Deposit Growth – Turkish Market News

Loan Growth: Where do the Expenses Come From?

Turkey is set to post one of the weakest GDP growth readings in Q3 since the global financial crisis. In a previous post, we mentioned that the quarter ended September may not mark the beginning of a period of low growth with tepid economic performance. However, what Turkey has been experiencing for a long time is in fact a secular slowdown, or an economic crisis in slow-motion, to speak clearly. Speaking of short term predictions, while the pre-indicators not giving a clear picture for Q4 yet, we believe that Turkey has enough resources to save the quarter.

Of course, that would not mean the end of the slow-motion contraction as we call it, but we expect the economy perform better in Q4 compared to the linked quarter. The charts above speak for themselves at this point, all suggesting faster lending primarily led by public banks (state-run) will potentially provide some relief. That said, relatively higher loan growth in public bank is a phenomenon that is going back a long way in Turkey. For the time being, y/y TRY loan growth stood at 15.2% and 7.5% in public and private banks, respectively. The divergence in FX loans is even more obvious with growth rates of 15.6% and 2% (in USD terms).

Still, we claim that public banks are more capable of maintaining lending at fast pace as evidenced by loans-to-deposit ratios (see the chart located at left-down). Now TRY loans are almost 1.35 times TRY deposits in private banks, remarkably lower mid-2015 record level of 1.55. On the other hand, we see public banks operating with a spread of 108% as of yet, suggesting a safer outlook regarding the liquidity. Key consideration in our view is the strong deposits base in public banks as they have been the financial institutions that most municipalities and governmental bodies work it.

Over the long term we need the risks appetite in private bank resuming for lending in order to accelerate the economic activity of which for now we have not received signals yet. We recommend investors keeping a close eye on banking sectors data within this context since it is sending attention-grabbing premonitory signals for the economy.

Turkey: Any Room for Loan Growth?

Turkish central bank cut its overnight marginal funding rates by 75 basis points in the past two monetary policy meetings in an effort to simplify its interest rate structure as the volatility in global financial markets eases. The rate cuts came amid criticism by the government over high interest rates limiting the economic growth. With year-end inflation expectations around 8% and the central bank’s average funding rate of 8.5%, one would call the current stance of the central bank extremely dovish, however, it still fails to boost bank lending which is believed to bring economic expansion with increased investments, according to the top politicians of the ruling AK party.

The central bank sees the current loan growth in Turkey at reasonable rates, correspondingly, in harmony with its macro prudential measures, and views structural reform measures by the government as the needed policy tools to boost potential growth. Previously we stated that Turkish central bank seemed to lose its ability to impact interest rates in credit markets as the divergence between the loan-deposit rates and the policy rate became strikingly visible. Another issue we mentioned was the skyrocketing loans-to-deposits ratio making the financial system increasingly vulnerable. This would suggest a weakness in banks’ tendency to pump up more funds into the economy to a certain extent despite the growth-friendly rate environment. On the other hand, we saw the state-run banks still recording above industry average loan growth which has been completely in line with the government’s strategy.

As expected state-run banks in Turkey has outperformed their privately-capitalized peers in Turkey by a substantial margin over the past three years in related to the lending growth as they have increased their market share from 23.3% in March 2008 to 32.8% in February 2016. Not surprisingly, loans-to-deposits ratio has been higher in state-run banks that that of the industry.

With aforementioned points made, we are very likely to see the banks’ deposits book on conditions that easing inflationary pressures and less volatility in exchange rates. Then, Turkish financial institutions would have stronger funding base to finance the lending growth. Yet, any unexpected easing steps from Turkish central bank would prevent these conditions from being fulfilled.

In terms of lending capabilities, Turkish banks are still in a better condition than some of developing economies. However, it is the only country with a loans-to-deposit ratio above unity that saw an increase between 2011 and 2015. Moreover, majority of the emerging markets have seen decrease during the same timeframe. Going forward, we believe that external debt will continue to build a scenario full of funding challenges for Turkish banks.

Determinants of Bank Profitability

Examining the determinants of the banks profitability is very important in any economy as these foundations perform key financial functions. In Turkey it is even more important considering the fact that the stock market is heavily dominated by the banks. See here, here and here for more about the bank-intensive style of Turkish financial markets.

Lately we noted that on historical basis profitability indicator ratios of Turkish banks have been dramatically declining despite the relatively high valuations. We observed those bank stocks losing momentum and the benchmark equity index evaporation right after, a harbinger for what might happen remainder of the year.

At this stage we find it important to find out what the industry-specific and macroeconomic determinants of Turkish banks’ profitability are because of its strong impact on the characteristics of stock market. To be more accurate I narrow the scope of this research and used the data of the commercial banks only -which is compiled by Turkish Banking Watchdog (BRSA)-.

Below is a list of possible determinants of Turkish commercial banks’ profitability.

Total Assets (log)
Capital Adequacy Standard Ratio
Loans to Assets
Non-performing Loans Ratio
Liquid asset to assets
Deposit to Assets
Loan to Deposit
Net Interest Margin
Non-interest Income
Annual Real GDP Growth
Annual Inflation
Real Interest Rates

After collecting the data over the time period between 2003 and 2014 I calculate the correlation between the variables listed above which is as follows:

As a profitability measure again we use the return on equity (RoE) ratio. Following that, this next table demonstrates the relationship between the profitability of Turkish commercial banks and the given independent variables through a regression analysis.

The results suggest that the relationship between the banks’ profitability and the selected macroeconomic variables is significantly weak. On the other hand we find out that the banks can improve their profitability through increasing their capital adequacy and decreasing their loan/asset or loans/deposit ratio. Our main deduction from the latter finding is that to improve their profitability the commercial banks in the country need pay more attention to being well-capitalized and having a more liquid financial position with lower loan/deposit ratio.

For the issue of declining capital adequacy ratios in Turkish banks read this.

and this is for the increasing risks around loan/deposit spreads.

Considering the above-mentioned developments it would not be surprising to see banks posting lower income figures in the upcoming quarters.