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Turkish vote could bode badly for banks

The outcome of the Turkish referendum to hand broader powers to president Recep Tayyip Erdogan is causing ripples of worry regarding the country's banks.
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Across the Western world, electorates are voting for change and uncertainty – from Donald Trump in the US to Brexit in the UK. Now Turkey has joined the fray. While the outcome of the Turkish referendum – which will hand broader powers to the country's president – was expected and president Recep Tayyip Erdogan's victory can be characterised as the 'base case' scenario, it still comes with a host of autocratic changes for the population.

A change in the constitution will allow Mr Erdogan wide-ranging powers, including the appointment and dismissal of ministers and high court judges, as well as abolishing the post of prime minister.

Turkish banks have already felt the president's strong hand, when in 2016 he strongly recommended that financial institutions should lower their interest rates on mortgages by about 4 percentage points because not doing so was, reportedly, an "act of treason" as, he argued, the financial institutions needed to support the economy. Banks did react, despite high funding costs, and across the board lowered rates by more than 2 percentage points – analysts expect this to have an impact on banks' profits and potentially asset quality going forward.

While any impacts and effects of Erdogan's Turkey under the new presidential system are yet unclear, the fact that the financial sector has already had to accommodate his wishes indicates that increasing political interference is likely.

The good news is that Turkey's banks are going into the future with solid fundamentals. Capitalisation is high – although changes by the regulator will make historical and international capitalisation comparisons more difficult going forward; a young and consumerist population have seen banks adapt to technological challenges early; and there is huge scope to embark into underbanked communities in rural areas such as Anatolia, as well as generally improving the business of banking for women. And international financial institutions (IFIs) such as the European Bank for Reconstruction and Development and International Finance Corporation are showing their commitment to the country's banking sector through equity stakes in institutions such as Odeabank, and through lending support especially for initiatives including reaching out to the underbanked.

So while the political system is in a state of flux, Turkish banks and IFIs are ploughing on, hoping that any political interference with their businesses will be bearable. But the reality is, Turkey is travelling into the unknown.

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Read more about:  Analysis & opinion , Western Europe , Turkey