LONDON

The outlook for the Turkish banking system is negative due to downside risks related to funding and asset quality, credit rating agency Moody’s said.

The operating environment for Turkish banks will also remain challenging due to a combination of factors including slowing economic growth, ineffective monetary policy, currency depreciation and high unemployment, Moody's said in a report published on Tuesday.

“These factors will suppress loan demand and pressure borrowers' capacity to repay debt. Moody's forecasts that Turkey's GDP will slow to 4 percent in 2018 and 3.5 percent in 2019 from 7 percent estimated last year,” Moody’s added in the report.

Noting that the overall picture suggests that the risk of an external shock to Turkey, while still quite low, had increased.

“This makes its banking system more susceptible to a loss of investor confidence,” Moody’s said.

“Banks' asset quality will likely deteriorate due to the challenging operating environment, financial difficulties among some large borrowers and the weakening construction sector. Problem loans will likely rise to around 4 percent in 2018, from 3 percent in 2017. Nonetheless, capital levels should remain adequate, even if the Turkish lira continues depreciating and loan growth is above internal capital generation.”