World Economy

Moody’s Says Turkey Banks’ Capital Levels to Decline

Moody’s Says Turkey Banks’ Capital Levels to DeclineMoody’s Says Turkey Banks’ Capital Levels to Decline

Turkish banks will need injections of additional capital to meet international rules on bank reserves known as Basel III that are set for implementation in 2019, Moody’s Investors Service said in a press release.

“Turkish banks’ lending growth is outpacing their capital creation and we expect capital levels to decline over the next three to five years,” Moody’s Assistant Vice President Arif Bekiroglu said in the release, Sputnik reported.

Basel III refers to a set of capital requirements for international banks that was drafted by the Swiss-based Bank for International Settlements following the near collapse of the US and global financial systems in 2008.

Capital refers to the cushion that allows banks to absorb unexpected losses.

Moody’s said the capital shortage, as well as losses in recent years, threatens the ability of Turkish banks to expand credit that is needed for the nation’s economy to grow.

To meet the full Basel III requirements, banks in Turkey must phase in a capital conservation buffer requiring another 2.5% of risk-weighted assets in capital by 2019. The country’s largest and systematically important banks must also hold a systemic risk buffer, additional capital equal to a further 2% of RWAs, by the same date, said the report, Hurriyet reported.

With Turkish banks’ profitability at historic lows, Moody’s estimated that the banking sector can only support lending growth of around 9% without depleting capital, assuming a 20% dividend payout ratio, as per the average trend in the recent past (or 11-12% growth with full retention of earnings), added the statement.

  Role of Balance Sheets

Moody’s noted that upon full implementation of the Basel III capital framework, the banks’ ability to maintain headroom above their minimum capital requirements will depend on the growth rate of their balance sheets.

A higher rate of growth, for example, would start to erode capital ratios, since RWAs will outgrow capital.

Any additional pressure on profitability could also accelerate the decline in capital; such pressures could include higher funding costs, narrowing interest margins, or a rise in loan-loss provisions as large volumes of new loans are tested, said Moody’s.

In addition, further depreciation of the local currency against the US dollar would also consume capital, as the local currency-equivalent risk weights for foreign currency loans will be magnified, in Moody’s view.

Declining capital headroom, though, could enhance the banks’ risk discipline, according to the rating agency.

The need to meet the full breadth of Basel III standards by 2019 will encourage banks to optimize their capital composition and tighten their underwriting practices to protect their margins and so enhance internal capital generation.

As a result, banks with the strongest core capital (currently the country’s four largest banks), will have a competitive advantage to extend more credit, increase their market share and improve their economies of scale, according to the rating agency.