Analysis Banking & Finance Turkey and Egypt can trip up Gulf lenders says analyst By Andrew Hammond, Matt Smith October 12, 2023 Reuters/Cagla Gurdogan A worker counts Turkish lira at a currency exchange in Ankara. Turkish companies' end-2023 balance sheets would be inflation-adjusted Gulf banks are in a resilient position as oil production cuts crimp economic growth, but lenders could face headwinds from macroeconomic volatility in Egypt and Turkey, an S&P Global analyst said this week. In Turkey, Dubai’s Emirates NBD owns Denizbank and Qatar National Bank owns QNB Finansbank, the country’s eighth and ninth largest banks by assets, S&P Global data shows. Kuwait Finance House’s Turkish subsidiary Kuveyt Türk is ranked 10th largest. “One of the risks we’re concerned about stems from operations abroad,” said Benjamin Young, director of Financial Institutions Ratings. “There are exposures in high-risk or higher risk jurisdictions, particularly for GCC banks … we’re thinking of Turkey and Egypt.” Turkey’s bounced cheques, loan and card defaults soar Sustained rate hikes fail to reverse Turkish lira slump Egypt’s economic outlook darkens as IMF postpones review Young said he was continuing to expect the Turkish lira to depreciate. “If you have a subsidiary in that jurisdiction there are a number of channels through which those risks can end up transmitting back onto your own balance sheet,” he told an S&P forum on Islamic finance in Dubai on October 10. “From Turkey’s point of view you have a hyperinflation adjustment that has to be taken into account,” Young added. Emirates NBD subsidiary Denizbank’s lira-denominated loans grew 24 percent in the first half of 2023 in local currency terms. Its loan book actually shrunk 3 percent when calculated in UAE dirhams, which are pegged to the dollar. Nevertheless, Denizbank’s first-half profit more than tripled year-on-year to AED 1.9 billion ($518 million). Resurgent inflation Turkey’s annual inflation is resurgent, hitting a 10-month high of 61.5 percent in September 2023. In response the central bank, under new leadership following Turkish president Erdoğan’s re-election in May, has raised the benchmark interest rate to 30 percent from 8.5 percent over the past four months. This so-called monetary tightening led S&P Global Ratings this month to revise its outlook on Turkey to “stable” from “negative”, citing new policies aimed at stabilising the exchange rate, and affirmed its rating at “B”. Qatar National Bank (QNB) says it expects problems in asset quality at QNB Finansbank as interest rates rise closer to inflation levels, but that it has been building provisions for this purpose. “We are covering for our asset quality risks in Turkey, which may come down the line, but it would be more of a 2024 issue,” QNB senior vice president Durraiz Khan said in July. While Qatar was the main location for QNB loans in 2023, Turkey was second, accounting for 8.9 percent. Turkey also provides 8.8 percent of deposits. Egypt ‘a little bit better’ Several Gulf banks are also present in Egypt, attracted by the country’s large, young population and relatively low penetration of financial services. QNB Alahli is Egypt’s fourth largest bank by assets, S&P Global data shows, while First Abu Dhabi Bank Misr is seventh. Abu Dhabi Islamic Bank and National Bank of Kuwait also have sizeable Egyptian subsidiaries. QNB Alalhi, which has 232 branches in Egypt, provided 3.7 percent of Qatar National Bank’s total loans and 6.9 percent of its deposits as of September 30. The unit’s nine-month profit in Egyptian pounds surged 72 percent year-on-year, but was unchanged in dollar terms due to currency devaluation. Similarly, QNB Alalhi’s assets fell 16 percent in dollar terms but rose 32 percent in Egyptian pounds. “In Egypt where there are a lot of macro constraints we’re expecting the pound to depreciate, but the asset quality is going to hold up a little bit better than Turkey,” Young said. Egypt has suffered persistent foreign currency shortages due to increasing external debt service payments over the next two years. There was an improvement in the current account deficit to 1.2 percent of GDP at the end of fiscal 2023 from 3.5 percent in fiscal 2022 on the back of strong import compression and improved Suez Canal and tourism revenues. The government has begun asset sales to help restore the foreign currency liquidity buffer. These proceeds include the $1.9 billion in sales finalised on July 11, of which $1.65 billion was in foreign currency. Another $3.5 billion will be raised from sales in fiscal 2024. Egypt has already imposed import restrictions to curb forex outflow, while at least two national banks have suspended using Egyptian pound debit cards outside the country.