NPLs and construction
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.