Consumer Loans – Turkish Market News

Turkey: February Job Report

Good News or Bad News

Labor market data for February 2016 was released early this week. The unemployment rate was down 20 basis points on monthly basis to 10.9% according to the official figures. The employment rate also saw a pick-up and stood at 45.3% while workforce participation rate was 10 basis points higher at 45.3% compared to January. In non-adjusted terms, Turkish economy added 181K jobs of which 117K was in non-farm industries. However, manufacturing jobs decreased by 24K in the month while it was more than offset by the strong performance in services.

We see its fit to analyze the adjusted data when it comes to study the dynamics of Turkish labor market and its relationship with the overall economy. According to the report, Turkey added 50K jobs in non-farm industries, and again 24K job lost in manufacturing was compensated by 55K new hires in services. The unemployment rate fortunately dropped to a single-digit level at 9.9% with non-farm and youth unemployment rates at 11.9% and 17.4%, respectively.

A while ago we mentioned that Turkey lacked the ability to create jobs despite recording positive growth. Not surprisingly, the policy makers came under fire against this backdrop. February saw the first single-digit unemployment rate since May 2014 when calendar effects excluded, could be signaling a new era for Turkish labor market but first we need to see to continuation of the recent trend.

But it is not all rosy and here is the bad point we gleamed from the labor market. Manufacturing job which are normally the main source of a healthy economy, continue to plunge. For the fourth consecutive month, the industry lost 20 basis points share in total unemployment as only 24.3% of the total workforce was employed in manufacturing, down from 25.1% in October 2015. This is critically important for any economy since non-manufacturing jobs are considered as less paying jobs, that is to stay, increasing manufacturing job is developing economies’ gateway to being a high income society.

On the economic expansion front, 171K non-farm jobs created in only two months was clear sign of solid performance in Q1 2016. We recently studied the relationship between the new hires in non-farm industries and the GDP growth, and found that the number of 185K (or 65K monthly) could function as a threshold to assess the overall economy. Yet, Turkey’s strong economic performance is evidenced by the newly added payrolls in the first quarter. With broad strokes, this is in line with our positive views about economy.

Considering that Turkey watchers have been concerned about credit metrics in Turkish financial system, we need to put some emphasis on the impact of unemployment on asset quality in consumer loans. Anecdotally, Turkish banks do not receive a major deterioration unless the rate of jobless people remain above 12%. Thus, we are of the opinion that the current developments in the labor market will not have negative consequences for lenders.

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.

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.

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.

Turkish Banks: Solvent but Illiquid?

One of the major roles of banks is to channel funds from savings into valuable projects. In doing so, banks engage in liquidity and maturity transformation, since they finance long-term, illiquid project while funding themselves with short-term, liquid abilities. By performing this important role, banks expose themselves to the risk of runs.

Turkish banks have become far more active in the international loan markets, giving international banks exposure to the both financial institution sector. But with huge due to come, some question whether there is enough liquidity as the end of zero interest rate policy world approaches.

This is what I noted on Jan 6, 2014.

…I firstly intent to demonstrate how the short-term foreign debt exposure became clearly frightening compared to the usable reserves, just like it was in South Korea.

Thanks to zero-rate interest policy world, the path for banks in emerging markets to borrow abroad in a convenient way was built by Ben Bernanke and Mario Draghi. Turkish banks were among beneficiaries as well. Banks in Turkey has a giant stock of short-term external debt now with a strong trend starting from 2010. So how about the liquidity in the banking system?

The chart above show the assets to liabilities ratios that both mature in one month, three months and twelve months, respectively. According to the Basel Accord application run by Banking Watchdog (BRSA) the ratio must be over 100 and it looks like that the financial institutions in Turkey are getting closer to the lower limit…

Needless to say, external financing is crucial for Turkish banking universe to be more stable. At this stage, rollover ratios gain importance. The ratio which is around %205, is expected to lower over the first half of 2014 as foreign creditors refuse to roll over their claims.

Following the massive rate hike by Turkish Central Bank, rising cost of funding and deteriorating loan books both may hurt Turkish banks with loss of funding and low asset returns.

The chart above indicates that short-term external debt of to total assets ratio in Turkish banks that climbed to 11% at the end of 2013 from 5% in the beginning of 2010. That means that for the last years there has not been an substantial increase in total assets of Turkish banks despite the strong pace of the external borrowing, which might be translated as the stock of the external debt has enlarged because of the economy lacking domestic savings.

Also some words from Standard & Poor’s picturing the asset quality:

Consumer loans have expanded the fastest and, in our view, demonstrate the highest credit risk vulnerability in Turkey, particularly to the potential of an economic slowdown and the associated increase in unemployment. The low amount of problem credit card loans is somewhat misleading, as borrowers tend to refinance card loans with consumer loans that carry lower interest rates. This explains the more pronounced rise in problem consumer loans.

and read the related post to find out how banks matter to the economy and to the stock market.