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Moody's expects Turkish capital levels to decline as Basel III comes into force

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Moody's expects Turkish capital levels to decline as Basel III comes into force

Moody's said April 7 that some Turkish lenders could need toissue additional capital to avoid a shortfall before the full implementation ofBasel III rules in 2019.

The agency said lending growth is outpacing capital creationfor Turkish banks and that it expects capital levels to decline in the nextthree to five years. It noted that lenders must phase in a capital conservationbuffer of 2.5% of risk-weighted assets by 2019, as well as a systemic riskbuffer of a further 2% of RWAs for the largest and systemically importantbanks.

With profitability at "historic lows" for Turkishbanks, Moody's said it estimates that the sector can support lending growth ofonly about 9% without depleting capital, assuming a 20% dividend payout ratioin line with the recent average trend. Thus, lenders' ability to maintainheadroom above their minimum capital requirements will depend on the growthrate of their balance sheets, the agency noted.

Declining capital headroom could enhance lenders' riskdiscipline, Moody's pointed out, and as a result, the entities with thestrongest core capital — currently the four largest banks — will have a competitiveadvantage to extend more credit, increase their market share and improve theireconomies of scale.