Turkish banks are up 3.5% on average year-to-date with tailwinds from a better outlook for 2016 and easing regulation standards. However, since last year, Turkish banks have performed remarkable worse in a MENA context. The “exciting” period regarding the political risks and the continuation of downward trend in profitability were the key reason for the exceptionally weak performance.
This year has signs of relief for the industry with strong projected EPS growth figure after a tough year. Even if the most banks guided prudently on volume growth and asset quality for 2016, the bottom line are likely to improve with the help of higher fee income and lower operational expenses. That said, Akbank (BIST:AKBNK) remained as the most optimistic lender with aggressive growth expectations for the upcoming period. Easing regulations will somehow help all the banks to growth their businesses and to record lower provision expenses despite some NPL additions in the horizon. Having said that, accelerating earnings growth is enough to make a permanent optimist, as expected ROEs would still be held back this year.
I continue to prefer Akbank (BIST:AKBNK) and TSKB (BIST:TSKB). I believe Akbank is set for profitable growth in 2016 and should perform relatively better than its peers. TSKB is still a defensive pick against foreign exchange volatility and its top line will be supported by stronger CPI-linker revenues this year.
The U.S. Federal Reserve tightening that is to set off a big exodus from emerging markets, coupled with rising geopolitical tensions in the Middle East has currently weighed on Turkish markets. We have seen all Turkish asset classes posting heavy losses as well as Turkish lira depreciating against major currencies.
A weaker lira would not mean doom and gloom for all Turkish stocks. In Turkey’s banking universe Turkiye Sınai Kalkinma Bankasi (BIST:TSKB) is known for its strong FX position and its outperformance during the lira decline periods. Not surprisingly the bank has incredibly outperformed its domestic peers on a year-to-date basis as seen at the following chart.
But not all banks are vulnerable as TSKB to currency moves. Moreover, the Turkey’s banking watchdog BRSA’s data shows the direct effects of FX rate fluctuations on banks’ balance sheets are now stronger than ever that come from bank’s holdings of assets or liabilities. According to the data Turkish banks’ net FX liabilities was equal to 79.4% of total equity at the end of May 2015 up from 62% at 2014 yearend.
BRSA requires all the banks in the country to keep their general FX position to total equity ratio below 20% in absolute terms. As you may guess the general FX position also include off-balance sheet accounts and the swap deals are commonly used for compensating the deficit. The trend in the ratio for all Turkish bank is highly attention-grabbing as the lenders has been consecutively posting a negative figure since August 2014.
Turkish banks have been heavily reliant on external funding in order to sustain the loan growth as overall loans to deposits ratio exceeded 100%. I believe one of theme key macro themes in the upcoming period will the voluntary deleveraging of business units, and more importantly of banks, as investors worldwide step up withdrawals from emerging markets and shift into developed markets. Now it seems that banks are facing some challenges for even hedging the currency risks arising out of foreign borrowing by using derivatives as swap costs remarkably are higher. The future outcome of this is likely to be weaker lira in the short-term and higher deposits rates in middle-term.