Lending – Turkish Market News

Mortgage Boom in the Making

Construction sector has maintained a significant role for Turkish economy in recent years as house prices in mega cities have skyrocketed and government sponsored large projects have been under way. Now with the economy sending signals of slowdown, we not surprisingly saw some attempts to boost the industry which has been at the forefront of the country’s recent economic development. Other than transforming the skyline of Istanbul, ─admittedly not many residents of the city take a fancy to this─ this may have some unexpected and unintended implications for the economy.

Not to mention the bubble it has created and possibility of economy toppled once it bursts, we currently observe strange findings in the financial space. First, Turkish central bank has increased its average cost of funding rate, in other words the effective rate, via some unconventional methods such as acting solely as a lender of last resort rather than a central bank. Meanwhile, mortgage rates have kept falling like dead leaves and now the average rate for the mortgage production is lower than the effective rate the central bank implied, which means Turkish banks provide mortgage loans at a loss. While banks are able to offset the loss via some fees and cross selling activities, we see it as long-term risk as rates are set to be higher in the upcoming period that would leave lenders with significant interest rate and liquidity risks. Please note that banks in Turkey are still not comfortable with the funding side.

So, the question may arise as to which segment of the banking records high origination activity recently. It comes as no surprise that state-run banks again take the lead in mortgage market and outperforming the rest of the industry by a wide margin.

With naysayers in the banking community now having the upper hand across the board, one would imagine the conservative and high quality underwriting standards and solid risk management in Turkish banks where regulations have been extremely strict but functioning well, but not, likely as a part of the ongoing “structural deform” process.

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.

The Impact of Credit on Turkey’s Growth

Credit impulse is an economic measure first introduced by Deustche Bank economist Michael Biggs. It is simply the change in new credit issued as a percentage of GDP. The conventional method measure used when associating developments in credit with developments in domestic demand is credit growth which actually is the growth in the stock of credit. But one should consider that domestic demand depends on the amount borrowed in a particular period, or the flow of credit. If this is correct, then growth in domestic demand is a function of growth in new credit issued, not growth in credit. Therefore the impact of credit on demand would also depend on the amount of credit extended relative to the size of the economy. As a consequence, the generated measure named as “credit impulse” at this stage emerges as a very helpful tool to overcome this issue.

Based on the methodology explained here, this is how Turkey’s credit impulse looks like.

I also recently posted that we would probably see a cyclical increase of consumption in the third quarter of this year. As expected this will lead a remarkable rise in GDP. Additionally, high GDP growth in the third quarter scenario was also backed by the August’s official industrial production data which reveals 5.2% rise in production activity on yearly basis as well as is visualized as follows.