To date we have posted two articles specifically focused on differentiates between public and private banks. As they have been in many developing economies ─particularly in India─, banks controlled by the government are milked to the bone with being forced to provide lending to sustain economic growth at the desired levels. This is also the case in Turkey (read Turkish Banks: Differentiating Rapidly, Loan Growth: Where do the Expenses Come From?).
Above we present loans-to-deposit ratios for private and state-run banks along with up-to one-month liquidity requirement ratios where state-runs have traditionally a lower l/d spread (left axis) meaning a stronger funding capacity however, relatively lower LRRs (right axis), also shows the maturity mismatch between their longer-dated assets and short-term financing. This is an interesting case that should be noted in our view. That said, regarding the liquidity Vakifbank (BIST:VAKBN) is relatively in worse shape when compared to its state-run peers.
At a time when some argue that Turkey is on a path to being more state-sponsored economy owing to the Treasury guaranteeing large scale projects, the performance comparison of public and private banks gains importance. Thus, we aim to compare both groups in terms of lending growth, funding capacity, capital adequacy, and liquidity position in order provide some insights.
Public commercial banks have been outperforming the private peers in lending growth since May 2013 when the so-called taper tantrum hit emerging markets as well as Turkish assets. The gap between lending growth rates has seemed to remain steady. However, there are clear signs of lending recession as the volume growth has slackened systemwide.
Remember that TRY loans-to-deposits ratio for private banks currently stands at a record high of 140%. Despite their strong FX deposit base, private banks apparently feel more constrained to finance their assets when compared to public banks. With a lower l/d spread public banks enjoy their strong local currency deposit base which is primarily compromised of retirement and civil servant salaries.
Having been way stronger than private banks regarding the capital adequacy for a long time, public banks posted a lower figure for the first time in March. This demonstrates public banks are on the ball when the market is in the doldrums.
It is easy to relate this to l/d spreads given above, but, public banks interesting have been weak set of results for liquidity requirements as they have been under the threshold of 100% which all the banks in Turkey must comply. Public banks can’t be given a pat on the back for their maturity management.
To sum up, Turkish government might play hardball to support the economy through state-run banks as it already has the capacity due to its perfect debt metrics. The differentiation explained between private and public banks would be prognosticating.
You can view the charts and the official data here (PDF).
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.