It’s going to get worse before it gets better for GCC banks with Turkish subsidiaries

Gulf banks with subsidiaries in Turkey are expected to incur higher net losses this year, before disinflation in Turkey begins to reduce the lenders’ losses, Fitch Ratings said in a research note.

FOR CONTEXT- GCC banks’ Turkish subsidiaries adopted hyperinflation reporting in 1H FY 2022 in response to cumulative inflation in Turkey exceeding 100% over three years. This reporting requires banks to include the net monetary losses in their income statements by restating their non-monetary assets and liabilities to reflect the impact of hyperinflation.

Emirates NBD was among the hardest-hit, along with Qatar National Bank (QNB), with both lenders seeing their risk-weighted assets ratios, Fitch’s core profitability metric, fall by 60-70 bps.

The outlook: Banks are now expected to turn in net losses of USD 2.8 bn this year — up from USD 2.6 bn in 2023 — on the back of high inflation in Turkey, which is expected to average at 53% this year. Fitch had previously forecasted 2024 net losses for these banks would come in at USD 1.3 bn. However, net losses are expected to halve next year to USD 1.4 bn as disinflation takes hold in Turkey, with Fitch expecting inflation to cool to 29%.

GCC banks are expected to no longer rely on hyperinflation reporting from 2027, as disinflation should reduce the subsidiaries’ net monetary losses,'' according to Fitch. Additionally, “slower TRY depreciation should reduce the adverse capital impact from currency translation losses,” as the firm predicts the Turkish Lira’s depreciation against the USD to slow down by 22% in 2024 and 7% in 2025 resulting in “smaller currency translation losses and less capital erosion” over the two years.

Traditional monetary policy will do some good: The banks’ losses will gradually fall in tandem with the decline in economic risks and the implementation of “traditional monetary policies,” head of Middle East Banks at Fitch Redmond Ramsdale told Asharq Business (watch, runtime, 5:23). Fitch upgraded the ratings of 18 Turkish banks, including GCC lenders’ subsidiaries, following Turkey’s sovereign rating upgrade to ‘B+’ with a positive outlook from ‘B’ with a stable outlook in March, signaling growing confidence in inflation falling on the back of the policies the country has been implementing since June 2023.