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GCC banks with Turkish subsidiaries may report higher net monetary losses of nearly $2.8 billion in 2024 before falling to about $1.4 billion in 2025 with the onset of disinflation, Fitch Ratings said in a new report.
“If disinflation is at least in line with our expectations and continues after 2025, GCC banks will probably stop using hyperinflation reporting from 2027,” the rating agency said.
The Turkish subsidiaries of GCC banks reported net monetary losses of $2.6 billion in 2023 and $1.9 billion in 2022, with inflation averaging 53% over the year. This led to the average erosion of the banks’ operating profit/risk-weighted assets ratios by 50 basis points (bps).
UAE’s Emirates NBD and Qatar National Bank were among the worst affected, with net monetary losses reducing their ratios by 60–70 bps.
However, the GCC banks with Turkish exposure are likely to benefit from Turkey’s macroeconomic adjustment and its shift to more conventional and consistent economic policies,
According to Fitch, Turkish inflation will likely average 58% in 2024 and 29% in 2025.
GCC banks with Turkish subsidiaries adopted hyperinflation reporting in H1 2022 under the accounting standard IAS 29, as Ankara’s cumulative inflation exceeded 100% over the past three years.
IAS 29 requires banks to restate non-monetary assets and liabilities to reflect the impact of hyperinflation, leading to net monetary losses in their income statements.
On average, currency translation losses from Turkish subsidiaries eroded 80 bps of GCC banks’ regulatory capital ratios in 2023 as the Turkish lira weakened by 36% against the US dollar.
“We expect smaller currency translation losses and less capital erosion in 2024 and 2025 as we expect the lira to weaken less against the US dollar by 22% in 2024 and 7% in 2025,” the report said.
Although Fitch still views GCC banks’ exposure to Turkey as “credit-negative” despite the recent Turkish bank upgrades, the rating agency said that “risks are easing”.
(Editing by Seban Scaria seban.scaria@lseg.con)
