6 min read 28 Aug 18
Also available in: Español
Summary: Turkish banks have been subject to closer scrutiny over the past weeks as political events have triggered a confidence crisis with a run on the Lira (down by 38% year-to-date vs the dollar and by 26% since end-June, the banks’ last reporting date), a sizeable widening in Turkish govt yields, and an even sharper widening in banks’ unsecured debt yields.
From a fundamental standpoint, there are valid reasons to be concerned about the Turkish banking sector due to the deteriorating macro outlook aggravated by structural weaknesses:
Sources: M&G, banks’ financial statements.
The willingness and capacity of a parent bank (and shareholders) to provide support for capital and funding is quite unpredictable although foreign banks have so far been supportive of their Turkish subsidiaries. For instance, BBVA acquired an additional stake of 9.95% in Garanti in 2017, raising their interest to just below 50%. In June, Unicredit injected $500 million of equity to support Yapi Kredi, held through a JV with an industrial Turkish group. Low level of public debt (28% of GDP) indicates that in theory there is some capacity to support the state-owned banks. Yet, state-owned banks have been penalised by the government push to fuel lending and cost of risk may have been mispriced. Finally, there are also idiosyncratic issues as well, with state-owned Halkbank facing US sanctions for involvement in Iran.
Whilst it is tempting to draw parallels between now and the last severe currency and banking crisis two decades ago, we believe that despite the current challenges the banking system looks a bit different, which doesn’t mean that the current trends are not worrisome. Today, supervision is generally tighter/better, and banks run very little open FX positions – although as said before the indirect impact of FC exposure is a real concern. Back in the early 2000s, banks were under-regulated and failures occurred amid fraud and corruption scandals which undermined sentiment. Banks’ balance-sheets were also quite different, as they mostly held government debt securities, financed with short-term funding. Liquidity was quite poor, and the weaker banks eventually had to fire-sell their bonds in exchange for liquidity. Banks also did not hedge their currency risk and experienced FC-related losses.
Sources: BDDK, TCMB, banks reports, management transcripts, BIS, Bloomberg, European Commission.
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