As Turkish banks stepped up business lending in the first half, their asset quality held up surprisingly well, according to analysts. However, net interest margins tended to drop and are likely to contract further toward the end of the year, while liquidity gaps and inflation are now at the forefront.
A government-supported credit guarantee fund of 250 billion Turkish lira, which supplies collateral for loans to small and medium-sized businesses, was at the beginning of August used up to the level of 207 billion lira by as many as 313,000 clients, according to Hüseyin Aydin, the head of the local banking association and of T.C. Ziraat Bankasi AS, cited by Hurriyet Daily News.
The guarantee fund was greatly expanded in March to stimulate the Turkish private sector following a failed coup the previous July and a series of deadly terrorist attacks that hit tourist numbers.
"There was huge growth on the loans side which reflected positively on the bottom line," said Övünc Gursoy, a bank analyst from TEB Investments in Istanbul. But, he added, lending expansion is likely to "taper off" toward the end of the year, absent an extension of the guarantee pool, leaving a number of imbalances to be dealt with in the second half.
Data from S&P Global Market Intelligence shows that the biggest profit gains were made in the first quarter, with sequential declines in the second quarter at four of the six largest banks. Türkiye Is Bankasi AS' net income fell quarter over quarter to 1.18 billion lira from 1.58 billion lira, while Türkiye Garanti Bankasi AS' ticked up to 1.55 billion lira from 1.52 billion lira, and Akbank TAS' climbed to 1.57 billion lira from 1.45 billion lira.
In aggregate, Turkish banks saw profits increase 33.2% year over year in the first half to 25.4 billion lira, Aydin reportedly said. Aggregate profit for the six banks sampled by S&P Global Market Intelligence was roughly 15.4 billion lira.
Banks scrambled to take bigger chunks of the state-backed collateral, which left them with funding needs that they had to meet by attracting deposits at higher rates. The sector's loan-to-deposit ratio fell to 115.8% as of Aug. 15 from record levels of over 125% in the spring, data from regulator BDDK shows, but the analysts said it needs to fall more.
"There's a problem on the liquidity side," warned Gursoy, with net interest margins likely to suffer as a result as competition for deposits becomes increasingly costly.
Three of the six banks sampled saw NIM decline from the first quarter to the second, while a fourth, Yapi ve Kredi Bankasi AS, registered a rise of a single basis point. Türkiye Halk Bankasi AS recorded the sharpest fall, to 3.26% from 4.07%, and was the only one of the six at which NIM declined year over year in the second quarter.
"We think the third quarter will be very difficult for banks," said Gursoy, as continued high inflation is likely to generate growing pressure to increase deposit rates, further straining margins. Inflation in Turkey hit a post-crisis high of 11.87% in April, dropping to 10.9% in June and 9.7% in July. It is forecast by the OECD to stay around 8% through 2018.
Loans tied to the guarantee fund accounted for most of the corporate credit originated in the first half, with outstanding volumes rising 12% over the period, Sadrettin Bagci, a bank equity analyst at Deniz Invest in Istanbul, said in an interview. Retail lending, he added, expanded "in line with capacity" at 9.7% in the first half, with loans to small and medium-sized businesses up 55%. He estimated total lending expansion to reach 18% to 20% for 2017.
"The biggest surprise [of the quarter] was the asset quality, which did not decline," said Bagci. Nonperforming loans as a share of loans at amortized cost fell markedly for all the top banks except Isbank, where they grew only by 2 basis points, although the analyst said NPLs might rise somewhat in 2018.
That year may also bring risks to asset quality from U.S. rate rises, which have already started to shake up emerging markets, Bagci added. "But for the time being the main risk is local," he said.
Politicians have long been pressuring banks to cut rates through inflammatory public statements, but such "populist declarations" are unlikely to escalate into actual regulation, Bagci said.
"I do not think that what politicians are saying will affect bank results," he said. "Turkey is using banks to carry out fiscal stimulus for the real economy. As such the government has to support banking and I expect it will continue to do so."
As of Aug. 16, US$1 was equivalent to 3.52 Turkish lira.
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