Bank of America (BofA) has released a report on the Turkish banking sector, stating that the asset quality risks are manageable and the banks have adequate capital and liquidity buffers. The report, based on a survey of 23 investors, also highlighted the positive outlook for loan growth and profitability in 2023.
BofA Survey Shows Investor Confidence in Turkish Banks
According to the report, which was leaked to Bloomberg, the investors who participated in the survey were mostly optimistic about the Turkish banking sector, despite the challenging macroeconomic environment. The survey showed that 74% of the investors expected loan growth to accelerate in 2023, while 65% expected net interest margins to improve. Moreover, 61% of the investors expected the banks to maintain or increase their dividend payouts in 2023.
The report also noted that the investors were not overly concerned about the asset quality risks, as they believed that the banks had sufficient provisioning and capital levels to absorb potential losses. The report stated that the average non-performing loan (NPL) ratio of the Turkish banks was 4.2% as of September 2023, which was lower than the historical average of 5%. The report also estimated that the NPL ratio could increase to 6.5% by the end of 2023, but this would still be manageable for the banks, as they had an average NPL coverage ratio of 85% and a capital adequacy ratio of 18%.
The report also pointed out that the Turkish banks had improved their liquidity positions, as they had reduced their reliance on foreign currency funding and increased their deposit base. The report stated that the average loan-to-deposit ratio of the Turkish banks was 97% as of September 2023, which was lower than the peak of 120% in 2018. The report also estimated that the Turkish banks had enough foreign currency liquidity to cover their short-term external debt obligations.
BofA Report Contrasts with Other Ratings Agencies
The report by BofA was more positive than the recent assessments by other ratings agencies, such as Fitch Ratings and Moody’s Analytics, which have highlighted the operating environment challenges and the profitability and asset quality risks for the Turkish banks. Fitch Ratings, in its peer review of the large Turkish banks published in October 2023, stated that the ratings of most Turkish banks were still constrained by the volatile macro and political conditions, the currency weakness, the inflationary pressures and the exposure to investor sentiment. Fitch Ratings also warned that the tail risks relating to the upcoming elections in 2023 could exacerbate the difficulties for the banks in the medium term.
Moody’s Analytics, in its report on the Turkish banks published in September 2023, stated that the high inflation posed profitability and asset quality risks for the Turkish banks, as it increased the operating and funding costs and contributed to the deterioration of the loan portfolio. Moody’s Analytics also noted that the internal capital creation rates of the Turkish banks were modest and below the asset growth rate, which could constrain their future growth potential.
BofA Report Reflects the Resilience of Turkish Banks
The report by BofA, which was based on the feedback from a diverse group of investors, reflected the resilience and the adaptability of the Turkish banks, which have managed to cope with the adverse economic and market conditions and maintain their financial performance and stability. The report also indicated that the Turkish banks had attractive valuation and growth prospects, as they traded at low price-to-book ratios and offered high return on equity and dividend yields. The report also suggested that the Turkish banks could benefit from the expected recovery of the Turkish economy in 2023, which could boost the credit demand and the income generation.
