Time and time again, we concerned ourselves with volume growth trends in Turkish banking spectrum. As is the case with any emerging market, credit growth in Turkey has been phenomenal since interest rates cut to near zero in developed economies. That being said, deposit growth has been weak mostly due to the fact that interest rates on savings have remained subdued. Turkish central bank has failed to keep the equilibrium real interest rate at a level that would boost savings and reduce inflation.
At the end of January 2016, L/D ratio for all Turkish banks reached a record level of 115%. Particularly, the spread has been widening since mid-2013, highlighting that local currency depreciation expectations led a shift in sentiment in deposit market.
Banks have inevitably faced instability on shake-up of funding base, which pushed them to diversify. It was December 2010 when Turkish lenders almost had not debt securities issued on their accounts. Then Turkish corporate bond market started to show first signs of life as the financial institutions pioneered. Now outstanding debt issued roughly amount to 100 billion in Turkish lira terms (of which only 30% were local currency denominated).
But we believe the crucial point lies in the relationship with the central bank. For the past twelve months, we have seen CBT funding increasing significantly, helping the banks to meet their short-term obligations and ultimately preventing a lack of liquidity. It is also interesting to see total volume in interbank markets slowly rising.
This may be underpinning Turkey’s inexpugnable M2 money stock growth which we somehow call Turkish quantitative easing. Having a great respect for CBT without fail, things are getting heavier for the bank’s hard task ahead.
Finally, remember that average cost for CBT funding has risen above 9% recently which would curb the bank’s earning through higher interest expenses. In interbank market, the rates are standing at 10.75% where the banks are becoming more reliant on. With all that, average of interest expenses incurred by Turkish banks will eventually rise, and, more importantly, bond yields unlikely to fall below 10%, that will continue to put pressure on asset prices.