Turkish Banks: Solvent but Illiquid?

One of the major roles of banks is to channel funds from savings into valuable projects. In doing so, banks engage in liquidity and maturity transformation, since they finance long-term, illiquid project while funding themselves with short-term, liquid abilities. By performing this important role, banks expose themselves to the risk of runs.

Turkish banks have become far more active in the international loan markets, giving international banks exposure to the both financial institution sector. But with huge due to come, some question whether there is enough liquidity as the end of zero interest rate policy world approaches.

This is what I noted on Jan 6, 2014.

…I firstly intent to demonstrate how the short-term foreign debt exposure became clearly frightening compared to the usable reserves, just like it was in South Korea.

Turkey - Short-Term Foreign Debt and FX Reserves

Thanks to zero-rate interest policy world, the path for banks in emerging markets to borrow abroad in a convenient way was built by Ben Bernanke and Mario Draghi. Turkish banks were among beneficiaries as well. Banks in Turkey has a giant stock of short-term external debt now with a strong trend starting from 2010. So how about the liquidity in the banking system?

Turkey - Liquidity Adequacy Ratios of Banks

The chart above show the assets to liabilities ratios that both mature in one month, three months and twelve months, respectively. According to the Basel Accord application run by Banking Watchdog (BRSA) the ratio must be over 100 and it looks like that the financial institutions in Turkey are getting closer to the lower limit…

Needless to say, external financing is crucial for Turkish banking universe to be more stable. At this stage, rollover ratios gain importance. The ratio which is around %205, is expected to lower over the first half of 2014 as foreign creditors refuse to roll over their claims.

Turkish Banks - Short-Term Foreign Debt to Total Assets

Following the massive rate hike by Turkish Central Bank, rising cost of funding and deteriorating loan books both may hurt Turkish banks with loss of funding and low asset returns.

The chart above indicates that short-term external debt of to total assets ratio in Turkish banks that climbed to 11% at the end of 2013 from 5% in the beginning of 2010. That means that for the last years there has not been an substantial increase in total assets of Turkish banks despite the strong pace of the external borrowing, which might be translated as the stock of the external debt has enlarged because of the economy lacking domestic savings.

Also some words from Standard & Poor’s picturing the asset quality:

Consumer loans have expanded the fastest and, in our view, demonstrate the highest credit risk vulnerability in Turkey, particularly to the potential of an economic slowdown and the associated increase in unemployment. The low amount of problem credit card loans is somewhat misleading, as borrowers tend to refinance card loans with consumer loans that carry lower interest rates. This explains the more pronounced rise in problem consumer loans.

and read the related post to find out how banks matter to the economy and to the stock market.