Private Banks – 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.

Turkish Banks: Differentiating Rapidly

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.

Loan Growth

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.

Loans-to-Deposits Ratio

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.

Capital Position

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.

Liquidity Position

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).