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Lira depreciation impacts GCC banks
August 13, 2018, 5:04 pm
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Several commercial banks in the six-nation Gulf Cooperation Council (GCC) bloc that have exposure to Turkey are likely to be impacted, both in terms of their earnings and in quality of their assets, following the sharp fall in the country’s currency, the Lira. 

According to market analysts, among the GCC banks that could take a significant hit in earnings from the depreciation in the Lira, are Burgan Bank and Kuwait Finance House (KFH) in Kuwait, as well as the Commercial Bank of Qatar (CBQ) and Qatar National Bank (QNB) in Qatar.

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

As for the earnings, Turkey contributes 19 percent and 18 percent of earnings for KFH and Burgan respectively, and 14 percent and 8 percent of earnings for QNB and CBQ respectively.

Though there will be a negative impact on core equity capital of the parent banks driven by FX revaluation losses as a result of depreciation in the Lira, the majority of the exposed banks, with the probable exception of CBQ and Burgan Bank, are more than adequately capitalized, two banks namely CBQ and Burgan who have relatively thinner capital adequacy ratios.

Economists said the contagion effect of Turkey’s currency turmoil could be limited to exposures specific to companies that have business links in the country and to individuals with Turkish investments, but the impact of Lira’s dramatic depreciation could persist for some time to come.

Analysts believe that 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.

Things could get worse before they get better, say financial pundits on Turkey as the economic situation is largely self-inflicted, resulting from a series of poor domestic economic policies. They point out that 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.

 

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