Prolonged political uncertainty in Turkey, which could aggravate tensions over economic policy, would create additional risks for the country's banks, commented Fitch on June 12,

Slower economic growth, lira depreciation, higher interest rates and weaker investor sentiment towards Turkey could all weigh on banks' credit profiles, said the ratings agency, adding that its base case is the deterioration in the operating environment will be moderate and the banks have capital and liquidity buffers to absorb mild shocks.

Foreign-currency (FC) exposures comprise a large part of lending to the corporate sector, and this represents a considerable risk given the risk of further lira depreciation against major currencies, warned Fitch which expects losses on these exposures to increase, in particular on loans to companies with no access to FC earnings, such as the construction and energy sectors. However, banks' risks are partially offset because some FC loans are made to exporters, or to companies that are parts of broader groups with access to FC revenues, it added.

The ratings agency also pointed out that if lira weakness leads to an interest-rate hike, this will hit banks' margins and capital.

“A shift in investor sentiment towards Turkey, as political uncertainty prevails and US monetary tightening draws closer, could result in significant pressure on banks' FC liquidity, however, its base case remains that banks will retain good market access, with negative sentiment more likely to affect pricing than funding availability,” said the rating agency in its commentary.

Turkish banks' available FC liquidity (funds placed under the reserve option mechanism with the central bank; balances on foreign correspondent accounts; and maturing short-term currency swaps) broadly matches the $80bn-$85bn, which it estimates they would need to service foreign debt over 12 months in the extreme case of a complete market shutdown, according to Fitch.