in the operating environment would be moderate and the banks have capital and liquidity buffers to absorb mild shocks.
Turkish banking sector's core and total capital ratios were a sound 12.9 percent and 15.1 percent at end-April 2015, Fitch reminden and said that the ratios were likely to have fallen since then due to the depreciation of the lira against the US dollar. "In a stress scenario involving a further 20% fall in the local currency, core ratios could weaken by another 100bp."
To date in 2015, lira depreciation respectively against the US dollar and the euro has reached 15 percent and 9 percent. "If lira weakness leads to an interest-rate hike, this will hit banks' margins and capital" said Fitch. Turkish banks' external funding has increased rapidly in recent years, rising to 176 billion dollars at end of the first quarter, with a majority of this comprising short-term borrowing.
"The ruling Justice and Development Party (AKP) last weekend lost its parliamentary majority for the first time in 13 years, resulting in significant uncertainty on the composition of the new government and near-term economic policy" Fitch added.
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