Fitch: BRSA asset ratio rule credit negative
The requirement for Turkish banks to maintain an asset ratio of at least 100% from 1 May is moderately credit negative, Fitch Ratings says
Fitch issued a note on Turkey’s new “asset ratio rule” by banking regulator BRSA, as well commenting on swap lines. The comments are moderately negative and are likely to increase the pressure on the Turkish currency and FX denominated bonds.
Asset Ratio Requirement Credit-Negative for Turkish Banks
The requirement for Turkish banks to maintain an asset ratio of at least 100% from 1 May is moderately credit negative, Fitch Ratings says. It will force some banks to increase lending at a time when the operating environment has weakened, with heightened risks to borrowers’ repayment capacity and therefore to banks’ credit profiles. Banks failing to meet the target are likely to face a fine based on their ratio shortfall. But many banks will not be affected as they already meet the requirement. Turkey’s Banking Regulation and Supervision Authority announced the move on 18 April to stimulate lending to support the economy amid the coronavirus pandemic.
Some banks with lower asset ratios may be unable to reach the target in such a short timescale purely with loan growth, particularly if customer deposits continue to grow. We therefore expect some banks to increase their holdings of government securities or FX swaps with the Central Bank of the Republic of Turkey (CBRT), which count towards the target. Unlike loans, however, these are subject to haircuts in the asset ratio calculation. Purchases of Turkish sovereign debt have already increased since the target was announced.
If banks increase FX swap transactions with the CBRT, this will boost the CBRT’s gross FX reserves, but not its net holdings of foreign-currency (FC) assets. Recently tightened limits on banks’ FX swaps with foreign counterparties have increased incentives for lenders to enter into swaps with the CBRT, and the new asset ratio adds to these incentives.
Some banks may deleverage deposits to achieve the 100% ratio, though at the risk of losing market share. They would probably focus on reducing FC deposits, given that these represent a high 51% of total deposits (end-2019) and have a higher weight than lira deposits in the asset ratio calculation, thereby eroding FC liquidity buffers. Some banks may also try to replace or restructure some of their deposit funding with debt issuance, which is not captured in the asset ratio denominator, if pricing and market conditions allow.
Most state-owned and larger privately-owned banks already meet or are likely to be close to meeting the ratio requirement, according to our calculations. Smaller privately-owned banks will typically be more affected, along with Islamic banks. The latter have a lower, 80% ratio requirement but they are typically starting with lower loans-to-deposits ratios. Moreover, they have less opportunity than conventional banks to boost their ratios though loan growth, or the secondary securities market given their sharia regulatory constraints.
Fitch comments on Bloomberg terminal: No swap lines?
The following Fitch comments were e-mailed to PA Intelligence by a loyal reader, because we are too poor to pay the fees for the terminal:
BFW 04/23 15:26 *FITCH SAYS NOT FACTORING TURKEY SWAP LINES IN ASSESING RATING
BFW 04/23 15:10 *FITCH SAYS TURKISH PUBLIC FINANCES STILL A STRENGTH FOR RATING
BFW 04/23 15:09 *FITCH SAYS TURKEY FISCAL RESPONSE IS `PRETTY MODERATE PACKAGE’
BFW 04/23 15:03 *FITCH: RISK OF U.S. SANCTIONS ON TURKEY VERY UNPREDICTABLE
BFW 04/23 14:50 *FITCH SAYS REFINANCING RISK FOR TURKISH BANKS HAS INCREASED
BFW 04/23 14:44 *FITCH EXPECTS TURKISH BANKS’ NPL GROWTH TO BE DELAYED TO 2021
BFW 04/23 14:42 *FITCH: ASSET QUALITY OUTLOOK IS NEGATIVE FOR TURKISH BANKS
BFW 04/23 14:37 *FITCH SEES MODERATE WEAKENING OF TURKEY CURRENT-ACCOUNT DEFICIT
BFW 04/23 14:35 *FITCH SEES SCOPE FOR FURTHER TURKISH INTEREST-RATE CUTS
BFW 04/23 14:33 *FITCH EXPECTS TURKISH ECONOMY TO CONTRACT 2% IN 2020
Dollar/TL traded down to 6.945 during the day, but rose to 6.96-97 once again in evening hours, potentially in response to Fitch comments, we are told by a trader.
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