Turkish Banks Seen Benefiting From Rate Hike, Stable Lira

(Bloomberg) -- Turkey’s banks will likely benefit from Wednesday night’s interest-rate increase, though there will be some pain as well. That’s the assessment of some analysts after the central bank’s emergency move to halt a run on the lira.

While there will be a short-term hit to funding costs and lending margins, banks will be helped as the move stems panic in financial markets, according to Cagdas Dogan, a banking analyst at Istanbul-based BGC Partners Inc. For lenders like Turkiye Garanti Bankasi AS, a stable Turkish currency would also ease the burden on local borrowers with dollar-denominated debts.

“The net impact will be positive for banks," Dogan said. “In the short term, the move will increase deposit costs, pressuring net-interest margins, but the impact of easing the tension in currency markets will offset that.” Further tightening at the central bank’s June 7 meeting would also help, he said.

The 13-member Borsa Istanbul Banks Index rose as much as 3.1 percent, the most since May 10, and was 3 percent up by 10:23 a.m. local time, while the benchmark index was up 1.8 percent. The gains helped pare losses in the banks’ index this year to 12 percent. The lira reversed Wednesday’s 2 percent advance to trade little changed from Tuesday’s closing levels.

The central bank acted after three weeks of turmoil on Turkey’s currency markets. President Recep Tayyip Erdogan, who’s seeking re-election next month, has publicly opposed any moves to raise interest rates, and has piled pressure on banks to keep extending loans at interest rates that barely compensate them for inflation.

Stabilizing the currency will incur longer-term headaches as well as short-term costs for banks, according to Ovunc Gursoy, an analyst at Istanbul-based TEB Investments.

“Banks will try to reflect the increase into loan rates, but this may come with a time lag,” he said. “The loan growth that has already started to slow will further decline. Higher rates may also cause marked-to-market losses in the second quarter."

The corporate sector has to repay a record $337 billion in foreign-currency debt, while banks have already had to restructure 78 billion liras ($17 billion) in loans because of the political and currency turmoil.

The central bank raised its late liquidity window rate by 300 basis points to 16.5 percent, after an extraordinary meeting of its monetary policy committee on Wednesday to “discuss recent developments.” It kept other rates unchanged, describing the move as a “powerful monetary tightening” and saying it’s ready to continue using all instruments.

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