Credit Guarantee Fund: Will It Juice Economy?

Turkish government introduced a new facility so-called ‘Credit Guarantee Fund’ a couple of months ago to boost the economic activity by spurring lending to small and medium size enterprises where majority of the country’s workforce is employed. As is Clear from its name, this is typically a system of state-guaranteed lending in which the government provides TRY25 billion in cash with the aim of creating a lending base of TRY250 billion with a leverage of 1:10. The guarantee will be offered to the banks if they keep the NPL ratio below 7%, but also note that provisioning standards was loosened by the banking regulator recently.

As we look at the y/y changes in installment commercial loans, we observe government’s push functioning as a strong incentive to increase the volume across the board. This also marked the strongest short-term momentum ever in the data set provided by the banking regulator. As of mid-April, the total amount of loans utilized by the corporates reached at TRY140 billion.

Meanwhile NPL ratios for the SME segment has been slowly but steadily rising since 2015 and current stand at 5.2%. There have been speculations around Turkey’s banking regulator’s loosening in provisioning policy led some preternatural improvements in the asset quality front. Whether it is true or not, one need to admit that we are not in a malign cycle regarding the credit metric as evidenced by the soar in bad loans.

Will these funds give way to new investments which would minimize the erosive impact of slowing growth and turn it into a faster one in the upcoming period? According to a Turkey’s daily Haberturk (see the article here in Turkish), some of the cash placed in companies is wasted on buying property and luxury cars. As evidenced by the data, corporates use the funds to close the revolving/overdraft accounts and to deposit the proceeds back to the banks. Government’s efforts, on the other hand, seemed to create an uptick in investment expenditures according to the sub-index of real sector confidence index but more improvement is needed to make a certain assessment of strength of the investments.

Turning back to the question asked at the headline of the article, in our view, there appears to be two important concerns; i-the moral hazard created with state guarantees that kind of would lead a ‘sub-prime SME lending crisis’, ii-more debt for already indebted corporates in period when deleveraging has to be an overriding theme for developing economies. That being said, this could lead some faster economic activity and earnings boost for banks in the short term, but there will a lot more talk of uncertainties in the medium-term.

Are Turkish Banks Undervalued?

Turkish banks had outperformed European peers over the course of last year. However, rising risks around Turkish central bank’s independency depressed the asset prices in the country as well as the share prices. Therefore, the gap between Turkish banks and their European peers began to close starting late January. Since then, we have seen Turkish banking index performing in line with MSCI European Financial Index.

Turkish Banking Index vs MSCI European Financials Index

To be more specific, following is an analysis of most traded Turkish banks stocks and their CEEMEA peers. Simply, Eastern European and Middle Eastern stocks seem to be the most overvalued ones while Nigerians remain exceptionally cheap. This should be mostly due to country-specific risks. In broad strokes Turkish banks along with their Russian peers are traded at reasonable multiples. At this stage my recommendation to investors looking into CEEMEA financials would be forming a list of stock picks supported by a strong investment theme and key fundamental data.

CEEMEA Banks Multiples

Below is a list of top-traded Turkish banks with fundamental indicators.

Turkish Banks Key Fundamentals

ROE generation has appeared to be the key theme in Turkish banking sector. Halkbank which delivered the strongest profitability metric has been the best performer in year-to-date terms. Isbank, Yapi Kredi, and Vakifbank are traded at a discount to their book values. Growing fee income in the industry has built a supportive case for Garanti and Akbank due to their exposure consumer banking and credit cards.

The consensus has a neutral view on Turkish banks in general, and more specifically on the stocks excluding Akbank and Halkbank. However, there are key risks to be watched including the economic growth on a slowing path and higher unemployment leading higher credit card fails.