Moody’s Downgrades Turkish Banks Over ‘Downside Scenario’ Risk

Ratings agency Moody’s on Tuesday downgraded its credit ratings on 20 Turkish financial institutions due to the increased risk of a “downside funding scenario” after the collapse of the lira.

Moody’s said the downgrade affected 18 banks and two finance companies. It comes amid persistent concerns over the health of the Turkish economy, especially the banking sector, after the lira lost a third of its value this month alone.

The downgrades prompted a new slide in the lira, which lost 2.2 percent against the dollar to trade at 6.3.

Moody’s, along with fellow ratings giant Standard and Poor’s, had earlier this month already cut the debt rating of the Turkish government deeper into junk on the same concerns.

The assessment of 14 banks was downgraded Tuesday by one notch and of four — including major lenders Denizbank and Is bank — by two notches.

“There is a heightened risk of a downside funding scenario, where a deterioration in investor sentiment limits access to market funding,” Moody’s said, explaining the sharp downgrades.

It noted Turkish banks are highly reliant on foreign currency funding and had market funds of around $186 billion denominated in foreign currency in June 2018, equivalent to 75 percent of their total wholesale funds.

“This makes the banking system particularly sensitive to potential shifts in investor sentiment, as these foreign currency liabilities must be refinanced on an ongoing basis,” it said.

It said that in the next 12 months around $77 billion of foreign currency bonds and syndicated loans need to be refinanced.

It said if investor sentiment shifted further, banks could need funding from the government or central bank.

The deterioration in the Turkish economy is “fuelling inflation and undermining growth”, said Moody’s, forecasting growth of just 1.5 percent in 2018 and 1.0 percent in 2019

It added that the outlook for all Turkish financial institutions was negative to “reflect the risk that prolonged volatility of the foreign currency exchange rate, or a sudden drop in investor confidence, could lead to significant stress on the banks’ foreign currency funding and deposits.”

Anxiety over the coherence of domestic economic policy coupled with sanctions announced by the United States generated panic selling of the lira earlier this month and raised fears of economic crisis in Turkey.

Despite a respite in the last days, analysts say that the same factors that at one point drove the lira above seven to the dollar for the first time in history remain in place.