(The following statement was released by the rating agency)
July 31 - Turkish banks' capital ratios will drop because of the country's switch to Basel II today, says Fitch Ratings. They will have to hold more capital against certain assets, notably sovereign bonds, and capital relief on large portions of their retail portfolios will be lower than originally expected. This should reduce the risk of a marked further increase in system leverage. We expect the banks' capital ratios to fall by an average of about 100bp.
Basel I favoured Turkey. As a member of the OECD, Turkish sovereign and bank exposures attracted lower capital charges. This is no longer the case under Basel II. The move towards a ratings-based approach means that risk weightings for Turkish sovereign exposure increase, in light of the sovereign's sub-investment grade IDR of 'BB+'/Stable.
The Banking Regulation and Supervision Authority (BRSA) is tough in its application of Basel II. Under its rules, FX-denominated Turkish sovereign bonds attract a 100% risk weight (previously 0%). Turkish banks are large investors in Turkish sovereign bonds, so capital ratios will suffer even though the regulator has determined that gold and FX reserves carry a 0% risk weight. The latter step is reasonable because of the central bank's high reserve requirements on FX deposits.
The BRSA's treatment of residential mortgage loans is stricter than recommended under Basel II. Despite intense bank lobbying, these loans still attract a 50% risk weight (Basel's guideline is 35%). Nor have requirements for unsecured retail loans been relaxed. These attract a 75% capital charge under Basel II, but in Turkey the risk weights for credit card receivables and consumer loans with maturities up to 12 months are 150%, rising to 200% for maturities over two years.
High capital charges for retail portfolios should help dampen the surge in consumer borrowing that fuelled loan expansion of nearly 30% in 2011. This would be credit positive for the banks. Retail portfolios are large in Turkey, at a third of total banking sector loans at end-May 2012.
The corporate loan book (44% of total sector loans at end-May 2012) remains risk weighted at around 100%, but SME specialist lenders will benefit under Basel II. We are not overly concerned about the easing of risk weightings for this portfolio class in light of its performance to date and the fact that it is fairly diversified by industrial sector.
We consider Turkish banks generally well capitalised. The sector as a whole reported a total regulatory capital adequacy ratio of 16.2% at end-May 2012, and leverage is moderate, despite recent rapid credit growth. Strong capitalisation generally remains a positive rating driver for Turkish banks, and we are reassured by tight regulatory oversight, which should help prevent a rapid build-up of sector leverage.
((Bangalore Ratings Team, Hotline: +91 80 4135 5898 satish.kb@thomsonreuters.com, Group id: BangaloreRatings@thomsonreuters.com, Reuters Messaging: satish.kb.thomsonreuters.com@reuters.net))
