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DBRS: Impact of Turkish Lira crisis on large European banks

Tuesday, August 21, 2018
Opalesque Industry Update - A number of European banks with exposure to Turkey face some impact as a result of the current Turkish Lira crisis. The banks most exposed to Turkey through their subsidiaries or equity investments are BBVA, UniCredit, BNPP, ING and HSBC.

The capital impact for these banks appears manageable based on DBRS's simplified stress scenario. However, DBRS expects negative impact on profitability and some deterioration in asset quality for some of these banks.

DBRS's main conclusions are as follows:

• There could be a negative impact on the Banks' profitability due to lower earnings in the local subsidiaries as well as their Turkish government bond portfolios and foreign exchange effects. In addition, it is possible that the five European parent banks might have to provide funding to their Turkish subsidiaries in case the latter are not able to repay their short-term foreign currency liabilities following a continued depreciation of the Lira. This is due to the high exposure of the five Turkish subsidiaries to foreign currency loans.

• DBRS expects the asset quality profile in the local subsidiaries to worsen in the near-term given the significant decline of the Turkish Lira and the deterioration in economic conditions.

• Nevertheless, DBRS considers the overall impact to be manageable given the Banks' diversified business models and strategies in place for their emerging markets exposures.

• DBRS will continue to monitor the situation in case the Lira crisis spreads to other emerging countries where European banks are present or if capital controls are put in place by the Turkish government to mitigate the currency's descent.

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