Turkish Banks May Hit Profit Milestone in 2021 on Erdogan U-Turn
Turkish Banks May Hit Profit Milestone in 2021 on Erdogan U-Turn
(Bloomberg) -- A key measure of Turkish bank profits could grow more rapidly than inflation next year for the first time since 2017 after President Recep Tayyip Erdogan vowed to return to market-friendly economic policies.
The average return on equity for Turkey’s 48 lenders has trailed inflation since a currency crisis in 2018 caused price increases to surge above 20%. That ended a 14-year streak in which banks were able to keep their ROE ahead of inflation, according to data compiled by the nation’s banking regulator.
The departure of Erdogan’s son-in-law as economy czar and the ouster of the central bank chief just over a week ago has spurred an outperformance by the lira compared to other emerging-market currencies.
Investors anticipate a return to orthodox policies will result in higher interest rates, and less pressure on banks to boost lending, which will allow profit margins to expand as inflation eases to just under 10% at the end of next year, according to central bank projections. The central bank will hold its first meeting under the new team on Thursday, when it is expected to hike the main policy rate by 475 basis points to 15%, according to a Bloomberg survey.
“If lira stabilization is followed by an easing in restrictive measures -- as we have seen in the last couple of days -- then the cost of risk will decline, improving profitability,” BGC Partners banking analyst Cagdas Dogan said. “That will be the story of 2021 unless we see another shock. Inflation around 10%, average return on equity at 13% seem to be reasonable for 2021.”
State banks waived short-term profits to keep businesses alive and support the economy for the medium- to longer-term, Osman Arslan, the chief executive officer of state-owned Turkiye Halk Bankasi AS, said during an online conference on Thursday.
Erdogan and the previous overseers of monetary and economic policy had leaned heavily on lenders, mostly state-owned banks, to support growth by extending credit and restructuring or reclassify troublesome loans.
In the ensuing credit boom, lenders had to set aside more provisions to cover debt that may sour, while also grappling with rules that curbed revenue growth and a currency that weakened about 55% before the Turkish leader raised the white flag on his unorthodox policies.
“Banks’ return on equity needs to be improved,” Turkiye Garanti Bankasi AS CEO Recep Bastug said on the same call. “This is one of the risks ahead.”
Since last weekend’s dramatic overhaul, banking stocks have rallied 24%, compared with a 10% gain the nation’s benchmark index.
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