Banking on the future
The banking sector is the engine that keeps the Turkish economy chugging. How did it do in 2017, and what comes next?
Turkey’s banks have come of age but can they maintain the torrid pace of lending post-KGF?
What was bank spending like in 2017?
Buoyed by the Credit Guarantee Fund (KGF), both credit growth and profitability increased. While credit growth reached 21 percent a year, the profitability increase rose to 29 percent. Despite the increase in credit volume, the capital adequacy ratio was on average as high as 16.5 percent while the non-performing loans decreased to 3.1 percent.
Is a similar performance possible in 2018?
I predict a profitability performance similar to the past year. With the slowdown in the rate of credit growth this year, I expect that the growth rate of the sector will be reduced from 29 percent to 7 percent. I consider the 15-16 percent levels in capital gains reasonable. I do not expect any significant deterioration in active quality. In particular, I think the recent adjustments that allow debt restructuring for KGF credits several times will postpone the risks to after 2018.
Will the recent decline in the credit growth rate continue?
I think the slowdown in the rate of credit growth will continue through 2018. Without KGF, credit growth in the sector in 2017 would have been around 10 percent. In 2017, 80 percent of KGF funds were used, leaving only TRY 50 billion in the fund. We estimate a repayment in KGF loans of around TRY 90 billion. If both the leftover funds and these repayments are used for new loans, it may add four percent to total credit growth this year. I expect credit growth in 2018 will shrink from 21 percent to 15 percent.
Is it possible to increase the capital of banks with current equity profitability?
In 2017, the banks were able to generate 15 percent capital gains. This yield fell below the 17-18 percent capital cost. I anticipate that capital gains will be below the cost of capital again in 2018. It does not seem rational for capital increases in the current situation. Potential capital increases will further reduce the gains and thus have the potential to create capital needs again.
What about bank shares ?
Although the volume of loans and profitability have increased, the banking index in 2017 has fallen be- hind the BIST-100 by 10 percent and the industrial index by 14 percent. My expectation is that the banking index will be positively dissociated from the industrial index in 2018. The sector is more attractive both from the developing country banks and from the industrial sector on the valuation side. I believe that the capital inflow could be carried over 16 percent in the mid-term with an increase in leverage effect and dividend payment rates.
Does the foreign currency weight in new deposits create risk for banks?
When TRY credit growth accelerates, the TRY fund base may be insufficient and the banks are forced to turn foreign exchange deposits to TRY in the swap market to close the deficit. There is no currency risk, but rather an interest risk in these transactions. Increased swap costs adversely affect the profitability of the banks.
What will be the impact of global liquidity conditions on the banking sector?
For developing countries, lively global liquidity and an appetite for risk are vital for economic growth and investment. If we look at the active growth of banking over the last 10 years, we see that one third of the growth is funded by foreign resources. On the stock exchange side, the foreign-owned share is as high as 65 percent. Therefore, global liquidity is important both in terms of the performance of bank shares and the growth dynamics.
What was behind regulations changing multiple structuring for non-performing loans to show them as performing loans for another 36 months? What will be the consequences?
We can say that these regulations are made to keep the investment climate alive and to ensure that the liquidity provided by the KGF remains in the market. These regulations seem favorable as they will support the investment climate in the short and medium term. But the credit risks that may arise may also be shifted to the future.
What does scrutinizing the non-performing loans of Otas (Turk Telekom’s main partner) mean?
There is a problem with the repayment of these loans. As of Jan. 2018, IFRS 9 accounting standards have been introduced all over the world. Subsequently, the credit portfolios and possible credit risks of the banks need to be re-evaluated. It’s under these new conditions that these loans are being scrutinized. Currently, according to the law, they will have a two percent general allowance for these loans instead of one percent.
What risks do you see in the banking sector in 2018?
The tightness in TRY funding in the sector is continuing. For this reason, I think that the posibility of decreasing the funding interest in the mid-term is low. In addition, industrial growth data is strong, both in the US and Europe. The Fed’s interest rate hike process can accelerate and this may lead to an outflow of funds from emerging markets.