NPLs and con­struc­tion

Dünya Executive - - FINANCIAL CORNER -

The BRSA, the bank­ing sec­tor watch­dog, set up a new ex­am­ple. Some­how, banks didn’t write off loans that were due to be booked as NPLs and fully pro­vi­sioned for. The amount is TRY 46 bil­lion, but peo­ple think it is prob­a­bly a lot more than that.

Most of them are in the en­ergy and con­struc­tion sectors. Again, this is no news. Ev­ery­body knew that al­ready.

The news, if any, is that there are non-en­ergy non­con­struc­tion bad loans that have to be writ­ten-off now. More than what has been re­vealed to the pub­lic might well be in the mak­ing, but let’s go one step at a time, yeah!

Two con­jec­tures. First, that NPLs go up doesn’t change cap­i­tal ad­e­quacy. Be­cause they are gen­er­ally pro­vi­sioned for ahead of sched­ule in the form of free pro­vi­sions, and be­cause with­out enough liq­uid­ity al­ready pro­vided for by the CBRT or plenty is avail­able in the in­ter­bank mar­ket, banks don’t get a for­mal warn­ing.

Sec­ond, there has to be enough room for lend­ing at cheap rates –es­pe­cially qua mort­gages- if the real es­tate sec­tor is to be bailed out within a cou­ple of years. This is a sine qua non.

Oth­er­wise, given home price trends, the ex­ist­ing un­sold stock of res­i­dences will im­ply au­to­matic fore­clo­sure for the sec­tor at large or at least for some seg­ments of it.

Yes, you have as­sets that rapidly de­pre­ci­ate to such an ex­tent that un­less you reach equi­lib­rium –which is at the mar­gin of course where mar­ginal cost crosses mar­ginal rev­enue- you will be both in­sol­vent and bank­rupt.

Mort­gages need not be ad­dress­ing gen­uine needs if you fol­low me here, but they will have to be pro­vided.

Rec­og­niz­ing (part of) NPLs means this. Af­ter all, new pro­vi­sions won’t hurt be­cause they don’t come out of the blue; banks knew that al­ready. In the end a bit of prof­itabil­ity set­back won’t cause any firm or bank to go un­der, but lack of liq­uid­ity would. NPL write-offs im­ply new loans for real es­tate: pe­riod.

ROEs will look just a bit lower for a quar­ter or so, and that’s about it.

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