Fitch warns on Gulf banks’ exposure to Turkey citing inflation, lira slump

Gulf banks’ exposure to Turkey is increasingly credit-negative for the companies because of the deteriorating operating environment in the country, Fitch Ratings said on Tuesday.

The businesses, which include Qatar National Bank, Emirates NBD and Kuwait Finance House, were all forced to adopt hyperinflation accounting in the first half of the year. Inflation in the country hit an annual 79.6 percent in July. That was the highest level in industrialised economies and emerging markets.

Fitch said Gulf banks with Turkish subsidiaries were consequently forced to register almost $1 billion in monetary losses during the first six months of 2022.

The ratings agency said it was deducting one notch from Qatar National Bank, ENBD, the Commercial Bank and Burgan’s domestic operating environment scores to reflect the banks’ exposure to weaker international markets, particularly Turkey. For KFH, it deducted two notches to reflect its higher exposure.

Banks in the Gulf may be doing more business in Turkey this year after President Recep Tayyip Erdoğan moved to repair relations with regional countries including the United Arab Emirates and Saudi Arabia. They have vowed to strengthen their economic and trade relations.  

In July, Fitch downgraded the credit ratings of 25 Turkish banks to ‘B-’ from ‘B’, following a cut to Turkey’s sovereign rating to ‘B’ from ‘B+’. It cited spiralling inflation and increasing macroeconomic and external risks for the downgrade. Turkish banks’ ratings remain on negative outlook.

Fitch also cited the lira’s declines against major currencies. The lira has lost more than a quarter of its value against the dollar this year after declined 44 percent in 2021.

“The lira has weakened dramatically in recent years, with the U.S. dollar/lira exchange rate now about 18, compared with 2.2 in January 2014,” Fitch said. “We calculate that GCC banks’ aggregate currency translation losses through ‘other comprehensive income’ were $6.3 billion in 2018–2021, mainly due to lira depreciation. The aggregate net income of Turkish subsidiaries was about $3.3 billion over the same period.

“We expect currency losses to remain high until at least 2024 due to further lira depreciation,” it said.

“We do not expect GCC banks to exit Turkey, despite the challenging conditions,” Fitch said. “One factor is the lack of potential buyers, even though Turkish banks are trading at 50 percent below their book value. Fitch believes that GCC banks would be willing and able to provide their Turkish subsidiaries with financial support, if needed, and this is reflected in the ratings of the subsidiaries.”

 

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