Fitch warns on bad debt at Turkey's banks, saying official data lacking

Turkish banks have more bad debt than headline figures suggest, meaning their financials could deteriorate at a faster pace than revealed by regulators, ratings agency Fitch said on Wednesday.

Banks in Turkey are facing financial headwinds due to a mounting pile of corporate loans, which constitutes a major portion of debt restructuring, known as forbearance, as well as new lending sanctioned by the government after the outbreak of COVID-19, Fitch said.

Banks’ financial statements, published quarterly, should be studied to ascertain the scale of the potential problem, Fitch said in a report. The regulator’s relaxation of the classification of what constitutes a bad loan adds to the difficulty of assessing the situation with official data, it added.

“Reported non-performing loans (NPLs) will be flattered by regulatory forbearance and loan growth,” it said. “Turkish banks' underlying asset quality will weaken due to the coronavirus pandemic, but this will be more apparent in their income statements.”

Turkish banks have been saddled with a mounting pile of non-performing loans while companies have sought more advantageous terms for existing borrowing since a currency crisis erupted in the summer of 2018. The trend has persisted since the economy slumped into a contraction in mid-March, when the first COVID-19 case was reported.

The relaxation of loan classification requirements, scheduled to last until end-2020, means that the worst NPLs, or so-called Stage 3 loans, are now classified when 180 days overdue rather than a previous 90 days. Meanwhile, Stage 2 loans, or loans "under close watch" that are not fully impaired, are revealed as such when 90 days overdue rather than 30.

A loan deferral scheme introduced by the government, requiring banks to defer interest or principal payments on debt for three months, will delay reported NPL increases until around the first quarter of next year, according to Fitch.

Banks’ balance sheets are also under financial pressure after the lira sank to successive record lows this year. The currency hit an all-time low of 7.49 per dollar this week.

A weaker currency weighs on banks’ financials because the institutions need to service their own foreign borrowings as well as to tackle repayment problems with loans they made to companies in dollars and euros, which have become more difficult to repay.

Fitch said new foreign currency loans to Turkey’s corporations have slowed markedly, meaning pressure on banks from that direction may be easing.

“Demand for foreign-currency loans has remained weak, exacerbated by lira volatility,” Fitch said.

The lira has lost more than 20 percent of its value this year. It traded up 0.2 percent at 7.47 per dollar on Thursday.

Top international investment banks including Goldman Sachs warned during the currency crisis of 2018 that Turkish banks were in danger of seeing their capital levels deplete due to the lira's losses.

Goldman said at the time that the capital of large non-government lenders Işbank and Yapı Kredi would erode should the lira fall to 6.3 per dollar. Next in line was Akbank, which would see its excess capital disappear at 6.9 per dollar, it said. Turkish banks have since sought to bolster their capital levels to help combat the lira's weakness.

Late last month, Fitch downgraded its outlook on the ‘BB-‘-rated debt of Turkey’s government and banks to “negative” from “stable”. A sizeable current account deficit, exacerbated by strong credit stimulus, was a major reasons for the downgrade, it said. Fitch and other ratings agencies generally alter the ratings of Turkey's banks to conform with the sovereign rating.