As Turkish corporates grapple with foreign currency debt, a rapidly depreciating lira and moderating economic growth, the country's banks face a deterioration in asset quality, analysts warned.
Isbank and Akbank, major lenders to the corporate sector, have reported sharp increases in Stage 2 or "underperforming" loans, a marker of declining asset quality. Isbank's stage 2 loans rose from 5.9% to 8.5% of gross loans in the first quarter of 2018, while Akbank's stage 2 loans rose from 5.4% to 10.2%.
Garanti Bank , another bank with large corporate exposures, had stage 2 loans worth 41 billion lira, or 16.1% of gross loans, at the end of the first quarter, though nearly half of this reflected the transition to IFRS 9.
Nicholas Smallwood, a senior emerging markets credit analyst at ING, described the increase in Akbank's stage 2 loans as "startling."
For both Akbank and Isbank, the increase in stage 2 loans — classified as loans under close monitoring — was mainly attributable to corporate borrowers, according to earning calls.
Akbank disclosed that its stage 2 tally includes loans to Otas, the owner of Türk Telekom, and Yildiz Holding AS, a conglomerate that owns food manufacturing companies including Godiva Chocolatier.
Otas owes $4.8 billion, and Yildiz $6.5 billion, and along with six other corporates they are seeking to restructure loans totaling nearly $20 billion with multiple banks, Bloomberg News reported May 31.
"This could be the start of an unravelling picture regarding corporate debt restructuring," said Magar Kouyoumdjian, an associate director at S&P Global Ratings. "From a very rosy picture, [the sector] has suddenly started to show signs of pressure. It seems to be a turning point for Turkish banks especially in terms of asset quality."
S&P Ratings downgraded six Turkish banks on May 4 following a downgrade of the sovereign rating from BB to BB–. The largest risk for the banking system is its reliance on external debt, said Kouyoumdjian, but rising distress in the leveraged private sector was also a factor in the downgrades.
The lira's dramatic weakening is expected to make it harder for some companies to meet their foreign currency denominated debt repayments. Nonfinancial corporates hold a net foreign exchange short position of $221.97 billion in March, according to the central bank.
Nevertheless, high levels of dollarization in the economy clouds the view of the possible impact. Many large companies have some form of hedging in place, some are exporting companies earning in foreign currency, while part of the exposure is government-guaranteed finance, said Kouyoumdjian.
Loan maturation is the key factor: Most forex loans are long term. "Until a company needs to pay the loan back all of this will be an accounting loss. With all that volatility in-between, it is hard to pinpoint how much damage we might have for the large corporates," said Zekeriya Ozturk, the founder of iRes Independent Financial Research & Advisory in Istanbul.
Signs of deterioration
Turkish banks are well-positioned to absorb some damage. Since recovering from a 2001 economic crisis, asset quality indicators have been "squeaky clean," said Kouyoumdjian, and Turkish banks felt the impact of the 2008 financial crisis much less than those in other emerging markets.
NPL rates are low, and despite deteriorating asset quality, Moody's expects problem loans to grow from just 3% in 2017 to 4% in 2018 across the 17 banks it rates — still better than the average for Turkey's emerging market peers.
This is partly because of denominator growth. Lending grew 21% in 2017, driven by a 250 billion lira government initiative to boost lending to SMEs, Ozturk said.
Most large Turkish banks also regularly sell problematic assets, while regulatory forbearance allows them to restructure problematic loans before they become nonperforming, preventing the deterioration of asset quality indicators on banks' books, Kouyoumdjian noted.
Despite the growing volume of loans to be restructured and potential for higher NPL ratios, Ozturk said that high levels of capitalization across the banking sector means a rise in problem loans would be a profitability issue rather than constitute a crisis.
The core tier one capital ratio averaged 12.46% across all Turkish banks in 2017, up slightly on the 11.88% reported in 2016, according to S&P Global Market Intelligence data.
A dip in growth could add further strain to corporate earnings and the ability to services loans.
Economic worries are expected to shape the outcome of Turkey's June 24 elections, with some reports suggesting Recep Erdogan may face a run-off vote on July 8 to regain the presidency.
Turkey's GDP will grow around 4.0% in 2018 and 4.6% in 2019, the Economist Intelligence Unit forecasts. Moody's expects growth of only 3.5% in 2019. In 2017, the State Institute of Statistics of Turkey reported growth of 7.3%.
Bank loan books will remain healthy at growth of 3% or more, said Kouyoumdjian. "The problems would start if we saw very low or negative growth. That would be quite problematic for asset quality."
Ozturk pointed to falling consumer confidence, weak housing sales, high inflation and rates pressure, as signs that Turkey's economy is hitting the limitations of "leverage-driven private sector growth."
"The pressure is clear," said Ozturk. "What matters for those corporates with dollar debts who invested in Turkish domestic consumption, tourism, and so on, [is that] Turkey needs to grow in dollar terms so that those dollar debts can be easily repaid."
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.
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