TEXT-S&P revises Turkey Banking ind country risk assessment

(The following statement was released by the rating agency)

— We see moderately improved economic stability in Turkey.

— We believe Turkey’s low levels of household and corporate debt and
reduced uneconomic lending by state banks have limited the recession’s impact
on the country’s banks.

— We are revising our BICRA on Turkey to Group 6 from Group 7 and our
economic risk score to ‘7’ from ‘8’.

— Economy-wide vulnerability to cross-border capital flows and currency
devaluation in our view remains an area of risk.

April 21 – Standard & Poor’s Rating Services said today it has revised its
Banking Industry Country Risk Assessment (BICRA) of the Republic of Turkey
(foreign currency (Read more about trading foreign currency. BB/Positive/B, local currency BB+/Positive/B, Turkey national
scale trAA+/–/trA-1) to Group 6 from Group 7.

The revision reflects a moderate improvement in the stability and credit
risk profile of the Turkish economy, the reduced lending share of poor
performing state-owned banks in the industry, and improvement in bank
regulation. Banking systems in the same BICRA group as Turkey include, among
others, China, India, Thailand, and Peru. Read More About Banking Crisis.

The BICRA integrates our view of the strengths and weaknesses of a
country’s banking system compared with those of other countries, on a scale
ranging from Group 1 (the strongest) to Group 10 (the weakest). We have also
revised Turkey’s economic risk score, a subcomponent of the BICRA, to ‘7’ from
‘8’ (also on a 1-to-10 scale, with ‘1’ representing the lowest risk).

The Turkish economy and financial industry remain vulnerable to a potential
devaluation of the Turkish lira, owing to the country’s reliance on high
cross-border portfolio investment flows and the open foreign currency (Read more about trading foreign currency. positions
that industrial companies typically maintain.

In our view, Turkey’s economy-wide credit risk profile is intermediate;
system-wide household and corporate leverage is low, as medium and long-term
financing remain underdeveloped in the wake of decades of very high inflation.
Since 2004, inflation has been more muted but still running higher than that of
most peer countries.

The Turkish banking system is now more resilient to shocks, in our opinion,
due to the elimination or restructuring of marginal and troubled institutions
and the clean-up of state banks since the country’s turbulent period in 2001.
We view the good system-wide operating results of banks as a first line of
defense for anticipated credit losses.

Banks currently carry moderate levels of nonperforming and restructured
loans (we estimate these at 8%-9% of total loans at present) in light of the
difficult economic environment since 2008. We expect modest further
deterioration in asset quality in 2010 as the recession’s lagging effects work
through banks’ portfolios. Still, the undeveloped state of banking
intermediation in Turkey (relative to other developing markets) limits risks.

In our opinion, Turkey’s system-wide credit profile is not threatened with
the potential unwinding of a real estate bubble. Turkish banks have reduced
their proportional use of cross-border funding over the past decade.
System-wide funding is supported by good retail franchises, but banks have a
relatively short maturity funding profile and consequently the system shows a
mismatch between assets and liabilities.

We note the country’s regulatory and supervisory framework has improved in
the past decade, particularly with respect to tightened rules on related party
and foreign currency (Read more about trading foreign currency. lending and the scaling back of the uneconomic lending
programs of state banks.

We have affirmed our estimation of Turkey’s gross problematic assets (GPAs)
at 25%-40%, representing the potential amount of cumulative GPAs that we
believe the country’s financial system could record over the full course of a
severe economic downturn. GPAs include nonperforming loans (NPLs), restructured
and foreclosed assets, as well as overdue loans and NPLs sold to
special-purpose vehicles.

Turkey’s present level of GPAs is well under the low end of the 25%-40%
range, but we believe that a longer lasting downturn could result in higher
cumulative GPAs.

As we see good prospects for Turkey’s economic rebound at present, in our
opinion the rate of GPAs to total loans likely will remain well under the low
point in the range over the medium term.

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TEXT-S&P revises Turkey Banking ind country risk assessment