Fitch downgrades 25 Turkish banks because of external risks and market uncertainties

Fitch Ratings has downgraded the credit ratings of 25 Turkish banks and revised their long-term outlook to negative due to rising inflation and increased macroeconomic and external risks amid uncertainty and increasingly interventionist government policies.

The rating actions on banks follow the downgrade of Turkey's sovereign rating by Fitch this month.

In its latest move, Fitch downgraded 25 Turkish banks' long-term foreign-currency issuer default ratings to 'B-' from 'B'. The rating agency has also downgraded the lenders' long-term local currency issuer default ratings.

Last week, Fitch slashed Turkey's sovereign debt rating deeper into junk territory, citing the country's “spiralling inflation”, as well as government and central bank policies that have increased macro and external risks.

Turkey's widening current account deficit, pressure on sovereign foreign exchange reserves and high deposit dollarisation are affecting the ratings of the country's banks, Fitch said in a report on Wednesday.

The affected banks include Akbank Arap Turk Bankasi, Anadolubank Denizbank, Fibabanka Anonim Sirketi, ING Bank, Kuveyt Turk Katilim Bankasi, Odea Bank, Turkland Bank and QNB Finansbank, among others.

Banks’ credit ratings are closely linked to the sovereign ratings of the country to which they belong.

This month, Fitch slashed Turkey's rating to B from B+, five levels below investment grade with negative outlook, which indicates that material default risk is present, but a limited margin of safety remains, according to Fitch. Such a rating makes it more difficult to access capital markets and raise financing.

The rating downgrade comes after inflation in the country hit a 24-year high of 78.62 per cent in June, according to data from the Turkish Statistical Institute.

Surging energy and commodity prices as well as continued depreciation of Turkey's currency has contributed to rising costs with producer prices rising 138 per cent annually in June, while food prices soared 93.93 per cent.

Fitch said it forecasts Turkey's annual inflation to average 71.4 per cent in 2022, which is the highest for any country rated by the agency.

The rating actions on Turkish banks is driven by a combination of factors, Fitch said.

The weaker operating environment has increased risks to banks' stand-alone credit profiles. External risks and policy uncertainty have increased the potential for government intervention in the banking system.

“This reflects our view that the risk of [government] intervention that would prevent banks from servicing their foreign currency obligations remains higher than that of a sovereign default,” the rating agency said.

Fitch said it no longer factors any government support to the state-owned commercial banks, due to high constraints on the ability of the authorities to provide support in foreign currency.

Turkish banks are subject to refinancing and foreign currency liquidity risks, given their reliance, to varying degrees, on external wholesale funding and high deposit dollarisation, the rating agency added.

Banks' capital ratios too have witnessed substantial erosion due to lira depreciation. The Turkish currency lost 44 per cent of its value against the dollar last year and more than 20 per cent of its value against the greenback this year, while inflation in the country has risen more than 42 per cent since December.