Fitch: Reasonable medium-term prospects for Turkish Islamic banks
The Turkish government aims to increase Islamic banks' market share in total sector assets to 15 per cent by 2025, from 4.7 per cent at end-9M16.
Fitch says that downside risks to asset quality remain, given high SME and foreign-currency lending (including foreign currency-indexed loans) on Islamic banks' balance sheets, and increases in watch-list and restructured loans. Islamic banks' NPLs/gross loans ratio stood at 4 per cent at end-9M16, above the sector average of 3.3 per cent, although this was partly driven by a fall in lending at the second-largest participation bank Turkiye Finans Katilim Bankasi in 9M16.
An average equity/assets ratio of 9.5 per cent at end-9M16 for the Islamic banks provides only a moderate buffer to absorb unexpected losses, in Fitch's view. This is because of significant asset quality risks, the possibility of further lira depreciation, pressure on internal capital generation from the challenging operating environment, and moderate unreserved NPLs relative to equity.
The Islamic banks report below-sector-average external funding, while higher Turkish Treasury Sukuk issuance has increased the volume of Shari'ah-compliant liquidity instruments eligible for repo with the Central Bank of Turkey. Several participation banks have also carried out Tier 2 and senior unsecured Sukuk issues. Foreign-currency liquidity at the Fitch-rated Islamic banks is underpinned by potential shareholder support.
Fitch-rated Islamic banks' ratings are sensitive to changes in support from their foreign parents. The Negative Outlooks on the Islamic banks reflect the Negative Outlook on the Turkish sovereign. A sharp deterioration in asset quality or capital ratios would be negative for the banks' standalone credit profiles and could lead to downgrades of the banks' Viability Ratings.