Turkey’s banks are at risk of losing their reputation as the crown jewel of the economy as the government’s focus on growth threatens to undermine profits and cause an uptick in bad loans.
As the state ramps up spending to sustain last year’s 7.4% increase in gross domestic product, pressure is piling up on banks to keep extending loans at interest rates that barely compensate them for inflation, narrowing profit margins.
President Recep Tayyip Erdogan has for years criticised the central bank for using interest rates to tame inflation, while also urging banks to lower their charges.
Concerns over the government’s economic policies have also caused the lira to plunge to a record low against the dollar. That’s squeezing borrowers, many of whom are heavily indebted in foreign currency. Rate increases by the central bank have also been criticised by some analysts as not being enough to contain inflation near a record high.
“Turkey is now running the risk of damaging the banking sector,” said Inan Demir, an economist at Nomura International. The weakening lira is hitting the balance sheets of companies, which “will eventually lead to an erosion in banks’ asset quality,” he said, adding that the central bank’s inaction is only deepening the problem. Any “foreign-currency shock may make depositors and foreign lenders even more risk averse.”
The weakness in the lira may have also contributed to the timing of the country’s biggest takeover deal since 2012. On May 22, Dubai’s Emirates NBD agreed to buy Sberbank PJSC’s Turkish unit for 14.6bn lira ($3.2bn).
The corporate sector has to repay a record $337bn in foreign-currency debt, while banks have already had to restructure 78bn liras ($17bn) in loans because of turmoil in local and international politics that’s battered the local currency. Lenders are already stretched following a government-backed credit programme that contributed to their loan-to-deposit ratios soaring to 128%, impairing their ability to keep extending credit while making the companies themselves heavily dependent on foreign borrowing.
“Asset quality is already showing the first cracks as we see a rise in restructured loans, which is likely to increase as lira’s weakness persists,” said Tomasz Noetzel, a Bloomberg Intelligence analyst covering eastern European lenders. “Defending margins will become more complicated. A potential GDP slowdown will only exacerbate the pain of generating revenue.”
So far, the banks are holding up, with non-performing loans holding below 3% of total credit despite the problems experienced in the economy and political spheres. The nation’s lenders also have more than enough buffers to protect themselves against any storms, boasting a capital adequacy ratio of 17%, well above 12% required by the regulator.
The banking industry is strong enough to navigate through the risks and the economy has remained resilient against shocks, the Turkish Banking Association said on May 16. Repayments on loans that have been restructured – which comprise only 3.8% of total credit – are at 80%, it said.
The operating environment for banks has become more challenging, which could cause the NPL ratio to deteriorate to 4% by the end of this year as more companies face financial difficulties and the construction sector weakens, Moody’s Investors Service said in a note on May 15. Moody’s expected economic growth to slow 4% in 2018 and 3.5% next year.
Investors are already prepared for more hardship for Turkey’s lenders, with the 13-member Borsa Istanbul Banks Index losing 9.4% over the past 12 months compared with an 8.3% gain in the Borsa Istanbul 100 Index.




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