Istanbul’s optimism wearing thin

By Delphine Strauss in Ankara

Published: November 16 2008 21:10 | Last updated: November 16 2008 21:10

Turkish bankers are more familiar with the convulsions in global finance than most.

In 2001 some two-fifths of the country’s banks failed after a spree of irresponsible, sometimes corrupt, lending. Rescuing and recapitalising these institutions cost a crippling 30 per cent of gross domestic product and plunged the economy into deep recession.

Yet it is thanks to that forced restructuring that Turkish banks now look almost solid compared with their shaky western counterparts.

For the sector as a whole, capital ratios range from 15-25 per cent, research by Moody’s found, while the loan to deposit ratio stood at 85 per cent in June, and retail deposits account for the bulk of banks’ funding.

But, Istanbul bankers’ early optimism is now wearing thin as Turkey increasingly feels the effects of global credit tightening and a sharp domestic downturn.

Third-quarter earnings will be 35 per cent lower than last quarter, due to trading losses and lower dividend and non-interest income, according to analysts at Credit Suisse.

Among banks that have already reported, Garanti revealed a 20 per cent quarter on quarter fall in net earnings and loan growth of just 4 per cent.

George Chrysaphinis, analyst at Moody’s, says for the global financial crisis to hurt Turkey’s banks, it has to reach the real economy first. “Only now are we entering that phase. What we don’t know is how severe it is going to be.”

One big vulnerability is the financial sector’s exposure to sudden swings in the lira’s value. Banks no longer have big direct exposure to foreign exchange borrowing, which proved devastating when the currency plunged in 2001. But their customers are highly sensitive to exchange rates.

When the lira tumbled along with other emerging market currencies last month, analysts estimate foreign exchange deposits in the banking system shrank by $10bn-$11bn. About $6bn was converted into Turkish lira deposits, but the rest disappeared – perhaps under the mattresses of consumers with long memories.

“This is making the balance sheet structure of banks change dramatically,” says Suzan Sabanci Dincer, chairwoman of Akbank, Turkey’s second-largest bank by assets.

A bigger worry is banks’ indirect exposure to exchange rate risk through the borrowing of non-financial companies – whose net foreign exchange liabilities were more than $80bn in the second quarter of 2008.

Sustained depreciation in the lira would hit companies with heavy, unhedged foreign currency borrowing – with a knock-on effect for banks’ balance sheets.

Views differ on the severity of the threat. Optimists argue that short-term foreign exposure is much lower than in the past and that owners would use family assets to bail out their companies in a crisis.

“When we lend to medium-sized companies, we always take guarantees from the owners,” Ms Sabanci Dincer says. But she added Akbank would for now be extending foreign currency loans mainly to exporters with foreign earnings – and was already offering advice to smaller companies on cashflow management.

Ergun Ozen, chief executive of Garanti, forecasts its lira-denominated lending will grow 10-15 per cent in 2009, while foreign currency lending will grow 5-10 per cent. One analyst at a foreign bank in Istanbul says that Turkish bank valuations are already attractive without any lending growth.

So far, bankers say, there is little need for heavy-handed government help. They welcomed changes to accounting rules that will allow institutions to hold some assets to maturity rather than marking them to market – a policy that is helping the earnings of banks across Europe.

But survivors of the last crisis are wary of reintroducing a full guarantee for retail deposits – saying this encouraged foolhardy lending before 2001.

Whatever the precautions, banks are bound to record an increase in bad loans as Turkish companies suffer a slump in export markets and a domestic slowdown.

Analysts warn that the quality of loan books – after a period of rapid loan growth to small and medium sized companies – has not been tested in a downturn.

In particular, nobody knows how painful could be banks’ exposure to real estate – where a splurge of luxury shopping malls now looks spectacularly ill-timed.

But the biggest risk is macroeconomic. Even with lower energy prices, there is growing speculation that Turkey will have to run down foreign exchange reserves, and possibly call on the IMF to help plug the gap. If that situation escalates into a full currency crisis, all bets are off.

Copyright The Financial Times Limited 2008