PARIS (S&P Global Ratings) Nov. 21, 2024--S&P Global Ratings said today that it sees lower economic risks for Turkish banks thanks to lower external imbalances. We have revised our economic risk trend to stable from positive and our industry risk trend to positive from stable.
The Central Bank of the Republic of Türkiye's (CBRT's) tight monetary stance has enabled disinflation and reserve accumulation. Since June 2023, the CBRT has adopted a host of measures to tighten credit conditions. Among others, the CBRT has increased its policy rate to 50% from 8.5%; introduced a monthly growth limit on new loans; and increased banks' reserve requirements on certain types of deposits to reduce the amount of available liquidity in the banking system. This has resulted in a strong deceleration of lending, a decline in inflation, a more stable Turkish lira, and a rebalancing of Türkiye's external accounts. The latter is evident from a falling current account deficit and a concomitant increase in the CBRT's foreign-exchange reserves (see "Türkiye Upgraded To 'BB-' On Reserve Accumulation And Disinflation; Outlook Stable," published on Nov. 1, 2024).
We expect gradual disinflation to continue. Persistently tight financing conditions combined with an erosion of real wages amid lower salary increases from 2025 are likely to reduce household spending. This has been the main constraint on disinflation this year. We therefore expect that nominal loan growth will continue decelerating to about 20% in 2025, from an estimated 35% in 2024, indicating a further contraction in real terms. We also project that inflation will finish the year at around 43%, compared with 63% in 2023, before gradually decreasing to 25% in 2025.
We expect higher credit losses in 2024-2025. This is because we project that Türkiye's economic activity will continue cooling, with real GDP growth decelerating to 2.3% in 2025, from an estimated 3.1% this year, after averaging 7.3% between 2021 and 2023. The Turkish lira will depreciate in line with inflation.
While the CBRT may cut rates next year, we expect tight financing conditions to persist as real interest rates are now positive. This will continue to weaken Turkish borrowers' creditworthiness and increase banks' impairment charges (net of provision reversals) to about 170-190 basis points (bps) in 2024-2025 from an estimated 138 bps in 2023.
The deterioration in asset quality is not yet fully apparent. New nonperforming loans (NPL) surged over the last quarter, mainly driven by consumer and credit cards loans. However, strong NPL sales, solid collections, and elevated nominal loan growth have kept the NPL ratio at a low level of 1.7% at end-September 2024, compared with 1.6% in January 2024.
We now expect NPLs to rise to 2.4%-2.5% of total loans by 2025. However, a higher number of loan restructurings will prevent a more significant increase in the headline NPL ratio, especially in the context of an easier restructuring process.
The real estate price adjustment over the next 12-18 months should remain moderate, as a high share of self-financed house purchases and a gradual decline in interest rates from 2025 will continue to support the market to some degree. Housing loans, all fixed rate, represent less than 4% of total loans at the system level, but real estate price dynamics are important for assessing both the value of collateral and banks' exposure to construction and real estate companies.
We have revised our economic risk trend to stable from positive. Risks could increase if Türkiye's economic activity slows beyond our current expectations, with GDP growth declining below 1%, along with a sharp correction in real estate prices. Conversely, risks may fall if the authorities are able to control inflation, bringing it down to single digits.
De-dollarization is ongoing. Attempts to unwind the foreign exchange-protected deposit scheme KKM and increase the attractiveness of Turkish lira-denominated deposits have finally reversed the dollarization of the financial sector. As of mid-October 2024, foreign-currency and KKM deposits made up 45% of total deposits versus 58% at the end of 2023, with KKM deposits having declined from $93.9 billion (19.1% of total deposits) to $41.6 billion (7.6% of total deposits) over the same period. Assuming that monetary policy remains tight, and the domestic savings rate remains attractive, the de-dollarization trend should continue, leading to further increases in the CBRT's foreign-currency reserves.
Turkish banks' refinancing risks have stabilized, but their funding profiles remain risky. The consistency of monetary policy tightening since June 2023 has improved market sentiment, resulting in a record-high rollover rate for banks' external debt of about 120% as of August 2024. Assuming that monetary policy remains consistent, we expect that banks will refinance all their short-term external debt, which amounted to $109.6 billion as of Aug. 31, 2024.
However, Turkish banks remain vulnerable to a sudden shift in investor sentiment because of their high reliance on short-term external debt, which constituted around 21% of their liabilities as of September 2024. The increase in foreign-currency liquidity, which we estimate at $160.6 billion as of Aug. 31, 2024, provides a buffer against unexpected declines in rollover rates. Nevertheless, the CBRT holds a portion of this liquidity and therefore it may not be fully accessible.
We have revised our industry risk trend to positive from stable. We could improve our industry risk assessment further if banks continue to demonstrate financial stability amid the ongoing economic readjustment. Although it could take time, a complete return to orthodox and predictable policies by removing distortive measures and adopting hyperinflationary accounting standards could also lead to a stronger industry risk assessment. Conversely, we could revise the trend to stable if we see pressure on banks' funding from an unexpected increase in inflation that could erode investors' and residents' confidence.
| BICRA score snapshot | ||||||
|---|---|---|---|---|---|---|
| To | From | |||||
| BICRA group | 9 | 9 | ||||
| Economic risk | 8 | 9 | ||||
| Economic resilience | Very high risk | Very high risk | ||||
| Economic imbalances | High risk | Very high risk | ||||
| Credit risk in the economy | Very high risk | Very high risk | ||||
| Trend | Stable | Positive | ||||
| Industry risk | 9 | 9 | ||||
| Institutional framework | Very high risk | Very high risk | ||||
| Competitive dynamics | Very high risk | Very high risk | ||||
| Systemwide funding | Very high risk | Very high risk | ||||
| Trend | Positive | Stable | ||||
| Banking Industry Country Risk Assessment (BICRA) economic risk and industry risk scores are on a scale from '1' (lowest risk) to '10' (highest risk). For more details on our BICRA scores on banking industries across the globe, please see "Banking Industry Country Risk Assessment Update," published monthly on RatingsDirect. | ||||||
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| Primary Credit Analyst: | Anais Ozyavuz, Paris + 33 14 420 6773; anais.ozyavuz@spglobal.com |
| Secondary Contact: | Regina Argenio, Milan + 39 0272111208; regina.argenio@spglobal.com |
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