MENA & Turkey Financials

Ercan Uysal

Thematic (Sector/Industry)

Turkey Banks / Thematic (Sector/Industry)

After a sharp slowdown in credit growth in the second half of 2018, the government has injected a significant amount of fresh credit into the economy in 1Q19 through the state-owned banks, leading to the largest quarterly credit impulse since 2007. In addition to the credit expansion, the government has also ramped up fiscal spending in an effort to stimulate the economic activity in the run-up to the local elections. Due to a confluence of economic policy mistakes such as loose fiscal/monetary policy and rapidly rising political uncertainties caused by the rerun of the voided Istanbul local elections and the on-going tensions with the US related to the pending purchase of Russian-made S-400 missile defence system, the Turkish Lira has depreciated by about 15% ytd against USD- the worst performing EM currency.
The most recent data suggest that economic activity softened again in Apr-May after the impact of the outsize credit impulse and fiscal stimulus in 1Q19 started to wear off. In the face of a rerun of the voided Istanbul local elections, we expect the Turkish government to resort to another round of fiscal and credit stimulus until the end of June. However, the marginal effect of additional fiscal and credit stimulus will likely to be very limited at this point, while inevitably causing inflation-devaluation dynamics to worsen, in our view. 
Given the sharp rise in TL lending rates and a weaker currency, we expect debt servicing capacity of the Turkish firms to weaken further, exacerbating the asset quality problems in the banking sector. Against an increasingly weaker macro backdrop and high corporate leverage, we believe problem loans (NPLs and Stage-2 loans) will continue to pile up in the period ahead, which have already doubled to TL295 bn (75% of CET1 capital post-provisions) as of the end of 1Q19 compared to the end of 2017. 
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We believe the current Turkish bank valuations do not adequately price in the mounting asset quality issues which will have to be resolved one way (orderly) or the other (disorderly) in the near future. Either way, bank shareholders seem to be on the hook for new capital injections, in our view.
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After a sharp slowdown in credit growth in the second half of 2018, the government has injected a significant amount of fresh credit into the economy in 1Q19 through the state-owned banks, leading to the largest quarterly credit impulse since 2007. In addition to the credit expansion, the government has also ramped up fiscal spending in an effort to stimulate the economic activity in the run-up to the local elections. Due to a confluence of economic policy mistakes such as loose fiscal/monetary policy and rapidly rising political uncertainties caused by the rerun of the voided Istanbul local elections and the on-going tensions with the US related to the pending purchase of Russian-made S-400 missile defence system, the Turkish Lira has depreciated by about 15% ytd against USD- the worst performing EM currency.
The most recent data suggest that economic activity softened again in Apr-May after the impact of the outsize credit impulse and fiscal stimulus in 1Q19 started to wear off. In the face of a rerun of the voided Istanbul local elections, we expect the Turkish government to resort to another round of fiscal and credit stimulus until the end of June. However, the marginal effect of additional fiscal and credit stimulus will likely to be very limited at this point, while inevitably causing inflation-devaluation dynamics to worsen, in our view. 
Given the sharp rise in TL lending rates and a weaker currency, we expect debt servicing capacity of the Turkish firms to weaken further, exacerbating the asset quality problems in the banking sector. Against an increasingly weaker macro backdrop and high corporate leverage, we believe problem loans (NPLs and Stage-2 loans) will continue to pile up in the period ahead, which have already doubled to TL295 bn (75% of CET1 capital post-provisions) as of the end of 1Q19 compared to the end of 2017. 

We believe the current Turkish bank valuations do not adequately price in the mounting asset quality issues which will have to be resolved one way (orderly) or the other (disorderly) in the near future. Either way, bank shareholders seem to be on the hook for new capital injections, in our view.


Turkish Banks: Pushing on A String