Moody’s Upgrades Turkey’s Banking Sector Outlook from Negative to Stable

Moody's changed its view of the Turkish banking sector in Turkey to stable, but at the same time emphasized that the challenges facing the sector still exist.

In a report, the agency pointed to a significant increase in asset and capital risks, while profitability, financing, work environment, and government support faced some challenges, but remained generally stable.

The report, published on Tuesday, indicated that the Turkish government is ready to support the sector, but its ability to do so is limited, especially with regard to foreign currencies. This capacity has shrunk over the past years, given the deterioration in Turkey's net reserves, according to the report.

The agency expected economic growth to slow and real GDP to grow by 4.2% in 2023, down from 5.6% in 2022; And for inflation to remain high at 51% in 2023, down from the 2022 rate of 72%.

It also noted that the export and tourism sectors will continue to support growth, despite a moderate slowdown in the first half of 2023 due to a slowdown in the country's main export markets in Europe.

Moody's warned that asset risks will continue to rise. Non-performing loans decreased in 2022 to 2.4% of total loans, which is lower than 2021 levels when the ratio was 3.7%. But the number of "new non-performing loans" nearly doubled in 2022 compared to the previous year, because high inflation and currency depreciation reduced borrowers' ability to repay. The agency expected a deterioration in the quality of Turkish banks' assets in 2023, affected by slower growth and continued high inflation rates.

Reported capitalization remains strong, but there are downside risks. Moody's expected that the depreciation of the exchange rate and credit growth would keep the capital of Turkish banks under pressure.

The agency pointed out that capital levels in state-owned banks are weaker compared to private banks, but the capitalization of state-owned banks was supported by cash injections from the government.

Bank profitability is supposed to decline from peak levels, but it will remain strong, according to the report, as the return on average assets declined to 3% in the first half of this year, compared to 3.7% last year, amid pressure on the basic margin of the sector.