Economic Research | Country Risk Weekly Bulletin | Country Risk Weekly Bulletin 533 | Currency depreciation in Turkey to weigh on asset quality, profitability and capitalization of banks | Lebanon | Byblos Bank

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Byblos Bank

Country Risk Weekly Bulletin 533

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Currency depreciation in Turkey to weigh on asset quality, profitability and capitalization of banks

Moody's Investors Service considered that the depreciation of the Turkish lira is credit negative for Turkish banks, as the ongoing currency weakness, along with high inflation, would weigh on the banks' asset quality, profitability, capitalization and access to foreign funding. It indicated that the lira depreciated by 12% year-on-year and by 8% month-on-month to a record-low of TRY4.15 against the US dollar on April 11, 2018. First, the agency noted that a sustained depreciation of the lira would reduce the repayment ability of corporate borrowers that do not generate revenues in foreign currency and, in turn, would increase problem loans. Second, it anticipated the currency depreciation to raise inflation and erode the profitability of corporates and the purchasing power of consumers. It projected the inflation rate to reach 8% at end-2018 relative to the Central Bank of Turkey's target of 5%. Third, Moody's anticipated the depreciation of the lira to reduce the banks' capital ratios, as it expected the value of foreign-currency denominated risk-weighted assets to increase when converted to local currency, and for the lira-denominated regulatory capital to be unchanged. It considered that a deterioration in the banks' capital ratio would reduce their ability to lend and would weigh on economic growth. Fourth, the agency said that the banks' access to foreign currency funding could decline due to investors' concerns about the solvency of Turkish banks, which constitutes a significant challenge for the banks given their large foreign-currency refinancing needs. 
Source: Moody's Investors Service
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