Turkey's banks need to prepare for slower lending growth: ECB paper

Turkey?s banking system needs to prepare for an end to rapid lending growth and faces some risk from rising external funding needs, while western Balkan banks may struggle with bad loans, an ECB paper says.

Turkey enjoyed rapid economic growth of almost 9 percent in 2011, but the pace slowed to just 2.9 percent last year and economists see that sustained this year, missing the government?s 4 percent target.

Growth may accelerate next year but only slightly and investment growth may remain muted due to lack of structural reforms, Europe?s weak economy and violence across Turkey?s borders in Syria and Iraq.

The study, which is not the official view of the European Central Bank, says Turkish banks are generally strong but their large government bond holdings expose them to the risk of sovereign debt shocks. A big increase in foreign currency loans to corporations is also a vulnerability, the authors said.

?The main challenge going forward will be to achieve a ?soft landing? as regards the pace of credit extension, both as regards the headline rate as well as in the specific segment of foreign exchange lending to the corporate sector,? said the paper, which examined banks in potential European Union member countries.
Still, banks? ability to withstand shocks appears high due to considerable capital buffers and relatively high profitability, the paper added.

In the Balkans, several countries face financial stability risks linked to weak economic dynamics and a high rate of non-performing loans.

?Albania, Serbia and Montenegro appear as particularly vulnerable in this regard,? the paper said, also noting high loan-to-deposit ratios in Bosnia and Herzegovina and Montenegro.