Turkey: Moody’s bank downgrades look harsh
Moody’s has taken aggressive action against most large Turkish banks. We don't think it was warranted
Aggressive action
Moody’s has taken more aggressive action against Turkish banks than expected, downgrading all banks’ ratings (except QNBFB) by one notch and leaving them on review for further downgrade (including QNBFB). As the banks’ ratings before this action were on a Stable outlook, this is a really dramatic move. It reflects Moody’s view that the operating environment has deteriorated, particularly in terms of market funding. The agency cites wider credit spreads (c. +300bp year to date), a lower Turkish lira (-24% YTD) and a lower roll-over ratio in March compared to the average for 1Q18. Moody’s expects the weaker lira to cause a decline in asset quality and capital ratios and sees Turkish GDP growth falling to 2.5% this year and 2.0% in 2019.
As part of its review, Moody’s will examine the incentives of foreign banks to support their Turkish units and the ability of the government to support local banks. Note that most large Turkish banks continue to incorporate one to two notches of government support. The upshot of all this is that most large Turkish banks are now rated Ba3, with the exception of QNBFB (Ba2) and HALKB (B1/-/BB+). ALTNF is at B1 and ODEABK at B3. All remain on review for downgrade.
The key driver for spreads
How we move so fast from stable outlooks in March to the current position is a mystery. Moody’s growth projections are very bearish (we see growth at 3.7% this year and 3.2% next year) and, while we agree that asset quality and capitalisation are likely to suffer due to the weaker TRY, the banks start from a strong position and the additional assumed weakness does not warrant a Ba3 rating. While we expect weakness for the sector this morning, we think monetary policy and political issues will remain the key drivers for spreads over the next few weeks.
Major Turkish banks' senior unsecured ratings
"THINK Outside" is a collection of specially commissioned content from third-party sources, such as economic think-tanks and academic institutions, that ING deems reliable and from non-research departments within ING. ING Bank N.V. ("ING") uses these sources to expand the range of opinions you can find on the THINK website. Some of these sources are not the property of or managed by ING, and therefore ING cannot always guarantee the correctness, completeness, actuality and quality of such sources, nor the availability at any given time of the data and information provided, and ING cannot accept any liability in this respect, insofar as this is permissible pursuant to the applicable laws and regulations.
This publication does not necessarily reflect the ING house view. This publication has been prepared solely for information purposes without regard to any particular user's investment objectives, financial situation, or means. The information in the publication is not an investment recommendation and it is not investment, legal or tax advice or an offer or solicitation to purchase or sell any financial instrument. Reasonable care has been taken to ensure that this publication is not untrue or misleading when published, but ING does not represent that it is accurate or complete. ING does not accept any liability for any direct, indirect or consequential loss arising from any use of this publication. Unless otherwise stated, any views, forecasts, or estimates are solely those of the author(s), as of the date of the publication and are subject to change without notice.
The distribution of this publication may be restricted by law or regulation in different jurisdictions and persons into whose possession this publication comes should inform themselves about, and observe, such restrictions.
Copyright and database rights protection exists in this report and it may not be reproduced, distributed or published by any person for any purpose without the prior express consent of ING. All rights are reserved.
ING Bank N.V. is authorised by the Dutch Central Bank and supervised by the European Central Bank (ECB), the Dutch Central Bank (DNB) and the Dutch Authority for the Financial Markets (AFM). ING Bank N.V. is incorporated in the Netherlands (Trade Register no. 33031431 Amsterdam).