Banking shares in Turkey after on Moody’s revision

Moody’s Investors Service has adjusted the outlook for Turkey’s banking sector to stable, although the operational environment remains uncertain due to factors such as an anticipated economic slowdown and high inflation. In a report released on Tuesday, the rating agency acknowledged that the environment for banks in Turkey continues to pose challenges, yet noted that recent governmental efforts to shift away from unconventional policies could alleviate some difficulties for the country’s lenders.

Moody’s analysts stated, “Following the elections in May 2023, the government’s initial steps towards orthodoxy are supportive of operating conditions and we expect the unorthodox measures introduced in the period building up to the elections will be gradually unwound during our outlook horizon.”

Despite the positive change in outlook, the rating agency highlighted that there’s a potential for missteps in the process of unwinding certain measures, which could impact factors like GDP growth and exchange rate depreciation.

The revision in outlook led to a surge in shares for Turkish lenders, propelling the Borsa Istanbul Banking Sector Index to its highest-ever level. This index tracks the performance of Turkey’s listed banks and saw a 4.1% rise on a closing basis.

Moody’s upgraded the outlook for the Turkish banking system from negative to stable, underscoring the resilience of the nation’s lenders. Despite ongoing challenges, the country’s stable B3 rating and strong export and tourism sectors are anticipated to continue supporting growth, despite a modest slowdown in the first half of 2023.

Moody’s projections suggest a deceleration in Turkey’s economic growth, with a real GDP expansion of 4.2% in 2023 compared to 5.6% growth in 2022. Inflation is expected to remain high, standing at 51% in 2023, although down from the 72% recorded in 2022.

Turkey’s central bank governor, Hafize Gaye Erkan, has pledged to maintain a “gradual” approach to monetary tightening despite the revision of the consumer price inflation forecast to 58%. This approach aims to restore the central bank’s credibility in the wake of unconventional measures taken during President Recep Tayyip Erdogan’s tenure.

While Turkey’s banking sector benefits from enhanced funding and liquidity positions, Moody’s notes that asset quality risks remain due to decreased consumer spending and weakened borrower repayment capabilities caused by high inflation. The banks’ return on average assets has dipped to 3% in the first half of 2023 from 3.7% in the same period of 2022, mainly due to the unwinding of macro-prudential measures and reduced income from inflation-linked securities.

The funding profile of Turkish banks has improved, with a lower loan-to-deposit ratio and reduced reliance on short-term wholesale foreign funding. Despite this progress, the sector faces lingering downside risks, reflecting the ongoing economic volatility.