(The following statement was released by the rating agency)
Jan 10 - The introduction of higher central bank reserve requirements for Turkish banks that fail to meet set leverage ratios may reduce somewhat the risk of a return to very rapid loan growth, which is one of the downside risks for Turkish banks, Fitch Ratings says.
The changes have limited immediate impact for the Turkish banks we rate. The new policy tool, effective from Q413, will require banks with leverage ratios below 3.5% to hold additional reserves, ranging from one to two percentage points. The threshold will increase up to 4% in Q414 and to 5% in Q415. The leverage ratios of Fitch-rated banks are mostly in the 7%-9% range, comfortably above the new requirement.
Although the additional reserve requirements are not to be implemented until the end of the year, the policy may help to curb excessive growth appetite that prevailed during 2010 and 2011 when loans grew rapidly at around 30% on average each year. Credit growth slowed to a more moderate 15% in the first nine months of 2012 on an annualised basis. We expect nominal loan growth to be somewhat higher than the official target of 15% in 2013, in part supported by continued inflow of foreign funds, but not to significantly exceed 20%.
Any deterioration in asset quality arising from the recent brisk credit growth is likely to be manageable. Risks are mitigated by some key fundamental strengths. The banks have diversified loan portfolios, sound credit underwriting, retail lending in only local currency and close regulatory supervision. Positive economic growth in Turkey (Fitch forecasts 3.8% real GDP growth in 2013), together with moderate corporate and household leverage, also reduce the risks for the banks.
However, our favourable outlook for Turkish banks could be threatened if credit growth significantly exceeds our 15%-20% expectation for a sustained period. We believe aggressive expansion could challenge banks' underwriting capacity and asset quality. It could also weaken capital and funding ratios. At the same time, it could stretch corporate and household balance sheets, widen the current account deficit and threaten macroeconomic stability. The stricter reserve requirements may help to prevent such risks from building up in the banking system and improve liquidity ratios.
Introducing a leverage ratio requirement is sensible as it prepares the sector for Basel III implementation. This measure is noteworthy as being the first macro-prudential policy to be implemented by the Turkish central bank that addresses individual banks' balance sheet structures. This normally falls under the responsibility of the Turkish Banking Regulation and Supervision Agency (BRSA). The central bank coordinates these measures with the BRSA through the financial stability committee established in 2011.
On 26 December 2012 Turkey's central bank announced a new reserve requirement to be calculated based upon the leverage ratio of banks. Banks will report their leverage ratios starting in 2013 for monitoring purposes only. The leverage ratio is to be calculated by dividing each bank's capital by its total liabilities and off-balance sheet items, which are subject to certain weightings.