The Bad News Keeps on Coming for Turkey's Already Battered Banks

(Bloomberg) --

Drawn-out elections and a rout in the lira mean more bad news for Turkey’s banks.

On top of a huge pile of debt restructurings, lenders now face the threat of higher interest rates and weaker capital levels. The lira’s slump to a seven-month low on Tuesday also makes it pricier for companies to repay their foreign-currency borrowings and could derail efforts to lift the economy out of recession, which is key for those repayments.

“The lira’s decline is adding salt to the wound,” said Umit Ozlale, a professor of economics at Ozyegin University in Istanbul. The situation is “creating a vicious cycle in the economy.”

Lenders are facing new pressures after Turkish authorities this week ordered a re-run of mayoral elections in the commercial capital Istanbul, raising the risk of heightened political turmoil. Bank capital ratios are already being squeezed after companies requested about $28 billion of debt-restructurings following a 28 percent plunge in the lira against the dollar last year.

Credit Push

The government also pushed state-owned lenders to offer more credit ahead of the elections at the end of March as their commercial and international peers pulled back. The corporate sector’s foreign-exchange liabilities stood at $315 billion as at the end February, almost 40 percent of the country’s gross domestic product. Even when netted against their foreign-exchange assets, the shortfall is $197 billion, central bank data showed.

After a period of “relative calm” since October that gave lenders “some breathing room, the nightmare has returned as the lira is once again on a weakening path," said Inan Demir, an economist at Nomura International Plc in London. If the currency weakens further “more companies will face difficulties in servicing foreign-exchange debt, increasing pressure on banks to restructure more loans, undermining their profitability and potentially their capitalization.”

Non-performing loans as a percentage of total credit rose to 4.04 percent in March from 2.9 percent at the beginning of 2018, according to the banking regulator, which expects that the ratio could climb to as much as 6 percent this year. The country’s energy industry alone has more than $51 billion of outstanding debt.

Stocks Sink

Investors are already prepared for more hardship for Turkey’s lenders, with the 13-member Borsa Istanbul Banks Index losing 18 percent over the past 12 months compared with a 9.3 percent drop in the Borsa Istanbul 100 Index. Banks are currently trading at almost half of their book value, according to Bloomberg data.

“Driven by mounting political chaos in Turkey and escalating fears of a U.S./China trade war, renewed pressure on the lira is unlikely to disappear anytime soon,” said Bloomberg Intelligence analyst Tomasz Noetzel. “This is a major threat to capital at domestic lenders, given that some 40 percent of the $460 billion of loans in Turkey are non-lira denominated.”

©2019 Bloomberg L.P.