ADVERTISEMENT

Erdogan Gets His Way as Turkish Loans Soar on Pent-Up Demand

Erdogan Gets His Way as Turkish Loans Soar on Pent-Up Demand

(Bloomberg) -- Loan growth in Turkey is soaring after four rounds of interest-rate cuts sent consumers rushing for credit. It may not last as firms have yet to join a debt spree that’s been weighing on profit at state-owned lenders.

Since taking office in July, Central Bank Governor Murat Uysal has slashed the benchmark rate by 12 percentage points to drive an economy still feeling the after-effects of a recession and currency crisis. Moreover, measures were also rolled out to free up capital in the country’s banks to ease the flow of credit and keep the momentum going.

That helped push annualized foreign-exchange loan growth to more than 20% through Dec. 6, after shrinking as much as 10% at the beginning of 2019, according to central bank data. Consumer loans surged about 45%, while commercial debt rose around 15% over the same period.

Erdogan Gets His Way as Turkish Loans Soar on Pent-Up Demand

“The rise in consumer loans are mostly due to pent-up demand and refinancing as consumers want to take advantage of lower costs,” said Cagdas Dogan, a banking analyst at BGC Partners in Istanbul. “We need to see commercial and investment loans following the trend” if it’s to be sustainable.

President Recep Tayyip Erdogan’s administration has been trying to reignite growth with cheaper credit as businesses struggle to repay foreign-currency debt because of the lira’s depreciation. His calls have mostly resonated with state-owned banks, where loan growth has outpaced that of their commercial peers, increasing 16% this year through Dec. 6 compared with 2.6% in the private sector.

That came at a cost as government lenders saw their combined profit decline 15% and their average return on equity drop to below the inflation rate, the banking regulator’s data show. Now that the government has increased its target for economic growth to 5% for 2020-2022, private banks have started to join the lending spree, also spurred by lower rates and new reserve requirements.

Erdogan Gets His Way as Turkish Loans Soar on Pent-Up Demand

The average cost of consumer loans fell to 16% from a peak of 38% in a year ago, according to central bank data. Borrowing costs may be poised to fall further as policy makers increase the number of their monetary policy committee meetings next year to 12, from eight in 2019, a decision that could allow them to move in smaller steps if they chase Erdogan’s goal of single-digit rates.

“The government is aware that economic growth can’t be achieved only relying on consumer loans and therefore regulator’s latest decision tries to encourage longer term commercial and mortgage loans,” Dogan said.

What Bloomberg Intelligence Says:

Deteriorating asset quality remains a major risk for lenders, with their bad-debt ratios set to surpass 6% in 2019.

The renewed plan to establish a bad bank in 1Q could prove critical to cleaning up balance sheets and freeing capital to reinvigorate lending and support a GDP recovery.

-- Tomasz Noetzel, European banks analyst

Click here to read the research

To contact the reporter on this story: Asli Kandemir in Istanbul at akandemir@bloomberg.net

To contact the editors responsible for this story: Stefania Bianchi at sbianchi10@bloomberg.net, Vernon Wessels, James Hertling

©2019 Bloomberg L.P.