Political uncertainties globally and within Turkey, as well as a weakening of the Turkish lira, are making life more unpredictable for Turkey’s banks.
Turkish president Recep Tayyip Erdogan survived a coup d’état in July 2016 and has since won a referendum in April 2017, which handed him wide-sweeping powers. With the impact of the change to Turkey’s constitution yet to be determined, financial institutions in the country are seeking to adapt to upcoming challenges.
“The main risks for Turkish banks for 2017 lie in the areas of funding and asset quality, mainly due to the ongoing depreciation of the Turkish lira and political uncertainties in Turkey and neighbouring countries,” said Magar Kouyoumdjian, primary credit analyst for Turkish banks at S&P Global Ratings, in a report.
Currency woes
The Turkish lira had fallen to an all-time low of 0.26 to the US dollar in late January 2017 before slightly recovering to 0.29 as of April 20. On April 20, 2015, the lira traded at 0.36 to the dollar.
Although Turkish banks do not “carry material open foreign-currency positions”, banks have a “substantial amount” of loans denominated in foreign currencies, according to Mr Kouyoumdjian.
According to credit rating agency Moody’s, some 33% of all loans provided across the Turkish banking sector were foreign exchange (FX)-denominated as of October 2016. “The FX positions of Turkish corporates are becoming more fragile,” says Can Demir, banking analyst at investment bank Wood & Company, who notes that borrowing in FX against revenues in Turkish lira is especially risky in times when the lira is unstable.
Several sectors of the Turkish economy could be affected by this, including tourism – already hit by the sharp drop in arrivals since 2016’s failed coup – and energy, where development costs are invariably priced in US dollar, while power prices do not always closely track exchange rates.
Overall, S&P expects “a moderate deterioration” of asset quality in 2017. Non-performing loans (NPLs) are expected to reach about 5% of total gross loans compared with 3.3% as at year-end 2016. NPLs had already increased in the past year, from year-end 2015 levels of 3%.
Asset quality challenge
Asset quality, as well as banks’ profitability, could face a further hit in 2017 as banks are giving in to demands for lower loan rates. In August 2016, Mr Erdogan reportedly called for annual interest rates on mortgages to be lowered to about 9% from an average of more than 13%, in what the government sees as a way to boost lending and the economy.
Banks have since reduced their mortgage rates, for the benefit of both consumers and the construction sector, with rates at the end of April of about 11%, according to data from Turkey’s central bank.
However, with the central bank’s overnight lending rates at 9.25%, analysts are questioning how far these rates are sustainable for banks. “We can’t see how much cross-selling the banks are doing but it’s very likely they are making losses,” says Mr Demir.
While the government is keen to boost bank lending – loan growth in early April reached 22% compared with 12.5% immediately before 2016’s failed coup – experts caution that the provision of artificially lower interest rates on credits could have a further negative impact on banks’ asset quality.
Dealing with NPLs
In an attempt to address NPLs, the government has boosted its existing Credit Guarantee Fund by an additional Tl250bn.
However Mr Demir warns there is a risk NPLs could rise to a higher level than the capacity of the fund and leave the banks holding loans for the fund with no collateral. “As long as it is used in the right way [the fund] is very positive, but it is important for [the project] to be sustainable,” he says.
Launched in February through state-owned Halkbank, new funding guarantees loans for small and medium-sized enterprises (SMEs) are encouraging the growth of small companies, which in Turkey are seen as the engine for future economic growth. “[The initiative] works for SMEs that have a good project or need to export but have no collateral,” says Mr Demir.
However, some questions remain, as Inan Demir, an economist at Japanese financial holding company Nomura, points out. He says the recent swift growth in the volume of loans being guaranteed in Turkey suggests banks have been repackaging existing loans under the new scheme – a move that may appear to go against the spirit of the scheme. However, this has advantages for banks “as they won't face any losses on these loans above the first 7%”, he says.
And there are other initiatives to deal with NPLs, such as Hayat Varlık, the country’s largest NPL and asset management company. The company, which recently merged with Turkasset Varlık Yonetim, seeks to acquire NPLs from financial institutions, a business case the European Bank for Reconstruction and Development (EBRD) has supported with a Tl120m syndicated loan to partly refinance Hayat’s maturing debt and to provide more capacity for further NPL purchases.
Wealth fund changes
Meanwhile, state-owned banks are facing further change after amendments to government policy have seen Ziraat Bank and Halkbank (respectively Turkey’s second largest and sixth largest banks by assets as of full-year 2015 data) transferred into the country’s newly created sovereign wealth fund, Türkiye Varlık Fonu.
The fund also holds state pipeline operator Botas, state oil company TPAO, national post office PTT, as well as the state’s stakes in national carrier Turkish Airlines and national fixed-line operator Turk Telekom, leading S&P to describe it as more akin to a “national development bank”.
The stated rationale is to use the fund to cut the cost of borrowing for major infrastructure projects and to avoid the need for Treasury guarantees. However, analysts suggest this may not be so easy.
“Unless they use the assets as collateral, the cost of funding won’t be below Treasuries,” says one Istanbul-based banking analyst, speaking on condition of anonymity. They pointed out that this would incur the risk of debt holders taking control of assets in the event of a default.
While the inclusion of Ziraat and Halkbank appears to rule out long-mooted plans for their part-privatisation, experts expect the banks to continue to operate as normal in the short term.
“From our discussions with the banks, we understand that there has been no immediate change to their strategies or operations resulting from the transfer of their shares to the sovereign wealth fund,” says Lindsey Liddell, a director for financial institutions at Fitch Ratings.
Reaching the underbanked
Turkey still remains widely underbanked, especially in rural areas such as Anatolia and, even more significantly, among women. Including these underbanked sections of society is one of the main aims of international financial institutions such as the EBRD and International Finance Corporation.
Since the launch of the EBRD’s finance and advice programme for women in business in 2014 – put together with the EU and Turkey – some 12,000 female-led businesses have received loans worth a total of Tl600m provided through banks partnering in the programme: Garanti, QNB Finansbank, TEB, Isbank and Vakıfbank.
“This programme is a wonderful example of how international institutions and local authorities can join forces and deliver for the benefit of the economy and society,” says Jean-Patrick Marquet, EBRD managing director for Turkey. “Supporting female entrepreneurs is a key part of our inclusion agenda to which the EBRD pays the highest attention.”
More than 5500 female entrepreneurs and managers in Turkey have also benefited from advisory support provided by qualified local consultants and international experts, and have participated in seminars, training workshops, networking activities and mentoring services.
Across sectors and products, Turkey has been the EBRD’s top investment destination in both 2015 and 2016, and EBRD president Suma Chakrabarti expects Turkey to remain the destination receiving the largest share of investments in 2017, despite being “in a state of flux”.
“There is a great deal of uncertainty [in Turkey] and that is having an impact on some foreign investors and some domestic investors in terms of adopting a ‘let’s wait and see’ approach,” he told The Banker.
Indeed, waiting and seeing is also likely to be the course of action for Turkey’s banks in 2017, as the outlook seems as hazy as ever.
