Turkey's banks eye higher profits amid policy normalization

Soaring Turkish benchmark interest rates have eased pressure on banks' margins and will help many major lenders post higher profits this year and next.

The country's banks toiled under Turkish President Recep Tayyip Erdoğan's unorthodox monetary policies, which stoked inflation, capped loan rates and forced lenders to buy low-yielding government securities to help support the ailing lira.

Yet following Erdoğan's reelection in May, the veteran AK Party leader has changed tack, appointing market-friendly finance officials. The central bank on Nov. 23 hiked rates for a sixth time since June, lifting Turkey's benchmark to a two-decade peak of 40%, and from 8.5% before the vote. Most large banks' share prices have increased sharply since rates began rising.

Additionally, all six of the country's largest listed banks are expected to report higher net income in 2024 than they did in 2022, after mixed results in 2023, according to analyst consensus estimates compiled by S&P Global Market Intelligence. The banks did not respond to requests for comment.

"The third quarter was the first in a long time that banks' margins improved, especially in terms of loan-to-deposit spreads, and these will expand further in the first half of 2024," said Sevgi Onur, vice president and banking analyst at investment company Seker Invest in Istanbul. "The main theme for Turkish banks is the interest rate hike cycle."

Future earnings

The major listed banks' net income performance is set to be mixed for full-year 2023, and then to improve across the board in 2024, according to analyst consensus estimates. Turkiye Garanti Bankasi A.S., Türkiye Is Bankasi A.S. and Yapi ve Kredi Bankasi AŞ are expected to record year-over-year increases in 2023, while Türkiye Halk Bankasi AS, Türkiye Vakiflar Bankasi and Akbank TAS are set for a decline.

Overall, bank sector earnings will grow 40% in 2023 and a further 20% next year, Seker Invest forecasts. Bumper fee and trading income, which has more than doubled as banks hiked charges, will boost this year's profits and offset weak full-year net interest income (NII).

"Next year, those should reverse, with NII increasing and fee income normalizing," said Onur, adding that real loan growth could be negative with inflation forecast to be around 40% in 2024.

Garanti Bank, owned by Spain-based Banco Bilbao Vizcaya Argentaria SA, stands to benefit the most. Its 2023 net income is projected to rise 10.4% year over year, and 2024 net income by a further 6.5%.

"In the last couple of years, private banks have outperformed state banks in terms of margins, return on equity, profitability and asset quality — and will probably continue to do so in 2024," said Onur.

Margins

Banking sector margins, which have been negative in 2023, are expected to become positive toward year-end and into 2024, Garanti Bank's CEO said during a call with analysts.

Akbank's CEO, Cenk Kaan Gur, told analysts the bank's net interest margin (NIM), especially in lira-denominated lending, had improved significantly in the third quarter, and that its lira "core spreads" were now positive. Core spreads, which in Turkey refers to the difference between deposit and loan interest rates, will expand further until the second half of 2024, Seker Invest's Onur predicts.

Vakiflar Bank expects its NIM to increase in the fourth quarter thanks partly to the inflation-linked government bonds it holds, its head of investor relations told an analyst call.

Rule reversal

The banking regulator had introduced more than 200 new rules in the past two years but has begun to eliminate many as part of government efforts to woo foreign funds. One is the rolling back of the foreign-exchange-protected deposit scheme, whereby savers were protected from lira depreciation.

"The transition to a more market-friendly policy approach will definitely be helpful for the business environment, financial sector and also investors," Akbank CEO Gur told analysts.

The tighter monetary policy path has also tempered inflation somewhat, with annual inflation in October at 61.36%, down from September's nine-month peak of 61.53%.

Tighter financing conditions, a depreciating lira and sluggish economic activity will impact borrowers' ability to make loan payments, and banks' credit losses may increase to about 3.5% in 2024 from 3.2% in 2022, S&P Global Ratings analyst Anais Ozyavuz wrote in a Nov. 16 report.

Nevertheless, normalizing policies should help rebalance the Turkish economy in the next two years or so, Ozyavuz said.

The changes are helping banks to refinance short-term debt, and moves to unwind the forex-protected deposit scheme should help reduce dollarization in the financial sector, Ozyavuz said.

As of Dec. 4, US$1 was equivalent to 28.92 Turkish lira.