Turkey Planning Help for Banks on Anticipation of Bad Loans

(Bloomberg) -- The Turkish government will unveil measures to help banks tackle the expected pile-up of bad loans resulting from the lira’s plunge and soaring interest rates, according to people with knowledge of the matter.

The plan will seek to mitigate the need for capital injections and propose transferring non-performing loans to a state-designated entity, said the people, who asked not to be identified because the deliberations are confidential. The measures are likely to be announced on Thursday, one of the people said.

Lenders have been struggling to deal with a rising number of restructurings after the lira dropped 40 percent against the dollar this year, second only to the Argentine peso as the world’s worst-performing currency, and hurting firms’ ability to repay foreign-currency loans. The energy industry alone owes $51 billion to the nation’s banks.

“The creation of a so-called bad bank to absorb all of the debts, which are bound to start non-performing, may dilute some of the risks associated with the Turkish banking sector,” said Julian Rimmer, a trader at Investec Bank Plc in London. “But the subsequent lack of transparency will concern bond investors and there is no way of avoiding a general decline in Turkey’s overall creditworthiness, no matter where you park the NPLs.”

Economic Program

The new measures were discussed in a series of meetings between bank executives and senior government officials last week, according to one of the people. On Thursday, Treasury and Finance Minister Berat Albayrak is expected to announce a medium-term economic program with fiscal and macroeconomic targets for the next three years, and the help for banks will likely be unveiled then, the person said. The people didn’t elaborate further on the details of the plan.

The Borsa Istanbul Banks Index was down 2.1 percent by 5:50 p.m. in Istanbul.

The Treasury and Finance Ministry didn’t comment on the plan when reached by Bloomberg.

About half of the $331 billion owed by Turkish companies was to banks based in the country, double the ratio in 2008, according to central bank data. Non-performing loans increased to 3 percent of total liabilities, figures from the Banking Regulation and Supervisory Agency show, and Moody’s Investors Service said in May this could deteriorate to 4 percent by year-end.

Loan Restructurings

The bad-loans plan follows another a set of rules, proposed by the country’s lenders and approved by Turkey’s banking regulator in August. Those rules facilitate the restructuring of loans borrowed by non-financial companies to help them avoid booking problematic credit as non-performing loans.

The carve-out of NPLs will ease the pain on banks from the lira’s depreciation and expected economic slowdown, said Trieu Pham, an emerging-market strategist at ING Groep NV in London. “Banks could be asked to increase lending in exchange which could be negative further down the line.”

The lira’s losses in August were triggered by U.S. sanctions on two Turkish ministers over the detention of an American pastor, and accelerated when U.S. President Donald Trump imposed tariffs on some of the nation’s imports. That exacerbated existing concern about President Recep Tayyip Erdogan’s unconventional economic views and opposition to interest-rate increases.

Last week, the central bank jacked up rates to 24 percent, more than expected, though the currency is still trading below where it was in July.

©2018 Bloomberg L.P.