Turkey Bank Stocks Sink to Record Discount Amid Foreign Exit

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Turkish bank stocks, hardest hit by a selloff of Istanbul equities from foreigners, are trading at a record discount to local industrial sectors. Only a combination of interest-rate rises and changes to government policy could shake them out of their slump, market participants said.

An index of major local banks has slid 32% this year, while the Borsa Istanbul Industrials Index has gained 17%. The lenders are trading at a 61% discount, based on estimated 12-month earnings, the widest gap since at least 2006.

Turkey Bank Stocks Sink to Record Discount Amid Foreign Exit

Bank stocks are typically favored among foreign investors, partly because of their relatively high liquidity. That means they have felt the worst of the $5.6 billion in net outflows of Istanbul stocks by non-residents so far in 2020, on track to make this a record year for redemptions from foreign investors.

Turkish banks may be profitable and remain well capitalized, but a 21% slide in the lira and concerns about policies that prioritize economic growth above all else, pushing record credit stimulus, have deterred foreign institutions.

“Historically, bank shares usually show a relative recovery after the adoption of orthodox monetary policies that bring inflation and the exchange rate under control with adequate interest rate hikes,” said Cagdas Dogan, a banking analyst at BGC Partners Securities in Istanbul.

The lira weakened to a fresh all-time low of 7.5438 against the dollar on Thursday.

Foreign Reserves

Toygun Onaran, managing director of Istanbul money manager Oyak Portfoy, said he doesn’t expect a change in direction for banking stocks unless the government adjusts regulations to support the sector. Non-banking companies have a higher correlation to a recovery in the global economy that makes them more appealing, said Onaran.

Banks also failed to get support from this year’s saviors of the Turkish equity market -- mom and pop investors looking for returns better than the meager interest on bank deposits. They have preferred the less-liquid shares of small- and medium-sized companies that are more likely to deliver a quick profit.

The fortunes of Turkish lenders are also more closely tied to central bank foreign-currency reserve levels than in other developing countries, according to Mathieu Racheter, an emerging-market strategist at Bank Julius Baer in Zurich.

“Higher reserves come hand-in-hand with an external funding surplus, which takes off the pressure on the lira and the central bank can lower interest rates,” Racheter said. “As a result, net interest margin expands and the cost of risk decreases, which improves the profitability of Turkish banks.”

Turkey Bank Stocks Sink to Record Discount Amid Foreign Exit

Turkey’s foreign currency reserves, excluding gold, dropped to $44.9 billion, central bank data showed as of Sept. 4. Gross reserves were at $87.5 billion in the same week, down from $106.3 billion at the end of 2019.

The nation has spent its foreign-currency holdings faster than any other major developing economy this year. With foreign-exchange reserves dwindling to near a 15-year low, Turkey needs either higher interest rates or bullish sentiment that would spur foreign capital inflows. The central bank has cut its key lending rate by a total of 1,575 basis points since it started easing in July 2019, keeping it at 8.25% since May.

“Should the policy makers take a step regarding the policy rate and abandon forced pro-growth regulations on the asset ratio and required reserves, there’s room for recovery” in banking shares, said Dogan, the BGC analyst.

©2020 Bloomberg L.P.

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