Bad Loans Soar at Turkish Banks

Bad loans in Turkey soared 3.6% m/m in January caused concerns rising around the asset quality in the financial sector. Even worse, annual change was 32.6% which was the highest figure recorded in six years. That being said, total NPLs in Turkish banking universe rose to TRY 49.2 billion which accounted for 3.18% of total loan portfolio of the sector with an increase of 9 basis points from December 2015. This was also the highest NPL ratio ever recorded since April 2011.

Turkey - NonPerforming Loans Change

Traditionally, a major asset quality deterioration is very rare event with mortgages and auto loans, but we have seen worse effects in other consumer loans, more specifically in credit cards. Consumer NPLs posted 36.4% y/y growth in January was a sign of the jobless rate remaining high leading a surge in insolvencies.
Credit cards are not the only source for pain ahead for Turkish financial institutions. Corporates struggling to pay their debts are also another hassle for Turkish lenders. Bad corporate loans rose by 32.1% y/y reaching TRY 28.2 billion.

Turkey - NonPerforming Loans Change - Consumer and Corporate

The following is the sectoral data for bad loans in Turkey. It is important to note that some key sectors have contributed to the increase in bad loans. Mining and energy sectors unfortunately posted higher than 50% growth in troubled loans. Considering mining industry mostly operating as a supply side to energy production, thing might have gone terrible bad for the industry (see our post concerning energy loans here). The debt performance of wholesale and retail trade seemed very disturbing either. Also, TSC (transportation, storage and communication) surprised to the downside. Going forward, bad loans in tourism should be expected to soar give the dramatic decrease in the number of tourists vising Turkey.

Turkey - Sectoral Breakdown of Bad LoansTurkey - Bad Loans in Manufacturing

Alarming Rise in Energy Loans

Turkish banks have been lending to energy industry firms at a rapid clip. The share of the industry in total corporate loans rose from 3% in 2007 to 7.4% in 2H15, and this came amid a lending boom that had been a major concern about the economy.

According to the Turkish banking watchdog (BRSA) data, total energy loans were 151 million liras that accounted for 7.36% of total corporate loans which was 2,058 million liras as of the end of the month of July. Bank loans apparently started to boost energy investments in Turkey in later 2007 when the industry only presented 3% of the total cash lent to the businesses.

Nevertheless the industry definitely has not taken a toll on banks as the non-performing loan rate for the industry stood at 1.37% while 2.87% of the total corporate loans were considered as bad. However, the NPL for energy industry grew such a fast pace that the bad loans had more than tripled since May 2014. Considering that the contribution of the industry to the total output of the economy that had remained steady, the over-investment fears loom in the industry. This also makes essential to assess the appropriateness of Turkey’s current energy investment levels.

Turkey - Energy Loans v Total Corporate Loans - GrowthTurkey - Bad Energy Loans vs Total Bad Business LoansTurkey - Energy Industry Share in Total Business Loans and GDP Contribution

Things are definitely not sticking out like sore thumb at the moment, Turkish policy makers may need to move fast to bring investment growth down, or over-investment will contribute to further financial fragility leading, ultimately, to the point where credit cannot expand quickly enough and investment will collapse anyway.