Afailed coup d'etathas sent Turkey's currency and bank stocks sliding, but, while investors' viewof an economy long seen as one of the emerging markets with greatest potentialis dimming, its lenders remain well-capitalized with low levels of loandelinquency.
Turkey'scentral bank has provided unlimited liquidity to banks to staunch any systemicfears, but shares in Türkiye IsBankasi AS, the largest private bank, slid 7% on July 18, asmarkets reacted to the failed putsch by sectors of the armed forces at the endof last week that left hundreds killed and 6,000 people under arrest.Türkiye Garanti BankasiAS, whose largest shareholder is Spain's ,tumbled 8.8%.
Sentimentwas further eroded July 18 by statements from European officials that any moveby Turkey to reintroduce the death penalty — which President Tayyip Erdogansaid was being considered — would put an end to its talks about joining the EU.Yet the lira, which had depreciated by 4.7% on July 15, retraced about half ofthat move July 18, as Erdogan reasserted his government's control over thecountry.
Adollar bond due 2022 sold by Turkiye Garanti Bankasi was yielding 4.36% on July18, virtually unchanged from July 14, the day before the coup. A 2026 bond soldby the Turkish government, with the same BB+ rating as Garanti according toS&P Global Ratings, was steady at 3.99%. An 2022 bond rose 4 basispoints to 4.46%.
Themacroeconomic impact of the turmoil should likely be limited, UBS analysts saidin a note, adding that there was only an outside chance of a sustained fall inthe lira and capital flight.
"TheTurkish banks still have among the lowest nonperforming loans ratios globallyof any emerging market financial system, they're still among the bestcapitalized," John Bates, head of emerging-market corporate research atPineBridge Investments Europe Ltd., said in an interview.
"Butwe do think we are going to see some deterioration, not as a consequence of theevents over the weekend, but mirroring the slower growth and generaldeterioration of the economy," he said, adding that NPLs could rise andany lira depreciation increase banks' dependence on central bank liquidity.
Turkishbanks' average Basel III capital adequacy ratio of 15.6% was higher thanBrazil's, South Africa's or Russia's. Nonperforming loans accounted for only3.3% of total loans in the first quarter.
InMadrid, BBVA shares slid 2.8%, underperforming other Spanish banks. BBVA agreedto acquire anadditional 14.9% of Garanti for a maximum of 5.57 billion lira last October,taking its holding to 39.9%. BBVA had bet on Turkey — where the ratio of loansto GDP has soared from 13% in 2002 to 68% in the first quarter of 2016, but wasstill only two-thirds of the eurozone level — to provide faster growth than indeveloped markets. BBVA's CEO said in April that the bank was looking to growfurther in Turkey.
July15's events, though, have come as a reminder of the risks of emerging markets.
Aslump in tourism, particularly after the Turkish Air Force shot down a Russianwarplane in November 2015, is already dragging on the economy, with GDP growthslowing to an annualized rate of 3.3% quarter on quarter in the first threemonths of the year, down from 4% in 2015.
Touristarrivals saw their biggest drop in 17 years in April, and some economists haveforecast that revenue will drop by a quarter, cutting revenues by 1% of GDP.
"Thereare lots of holes appearing in the tourism sector that banks are going to beexposed to, in terms of hotels, construction, that kind of stuff. And I thinkgenerally the risk premium for the market is going to deteriorate," JulianRimmer, an emerging-market equities specialist at Jefferies, said in aninterview. He said lira volatility would continue and that the central bankcould cut interest rates despite inflation running at 7.5%.
Whileabout one-third of outstanding bank loans and 46% of total liabilities aredenominated in foreign currency, Turkish banks also have substantial foreign currencyassets, meaning their net exposure is much smaller. Stress tests have shownthat the effects of exchange rate swings on the banks are relativelyinsignificant, according to local bank regulator BRSA, cited by the BaselCommittee on Banking Supervision in March.
Turkey's2-year government bond, the benchmark for lira funding costs, rose 20 basispoints to 8.7% on July 18.
Mostexposed to any rise in the cost of lira funding would be state-controlledbanks, such as Türkiye HalkBankasi AS, Barkin Yalcin, an analyst at Meksa Investment inIstanbul, said in an interview, although he added that he expected littleimmediate economic impact from the coup and its fallout.
IfTurkey's accession talks with the EU were to end, however, it would be verynegative for Turkish financial markets, Yalcin said.
S&P Global Ratings andS&P Global Market Intelligence are owned by S&P Global Inc.