Dubai: A number of GCC banks that have exposure to Turkey will be impacted by the sharp decline in lira in terms their earnings and asset quality, according to banking sector analysts.

“The ongoing lira depreciation will lead to higher inflation, sluggish foreign direct investment, muted real GDP growth and higher unemployment, resulting in lower lending growth and weakening asset quality indicators for the Turkish banking system,” said Aarthi Chandrasekaran, vice-president of Shuaa Capital.

Significant impact on earnings

According to a research note from Shuaa, amongst the GCC banks, Qatar Natioanl Bank (QNB), Commercial Bank of Qatar (CBQ), Burgan Bank, Kuwait Financial House (KFH) will have significant impact on earnings on the back of the lira’s depreciation.

KFH and Burgan bank have sizeable lending exposure with 30 per cent and 25 per cent of total group loans respectively to Turkish subsidiaries, while Qatari lenders such as QNB and CBQ have 13 per cent and 15 per cent of loans to Turkey.

Turkey contributes 19 per cent and 18 per cent of earnings

As for the earnings, Turkey contributes 19 per cent and 18 per cent of earnings for KFH and Burgan respectively and 14 per cent and 8 per cent of earnings for QNB and CBQ respectively. Meanwhile in Saudi Arabia, NCB has exposure to Turkey via a 67 per cent stake in Turkiye Finansbank, but the impact is relatively negligible

“There will be a negative impact on core equity capital of the parent company driven by FX revaluation losses as a result of depreciation in the Lira. Although the majority of these exposed banks are more than adequately capitalised, we draw our attention to two banks namely CBQ and Burgan who have relatively thinner capital adequacy ratios,” Chandrasekaran said.

Turmoil

Economists said the contagion effect of Turkey’s currency turmoil will be limited to exposures specific to companies that have business links in the country and the impact could persist for some time to come.

“In Turkey, we expect things to get worse before they get better. Turkey’s economic situation is largely self-inflicted, resulting from a series of poor domestic economic policies. Over the past few years, Turkish fiscal and monetary policy has been excessively accommodative, resulting in rapid growth but also a build-up of financial vulnerabilities,” said James Cheo, Senior Investment Strategist at Bank of Singapore.