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Banks Remain a Sore Spot for Turkey ETF

This article was originally published on ETFTrends.com.

The often controversial and volatile iShares MSCI Turkey ETF (TUR) is up nearly 20% over the past month, a noteworthy rally for one of this year's worst-performing single-country emerging markets exchange traded funds.

TUR is still down more than 45% year-to-date and the Turkish economy faces myriad challenges, including weakness in the banking sector.

Turkey’s central bank has even hiked interest rates 6.25 percentage points to fight the rising inflation and support the weakening lira currency. The Turkish government has also implemented a new economic program with lower growth targets as a response to the current market environment.

“Fitch Ratings has downgraded the Long-Term Foreign-Currency Issuer Default Ratings (LTFC IDRs) of 20 Turkish banks and their subsidiaries. The agency has also downgraded the Viability Ratings (VRs) of 12 banks,” said Fitch Ratings in a recent note.

Why It's Important

The state of affairs for Turkish banks is critical for TUR because the fund devotes 26.34% of its weight to the financial services sector, its largest sector allocation. Four of TUR's top 10 holdings are financial services stocks.

“The downgrades of the banks' VRs reflect increased risks to their stand-alone credit profiles over the rating horizon since the last review of these institutions on 20 July 2018,” said Fitch. “In Fitch's view, the banks' performance, asset quality, capitalisation and liquidity and funding profiles are now more likely to come under pressure as a result of the further depreciation of the Turkish lira (by about 20% against the US dollar since the last rating review), the spike in interest rates (driven by the increase in the policy rate to 24% from 17.75% on 13 September) and the weaker growth outlook (Fitch has revised downwards its forecasts for GDP growth to 3.8% in 2018 and 1.2% in 2019).”

To help remediate the currency crisis, the Turkish central bank lowered the reserve requirement for banks by 250 basis points to improve liquidity conditions.

“Fitch believes that near-term pressure on the banks' ratings has moderated as a result of the eventually orthodox monetary policy response, the stabilisation of the lira exchange rate, recent evidence of external market access - albeit at a higher cost - and the absence of significant deposit outflows since mid-August,” according to the ratings agency.

For more information on the Turkish markets, visit our Turkey category.