Additional restrictions on consumer lending and higher interest rates could mean a slowdown in growth for Turkey’s banks, although the sector should have the resilience to ride out any shockwaves.
According to new regulations from the Banking Regulation and Supervision Agency (BDDK), issued in late 2013 and set to come into effect on February 1, instalments on credit card purchases will be limited to nine months and entirely banned for mobile phones, jewelry, food and gasoline.
The rules, which aim to curb growth in consumer borrowing, are expected to hit the retail and manufacturing sectors, as well as banks. However, stores will continue to be able to offer their own financing plans without the nine-month restriction, suggesting Turkey’s banks could make up any decline in credit card usage by partnering with retailers to offer purchases by instalment.
Higher interest rates expected
While the government is putting the brakes on lending to consumers, banks are also facing the prospect of higher interest rates. The decision by the US Federal Reserve to taper its bond buying activity is set to raise the cost of financing across emerging markets, and Turkey is no exception. Moreover, the Turkish central bank may need to increase interest rates to prop up the ailing lira, although it announced on January 21 it was leaving its key benchmark rate unchanged at 7.75%.
According to Ergun Ozen, chairman of Garanti Bank, one of the country’s largest lenders, Turkish banks could be facing the most difficult year in a decade. “The risk of a slump in profitability may emerge if the upward trend in interest rates continues,” he said in an interview with state news agency Anadolu Ajans at the end of December.
Another cause of concern is the ongoing turmoil surrounding a series of corruption allegations against political figures, property developers, bureaucrats and business leaders, including the CEO of state-owned Halk Bank. The scandal has already had an impact on the lira, and a number of investigations are focused on construction and real estate developments, two key areas for bank lending.
Rising to the challenges
Though there may be challenges ahead, Turkey’s banks should be able to rise to them. In late December, ratings agency Fitch said the medium-term forecast for Turkish lenders was stable, but the sector could come under pressure from a number of fronts, including rising interest rates, slowing economic growth and a weakened lira.
“These trends will contribute to a modest fall in margins and rise in loan impairment charges, but strong capitalisation, healthy funding structures and liquid balance sheets will help minimise the impact on credit quality, leading to a stable rating outlook for the sector,” the agency said in an investors’ note.
While Fitch said the sector would also face challenges due to the easing in loans to smaller businesses and state-sponsored pressure to scale back consumer lending, Turkey’s banks would go into 2014 with low levels of non-performing loans and above-required capital adequacy ratios, meaning the industry has significant loss-absorption capacity. This gives lenders the capability to deal with interest and exchange rate shocks, which Fitch warned were the greatest risks to the banking sector, as they would feed through to borrowers and weaken loan quality.
The banks’ ability to deal with currency fluctuations was being tested in the early part of the year, with the Turkish lira hitting a series of historic lows in the opening weeks of 2014. The lira dropped to 2.21 against the dollar in mid-January, the fall in the main a response to concerns over the investigations into companies and figures close to the government.
In another note issued on January 7, Fitch warned that the political scandal – if prolonged – could weaken Turkey’s ability to maintain economic stability, posing a threat to its creditworthiness. Should the country’s current rating of BBB- come under pressure, or even be downgraded if confidence is further eroded, this in turn could raise borrowing costs for banks.
The banking industry is unlikely to match its performance in 2013, which saw loans rise by more than 30% and profits up by 7% for the 11-month period ended in November. However, the fundamental strength of the sector should insulate it from any setbacks the economy may endure, with solid capitalisation and adequacy rates acting as a buffer against shocks internal and external.