Banks to Face Risks from FX Liabilities

The U.S. Federal Reserve tightening that is to set off a big exodus from emerging markets, coupled with rising geopolitical tensions in the Middle East has currently weighed on Turkish markets. We have seen all Turkish asset classes posting heavy losses as well as Turkish lira depreciating against major currencies.

A weaker lira would not mean doom and gloom for all Turkish stocks. In Turkey’s banking universe Turkiye Sınai Kalkinma Bankasi (BIST:TSKB) is known for its strong FX position and its outperformance during the lira decline periods. Not surprisingly the bank has incredibly outperformed its domestic peers on a year-to-date basis as seen at the following chart.

TSKB Stock Performance vs Peers

But not all banks are vulnerable as TSKB to currency moves. Moreover, the Turkey’s banking watchdog BRSA’s data shows the direct effects of FX rate fluctuations on banks’ balance sheets are now stronger than ever that come from bank’s holdings of assets or liabilities. According to the data Turkish banks’ net FX liabilities was equal to 79.4% of total equity at the end of May 2015 up from 62% at 2014 yearend.

Turkish Banks - Net FX Liabilities to Total Equity

BRSA requires all the banks in the country to keep their general FX position to total equity ratio below 20% in absolute terms. As you may guess the general FX position also include off-balance sheet accounts and the swap deals are commonly used for compensating the deficit. The trend in the ratio for all Turkish bank is highly attention-grabbing as the lenders has been consecutively posting a negative figure since August 2014.

Turkish Banks - FX Net General Position

Turkish banks have been heavily reliant on external funding in order to sustain the loan growth as overall loans to deposits ratio exceeded 100%. I believe one of theme key macro themes in the upcoming period will the voluntary deleveraging of business units, and more importantly of banks, as investors worldwide step up withdrawals from emerging markets and shift into developed markets. Now it seems that banks are facing some challenges for even hedging the currency risks arising out of foreign borrowing by using derivatives as swap costs remarkably are higher. The future outcome of this is likely to be weaker lira in the short-term and higher deposits rates in middle-term.