UAE and GCC Banks Turkish Subsidiaries Poised for Macro-Economic Opportunities
Fitch Ratings’ March upgrade of 18 Turkish banks, fueled by robust growth prospects, signals a promising horizon for financial institutions across the UAE and the Gulf Cooperation Council (GCC) region with Turkish subsidiaries. This strategic move comes amidst Turkiye’s macroeconomic recalibration towards more conventional and steadfast economic policies, as highlighted by Fitch.
The agency’s decision to elevate Turkey’s sovereign rating to ‘B+ Positive’ from ‘B Stable’ reflects growing confidence in the sustainability and efficacy of policies implemented since June 2023. Fitch’s optimistic outlook for Turkiye underscores expectations for a significant reduction in inflation and continued mitigation of external vulnerabilities.
The ripple effects of this positive shift are anticipated to extend to Turkish subsidiaries of UAE and GCC Banks , with potential benefits arising from the country’s disinflation trajectory and a more stabilized Turkish lira. Fitch projects a decrease in net monetary losses for these subsidiaries, which amounted to $2.6 billion in 2023, compared to $.9 billion in 2022, attributed to Turkish inflation averaging 53 per cent over the year.
The adverse impact of currency translation losses on capital is expected to diminish, fostering improved operational profitability and risk management. Notably, Emirates NBD (ENBD) and Qatar National Bank (QNB) were among the entities most affected by net monetary losses, witnessing reductions in their ratios by 60bp–70bp, according to Fitch analysts.
Looking ahead, Fitch anticipates net monetary losses to reach approximately $2.8 billion in 2024 before gradually declining to about $1.4 billion in 2025. These projections hinge on Turkish Consumer Price Index (CPI) averaging 58 per cent in 2024 and 29 per cent in 2025. The eventual cessation of hyperinflation reporting by GCC banks from 2027 is forecasted if disinflation trends align with expectations and persist beyond 2025.
It’s noteworthy that GCC banks with Turkish subsidiaries adopted hyperinflation reporting in the first half of 2022 under the accounting standard IAS 29, in response to cumulative Turkish inflation surpassing 100 per cent over the preceding three years. This reporting requirement, stipulated by IAS 29, necessitates the restatement of non-monetary assets and liabilities to reflect the impact of hyperinflation, thereby leading to net monetary losses in their income statements.
Fitch underscores that sustained market stability, exchange-rate equilibrium, ongoing disinflation efforts, and further relaxation of macroprudential regulations could pave the way for a potential uptick in the domestic operating environment score for Turkish banks. This, in turn, might translate into improved Viability Ratings (VRs) for select UAE and GCC Banks with Turkish subsidiaries, promising a more favorable landscape for financial endeavors in the region.
Fitch’s upgraded outlook for Turkish banks heralds a new era of stability and growth, with tangible benefits poised to accrue to UAE and GCC Banks with Turkish subsidiaries. As Turkiye continues on its trajectory towards economic normalization, strategic collaborations and prudent risk management strategies will be key for maximizing opportunities and navigating evolving market dynamics effectively.
Expanding on the implications of Fitch’s assessment, the upgraded outlook for Turkish banks not only underscores economic stability but also signals a broader shift in investor sentiment towards emerging markets. This could potentially bolster investor confidence in the region, attracting greater foreign investment and fostering economic growth.
Moreover, the anticipated reduction in net monetary losses for UAE and GCC Banks with Turkish subsidiaries is expected to have a ripple effect on the broader financial landscape. Improved profitability and risk management strategies could translate into enhanced lending capacity, facilitating greater access to credit for businesses and individuals alike. This, in turn, could stimulate economic activity and contribute to overall financial resilience in the region.
The gradual normalization of Turkey’s economic policies also presents opportunities for deeper collaboration and integration between Turkish and GCC financial institutions. As both regions seek to capitalize on emerging market growth opportunities, strategic partnerships and joint ventures could emerge as a key driver of long-term sustainability and competitiveness.
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