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* Moody's downgraded Turkey to "junk" in September
* Fitch review of investment grade expected early in 2017
* Turkish banks use Fitch rating as baseline for assets
* Downgrade raises risks for borrowing costs, lending
By Asli Kandemir
ISTANBUL, Oct 4 Turkey's love affair with
international credit agencies - if it ever existed - is already
over and its banks may rein in lending yet more if the last of
the big firms, Fitch, downgrades the country's rating to "junk".
President Tayyip Erdogan has long criticised the agencies,
most recently when Moody's followed Standard and Poor's last
month in removing Turkey's investment grade rating. He will have
another opportunity to vent his feelings if Fitch does the same
when it reviews its BBB- sovereign rating in early 2017.
"I love rating agencies and they love me," Erdogan said with
sarcasm last week, accusing Moody's of being political with its
downgrade on Sept. 24, which followed a lowering of Turkey's
outlook after a failed military in coup in July.
"Put a few cents in their pockets and get the rating you
want, this is how they work," he said.
Fitch's influence remains high as the only one of the three
main agencies that still ranks the country investment grade.
Turkish banks have used Fitch's rating as the benchmark to
calculate their risk-weighted assets, used to determine whether
they have set aside enough capital to withstand shocks.
The agency already has Turkey on a negative outlook and
analysts think a downgrade from BBB-, the lowest investment
grade, is possible. This would push up borrowing costs while
prompting commercial banks to trim lending as they move to shore
up their balance sheets, sending ripples through the banking and
Turkey's economy weathered the Moody's downgrade without too
many difficulties, but Prime Minister Binali Yildirim
acknowledged on Tuesday that the failed coup had taken a toll,
prompting the government to revise its year-end growth forecast
to 3.2 percent from 4.5 percent.
S&P has already cut its rating to two notches below
investment grade, and analysts say a Fitch move could have more
impact. It would not only make banks' borrowing more costly but
double risk weightings on foreign currency reserves they keep at
the central bank and non-lira securities to 100 percent.
"If Fitch downgrades Turkey, the banking sector's capital
adequacy ratio will fall 125-150 basis points," said Sadrettin
Bagci, a banking analyst at Istanbul-based Deniz Investment.
"This may further hit banks' appetite to extend loans."
The banking sector's average capital adequacy ratio is
strong, standing at 15.8 percent at the end of July, well above
the banking watchdog's lower limit of 12 percent and the legal
requirement of 8 percent.
But lending is less positive, with year-on-year growth of
around 8 percent, well below the central bank's guidance of 15
percent. A downgrade could dent that further, while also cutting
into capital adequacy ratios.
The banks are under pressure from Erdogan to provide cheaper
credit to consumers and companies to boost slowing economic
growth. However, they rely heavily on foreign borrowing to fund
their lending at home, and that will become more expensive.
"Should Fitch downgrade, its impact will be more crucial
than Moody's in terms of banks' capital," said a senior banker
who declined to be named. "Some banks may fall below the 12
percent threshold, further tightening loans."
Many banks already have loan-to-deposit ratios of over 100
percent and are reluctant to extend credit further.
With economic growth slowing, demand for credit is also
easing. "We are focusing on the supply side, but there is very
low appetite from credible firms to use loans. There is no
backlog of feasible and bankable projects," the banker said.
RISE IN BORROWING COSTS
Turkish banks' dollar borrowing costs already took a hit in
anticipation of the Moody's downgrade, rising an extra 10 to 20
basis points over the Libor benchmark interest rate, although
their euro costs remain steady at around Euribor +75 bps.
In a measure of the decreased appetite institutions have for
Turkish risk, and the difficulty Turkish banks are having in
finding takers for debt, the roll over ratio for maturing
syndicated loans fell to 95 percent this year, from 120 percent
in 2015. Anything below 100 percent shows declining interest.
Turkish banks borrowed $19 billion via syndicated loans last
year. Before the end of this year, Vakifbank, Garanti
Bank, Yap Kredi and Finansbank
all have syndicated loans that will mature.
The possibility of a Fitch downgrade - coupled with an
expected interest rate rise by the U.S. Federal Reserve before
the end of this year - is likely to push up the cost of rolling
over that debt.
"Borrowing costs will increase by 50 basis points. If the
Fed raises rates, this may also add another 35 basis points,"
said Atilla Yesilada, an analyst at Global Source Partners, who
advises foreign investors.
However, once political developments are added to the mix,
the rise could end up greater than this. "If we consider the
political risk premium, foreign borrowing costs may go up 100
basis points, Fitch's downgrade will add another 25-30 bps on
top of that," Yesilada said.
Despite the expected impact on the private sector - which
has total external debt of $299 billion, a little over half of
which belongs to the financial sector - bank bosses are so far
putting on a brave face.
"There may be some increases in banks' foreign borrowing
costs," said Hakan Binbasgil, chief executive of Akbank, one of
Turkey's biggest lenders. "But the increase will be limited to
25-50 basis points, which is not very significant."
Erdogan is dismissive. "They suddenly cut our rating. So
what?" he said of Moody's, adding that nobody took ratings
agencies seriously any more. "Cut Turkey's rating as much as you
want, this isn't the reality in Turkey."
(Editing by Luke Baker and David Stamp)