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Gulf banks could benefit from macroeconomic shift in Turkiye – Fitch Ratings

Gulf banks could benefit from macroeconomic shift in Turkiye – Fitch Ratings
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Mubasher: Potential macroeconomic changes in Turkiye are set to benefit subsidiaries of GCC-based banks in the country.

A disinflation in Turkiye is set to cut GCC banks’ net losses and the decelerated devaluation of the lira is expected to reduce the negative capital impact from currency translation losses, according to a report by Fitch Ratings.

If disinflation aligns with expectations and continues beyond 2025, GCC banks are likely to discontinue hyperinflation reporting from 2027, the report said.

In 2023, Turkish subsidiaries of GCC banks incurred net monetary losses of $2.6 billion, compared to $1.9 billion in 2022, amid Turkish inflation averaging 53% for the year.

Projections suggest that net monetary losses may rise to around $2.8 billion in 2024 before decreasing to about $1.4 billion in 2025, assuming Turkish Consumer Price Index (CPI) averages of 58% in 2024 and 29% in 2025.

Expectations for smaller currency translation losses and reduced capital erosion in 2024 and 2025 stem from anticipated weaker Turkish lira depreciation against the US dollar, estimated at 22% in 2024 and 7% in 2025.

Fitch Ratings has consistently viewed GCC banks' Turkish exposures as credit-negative, resulting in a one-notch deduction from the domestic operating environment scores for Burgan Bank, ENBD, QNB, and The Commercial Bank.

For Kuwait Finance House (KFH), a two-notch deduction from the domestic operating environment score reflects higher exposure to Turkiye, coupled with exposure to Bahrain.

While recent upgrades have been made to Turkish banks, Fitch maintains a credit-negative view on GCC banks' exposure to Turkiye.

However, risks are diminishing, with Fitch upgrading the domestic operating environment score for Turkish banks to 'b' with a positive outlook from 'b-' with a stable outlook. This reflects eased operating environment pressures due to sustained policy revisions and reduced external funding pressures in Turkiye.