Banks to Stay Under Pressure

One of the main functions that banks provide is liquidity transformation. To simplify this financial term, one can interpret it as funding shorter term assets with longer term liabilities. In case of  failure of this process, the banks face a liquidity mismatch which would put them at serious risk.

Like any of its peers in other countries, Turkish watchdog, or shortly BRSA applies tough risk rules in order to stem the financial system facing the risks that we tried to explain above.

Previously we stated that the banks in Turkey have ridden toward the danger zone in terms of liquidity management for the period of last three year. To see how just check the blog post titled Turkish Banks: Solvent but Illiquid? with explanatory charts.

So how things have gone since then? It is evidenced by BRSA data that  it has been even more worrisome. The chart below visualizes the data and proves that proves that liquidity in the banking system hitting the dip.

Liquidity Adequacy in Turkish Banks

In order to show the significance of the issue, a cross sectional analysis must be studied at this point. First, the relationship between Capital Adequacy Standard Ratio (Tier 1 Common Capital Ratio) and Liquidity Adequacy Ratio is apparently very strong. However, the positive relationship may indicate that when banks are less vulnerable to under-capitalization, they take more liquidity risk. In other words, capital and liquidity may act as substitutes. Interestingly, this relationship is only observed after the crisis, as can be seen in the second chart below.

Turkish Banks - Liquidity and Tier 1 Common Capital

The relationship between the credit-risk taking and liquidity is also another indicator for analyzing the behaviors of the bank in Turkey. As expected, two risk components are negatively correlated, suggesting that the two risks are substitutes.

Turkish Banks - Liquidity and Risk Weighted Assets

Finally this is where the punchline comes. Normally it is expected that the lower is profitability, the higher is liquidity due to the costs of holding liquidity. Then, returns should be lower when a pick-up in liquidity is observed. However, this does not seem to be the case for Turkey. A negative correlation is realized between return on equity and liquidity.

Turkish Banks - Liquidity and Profitability

Specifically, the last chart seems to be the most shocking one among all. At the same time, it makes the liquidity of Turkish banks a non-negligible variable to track for any investors who look Turkey as a play. It is even gaining more importance in view of the ability of the bank stocks to drive the whole market in Turkey. And it is also a serious issue for regulators to focus on, since the conclusions of the flying liquidity in the banking industry are widely known in the country.

Are Turkish Banks Safe?

Recently Turkey’s banking watchdog (BRSA) made a decision that means paving the way for bank owners and top managers to lend to businesses that belong to them. This type of transactions has been under a ban since 2001, the year Turkish financial institutions collapsed. The rest of the story comes from Wall Street Journal.

The BRSA decision was issued after a Kuwaiti-backed Turkish bank, Kuveyt Turk, made a loan to Dicle Enerji Yatirim, an energy investment firm. Businessman Abdullah Tivnikli controls more than 30% of Dicle Enerji through holding companies and is also deputy chairman of Kuveyt Turk. The BRSA said that relationship didn’t breach regulations because Mr. Tivnikli holds his stake in Dicle Enerjii indirectly.

What has BRSA done is simply rule bending, because it is “nakedly” banned for stakeholders to extent credit to their own firm. However BRSA’s decision is up to characteristics of  partnership and it let “indirect” shareholders to do so. Although now and 2001 period are not the same, it is the restrictions that have kept the system strong till now.

The Historic Background

An enlightenment is needed to understand why the credit restrictions took effect. Over the 90s, there had been a large number of banks involved in tunneling bank deposits to shareholders through connected lending. This process was generally related to personal benefits politicians reaped from the banking sector. The politicized implementation of banking regulations could benefit from connected lending and allowing defunct banks to continue operating. Furthermore, the granting of banking licences was a beneficial business, and many were granted to bankers without the proper credentials. A blanket deposit guarantee, in place since the 1994 crisis, helped a lot of the banks to survive, allowing them to bid up deposit rates, and killing incentives for depositors to be selective.

As you understand, the process has nothing to do with technically risk management or conceptually business ethics.

At that time, what the banks do in fact was not banking. Retail banking emerged following the 2001’s meltdown as common theme in financial services industry. Before that, banking had been all about investing in government paper, but some small banks were primarily concentrated in financing the owners’ business.  These transactions were the triggers of the crisis.

Time will show if the latest decision is a signal of turning the clock back. Tightened regulations let Turkey to be one of the best performing economies through late-2000s financial crisis with a fast recovery. In other words, they are what Turkish banks are kept safe by. Keeping an eye on relevant developments is an absolute must.

Hopefully I will write about unsatisfactory financial results of  Turkish banks in next posts.

Draft Revealed For Regulation on Consumer Loans

The burning question has been how the Banking Supervisory would regulate the consumer loans with some tightening tools. Yesterday, the draft for new regulations were revealed on consumer loans and credit cards with the intention of slowing general purpose lending.

Some expected restrictions are listed below:

  • No layaway while purchasing food and gas,
  • Length of layaway plans limited to 6 months while purchasing electronics, jewellery,
  • Length of layaway plans limited to 12 months while purchasing white goods, furnitures,
  • New restrictions for consumer loans used in purpose of purchasing cars, the plans could be 48 month-length at most,
  • All consumer loan plans excluding mortgages will mature in 36 months at most.

Now let us just get focused how these will shape the macro view.

As mentioned many times before, Turkey Current Account Deficit is serious threat for the economy mainly caused by the saving gap. For three years, Turkish policymakers have organized efforts for applying pressure on consumer loans to reduce consumption as CAD had widened. For a reliable macro outlook, this initiative was needed but firstly we need to observe the market reaction.

Turkey - Consumer Loans and Cuurent Account Balance

Taking a deeper look, policymakers are happy with a moderate pace growth, even ahead of elections from four months now. Actually, this unusual approach is reducing the political risk.

Of course, some industries will be hurt that are most depending on consumer loans because of the restrictions on consumer spending to stay in effect as mentioned above. The first industry spring to mind is banking of course. These regulations will in some way hurt the consumer loans but the banks will reduce the risk of maturity mismatching, have asset quality to be improved, and the liquidity. In the eyes of market, these all are already priced in and measures have been better than feared so far.

In my opinion, car sales will be seen falling due to shortened layaway plans because it may force consumers to delay purchases. Notwithstanding, in the short-run car sales may be boosted until the new regulations come into force.

This was a good sign prompting if policymakers intend to cool down the economy. More macro-based measures to be taken should be expected soon.