People withdraw Turkish Liras from automatic teller machines in Istanbul October 17, 2011. Over the past decade the savers have become savvy players of exchange rate swings, using sharp falls in the lira to buy it back. Their shrewd eye for currency values has helped to put a floor under the lira during past crises afflicting the world's emerging markets. Picture taken October 17, 2011. To match Analysis TURKEY-CURRENCY/DEPOSITS REUTERS/Murad Sezer (TURKEY - Tags: BUSINESS)

People withdraw Turkish Liras from automatic teller machines in Istanbul October 17, 2011. Over the past decade the savers have become savvy players of exchange rate swings, using sharp falls in the lira to buy it back. Their shrewd eye for currency values has helped to put a floor under the lira during past crises afflicting the world’s emerging markets. Picture taken October 17, 2011. To match Analysis TURKEY-CURRENCY/DEPOSITS REUTERS/Murad Sezer (TURKEY – Tags: BUSINESS)

(The following statement was released by the rating agency) Link to Fitch Ratings’ Report: Turkish Islamic Banks.

DUBAI/LONDON, January 25 (Fitch) Fitch Ratings says it expects Turkish Islamic banks’ loan growth to remain above the sector average, supported by new entrants to the market and increasing penetration, despite intense competition from conventional banks.

Excluding the troubled Bank Asya, Islamic banks (participation banks) expanded their loan books 34% YoY in1H15, compared with sector’s average of 25%. For 2016 Fitch forecasts 15%-20% loan growth for the sector. Including Bank Asya, loan growth at Islamic banks has lagged behind conventional banks in the past two years (up 16% YoY in 9M15). In a report published today, Fitch says return on equity could increase in 2016, underpinned by loan growth, but will be sensitive to non-performing loan (NPL) growth due to the banks’ fairly high credit risk profiles and a volatile operating environment. Fitch-rated Islamic banks’ Viability Ratings remain sensitive to deterioration in asset quality, capital or profitability.

The Islamic banks’ NPLs/gross loans ratio rose to 5.6% at end-9M15 from 3% at end-2012. This was above the sector NPL ratio of 2.9% at end-9M15. Although NPL growth across the sector has partly reflected the impact of the Turkish lira depreciation and slowing economic growth, the more marked deterioration in the NPL ratio of Islamic banks mainly relates to significant asset-quality problems at Bank Asya.

Significant foreign-currency (FC) lending at Islamic banks (a high 47% of loans), heightens credit risk and exposes the banks to further depreciation of the Turkish lira. In particular, FC- indexed loans, which are higher-risk in Fitch’s view, are significant and accounted for 72% of participation banks’ FC lending at end-9M15. This partly reflects their higher level of SME lending (two-fifths of their gross loans at end-9M15) than conventional banks. Islamic banks’ capitalisation (Tier 1 of 11.4% at end-9M15) remains reasonable, despite having declined in 2015. However, return on equity has weakened (10.9% in 9M15 excluding Bank Asya, slightly above the sector average of 10.2%) and capital could come under pressure from any further sharp fall in the lira. In Fitch’s view, targeted growth in the participation banks’ share could spur equity raising and Basel-III compliant Tier 2 sukuk issuance in the short- to medium-term.

The regulatory, legal and accounting environments are key areas of development for Islamic banking in Turkey. Fitch views government efforts to support the sector, by Turkish Treasury sukuk issuance and new regulations that allow for more sharia-compliant instruments, among other things, as favourable for growth. However, the limited range of instruments presently available to Islamic banks remains a constraint on funding, investing and lending. Liquid assets consist mainly of cash, central bank reserves and interbank assets, reflecting a lack of sharia-compliant investment products. There are five Islamic banks in Turkey, accounting for 5.1% of total banking sector assets and loans at end-9M15. Participation and conventional banks are subject to a single supervisory authority and the same disclosure requirements.

The Turkish government has a strategy to increase the Islamic banks’ share of total sector assets to 15% by 2023. To support this strategy, state-owned Ziraat Bankasi established a participation bank, Ziraat Katilim Bankasi, in May 2015; the two other state-owned commercial banks are set to follow suit in the foreseeable future.

Contact: Lindsey Liddell Director +44 203 530 1008 Fitch Ratings Limited 30 North Colonnade London E14 5GN Bashar Al Natoor Global Head of Islamic Finance +971 4 424 1242 Fitch Ratings Limited Al Thuraya Tower 1 Office 1805 Dubai Media City Media Relations: Rose Millburn, London, Tel: +44 203 530 1741, Email: rose.millburn@fitchratings.com.

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