1 Jun, 2023
Erdoğan victory casts long shadow over Turkish bank profits
By Matt Smith and Mohammad Taqi
Turkish banks are expected to record sharply lower profits in 2023 as President Recep Tayyip Erdoğan's reelection signals a continuation of an unpredictable banking sector policy that has upended lenders' business models.
Erdoğan's victory in the May 28 runoff gives him a mandate to maintain the country's unconventional economic approach, which has seen the central bank cut, rather than raise, interest rates and push banks to de-dollarize their balance sheets in response to soaring inflation. Requirements for high rates on bank savings accounts and caps on loan rates are crimping lending income, with further credit rationing likely.
Banks' profitability in 2022 was solid, largely thanks to lower funding costs following interest rate cuts and gains on inflation-linked bonds, Serhan Gok, an Istanbul-based economist and fund manager at investment fund Arista, told S&P Global Market Intelligence. This allowed lenders to achieve a return on equity that was close to inflation levels.
"This year they have no chance [of getting] that kind of return," he said.
Net income at four of Turkey's biggest listed banks — Türkiye Vakiflar Bankasi Türk Anonim Ortakligi, Yapi ve Kredi Bankasi AŞ, Turkiye Garanti Bankasi AS and Akbank TAS — is set to decline by between 24% and 32% year over year in 2023, according to analyst consensus estimates compiled by Market Intelligence. Estimates for Türkiye Is Bankasi AS, Türkiye Halk Bankasi AS and QNB Finansbank AS were not available.
The problem is acute for banks with foreign owners, whose repatriated profits have plummeted in value because of the lira's roughly 80% slump over the past five years. Garanti Bank is owned by Spain's Banco Bilbao Vizcaya Argentaria SA and QNB Finansbank by Qatar National Bank (QPSC). Meanwhile, state-owned banks such Vakiflar Bank and Halkbank have explicitly removed profitability targets from their strategies.
Vakiflar Bank, Yapi Kredi, Garanti Bank, Isbank and Halkbank did not respond to requests for comment.
'Liraization'
The central bank has been forcing banks to convert deposits from foreign currency to lira as a way to convince savers to remain in lira deposits despite sharply negative real lira interest rates. Banks must buy local currency-denominated government bonds if their lira deposits fall short of certain thresholds. The government also guarantees depreciation-protected lira deposit accounts, and in March it scrapped an interest rate limit on them.
The central bank said June 1 that its "liraization" strategy, introduced in December 2012, is designed to "create an institutional basis for permanent and sustainable price stability" to foster macroeconomic stability and financial stability by bringing down the country risk premium, reversing the currency substitution and promoting a durable decline in financing costs.
"This would create a viable foundation for investment, production and employment to continue growing in a healthy and sustainable way," it said, echoing comments it has made previously.
Such accounts probably pay 30% to 40% yields in dollar terms, Arda Tunca, an independent Bodrum-based economist told Market Intelligence.
"Turkey cannot bear these costs — it's impossible to carry on like this in the long term," Tunca said.
Such a program is "the only way to convince people to remain in so-called Turkish deposit accounts and not demand FX," said Arista's Gok. The accounts will remain necessary unless official interest rates rise to near inflation levels, he said. Since 2021, though, the central bank has slashed the benchmark interest rate by more than half to 8.5%. Annual inflation was 44% in April.
'Not sustainable'
Lending has slowed as it becomes increasingly tough for banks to assess and price risk. Declining credit growth has lowered inflation.
"But it's not a sustainable strategy," said Tunca. "Erdoğan getting reelected was bad news for the banking sector."
The central bank may be amenable to loosening some of its liraization policies, Reuters reported, citing bankers present at a recent meeting with central bank deputy governor Taha Cakmak. The central bank supported a decision by banks to scrap a prepaid premium for those opening depreciation-protected accounts, the bankers said.
Turkey's 12-month rolling current account deficit is about $54 billion. Sovereign debt repayments and energy import costs will likely lead to a balance of payments crisis in Turkey and capital controls, Mustafa Murat Kubilay, a non-resident scholar at the Middle East Institute in Istanbul, told Market Intelligence. It is possible that this may begin in autumn or early winter, he said.
"It's going to be very difficult for the conventional banking sector," said Kubilay, predicting a "credit crunch" in the final quarter of 2023. "Private banks will implement more credit rationing."
Banks also face stricter lending criteria whereby new commercial borrowers must show evidence of the need to pay a supplier. This "credit against expenditure" method sees banks pay creditors directly, meaning borrowers cannot spend the money elsewhere or convert borrowings into foreign currencies.
Since mid-May the rules have also applied to other borrowers including small- and medium-sized businesses and state-owned entities, said Tunca.
As of May 31, US$1 was equivalent to 20.71 Turkish lira.