Barclays Capital indicated that the depreciation of the Turkish Lira has weighed on the capitalization of banks operating in Turkey, given that 40% of their assets are in foreign currency, while their capital is mainly in local currency. It expected the Central Bank of the Republic of Turkey (CBT) to continue to tighten monetary policy amid increased political pressure to stabilize the lira before the general elections of June 2018. But it anticipated that such CBT measures would weigh on the Turkish banks' profitability and capitalization through higher funding costs in the short term, and would lead to a slowdown in the banks' lending, as well as to a deterioration in their asset quality in the medium term. Also, it considered that risks to the Turkish banks' asset quality have recently increased, given that their large foreign currency-denominated loans to corporates, which represent 30% of total loans, expose them to foreign currency volatility. It noted that corporates have borrowed $174bn in foreign currency from domestic banks and another $107bn from external sources as at the end of 2017. It added that non-performing loans in foreign currency are very low, but noted that the depreciation of the lira has resulted in additional non-performing loans in foreign currency in the first quarter of 2018. Overall, it said that the asset quality of foreign currency-denominated loans remains strong, partly reflecting longer maturities of corporate loans in foreign currency and a strong rollover ratio of such loans. In addition, it said that Turkish banks have reported in the first quarter of 2018 sizeable amounts of Stage 2 loans, which are loans whose credit risk has increased significantly since their initial recognition. But it pointed out that Turkish banks have enough liquidity to absorb the $20bn in new non-performing loans given that their capital buffers exceed the Basel III requirements. 
Source: Barclays Capital