Turkish Bank Earnings to Expose Havoc Caused by Lira

(Bloomberg) -- Turkey’s banks are about to reveal the extent of the damage caused by the lira’s plunge and a surge in interest rates.

As the country’s biggest lenders start reporting second-quarter results this week, investors will be scouring their balance sheets for clues into how they’re coping from a 22 percent slide in the currency this year that is knocking the ability of companies to repay their foreign debt. They’ll also be looking for signs on whether the highest borrowing costs in almost a decade have started to cool the economy.

Bank profits are expected to show an average 5 percent drop from the previous three months, according to data compiled by Bloomberg based on the median estimates of the six-biggest publicly traded lenders. The lira weakened 2.9 percent against the dollar on Tuesday after the central bank unexpectedly left interest rates unchanged.

“Turkey’s weak currency, together with a 500-basis point interest-rate hike year-to-date will wreak havoc on banks’ asset quality, and raise alarm bells that flat 2018 cost-of-risk targets are increasingly unrealistic,” said Tomasz Noetzel, a European banks analyst for Bloomberg Intelligence in London. Those efforts are being further complicated by the adoption of new accounting standards that has led to higher provisions, he said.

Akbank TAS will report earnings on July 25, followed a day later by Turkiye Garanti Bankasi AS. Others lenders including Turkiye Is Bankasi, Yapi ve Kredi Bankasi AS, Turkiye Vakiflar Bankasi TAO and Turkiye Halk Bankasi AS.

Turkey Bank Estimates:

NameAverage Est.
2Q ’18
2Q ’171Q ’18
Garanti1.84b1.57b2b
Akbank1.53b1.51b1.7b
Isbank1.45b1.25b1.81b
Yapi Kredi1.12b892m1.24b
Vakiflar 1.06b865m1.01b
Halk Bank1.08b1.01b773b
Average1.35b1.18b1.42b
* Values in lira
* Data compiled by Bloomberg

The lira is the worst-performing currency after Argentina’s peso among 24 emerging markets tracked by Bloomberg at a time when foreign borrowings have more than doubled since 2008. Foreign-exchange liabilities after accounting for offshore assets climbed to a record $221 billion at the end of April.

Turkish Bank Earnings to Expose Havoc Caused by Lira

The currency’s decline and the interest-rate increases risk causing a spike in non-performing loan ratios and eating into capital adequacy ratios, which are still at about 3 percent and 16 percent, according to banking watchdog data. However, bad loans jumped more than 7 percent in the three weeks to July 5, reaching $16 billion, showing the first signs of cracks in asset quality.

Click here to read about Turkey’s bad loans jumping the most in 15 years

Turkey’s largest companies are seeking to rearrange almost $24 billion of loans, with the energy sector alone still having to repay $51 billion of debt. It also comes as President Recep Tayyip Erdogan tries to stoke growth by encouraging lending and after he jolted local markets by appointing his son-in-law to oversee the economy and replacing market-friendly names since consolidating power after last month’s elections.

“Should a significant number of Turkish corporates default on their foreign obligations, this would reverberate across the Turkish economy, cause mass consumer panic, shake the confidence of international financial markets and potentially lead to a crisis within the Turkish financial system and to a deep and prolonged economic recession,” said Fadi Hakura, Chatham House Turkey analyst.

“Erdogan is spiking the fuel to boost the speed of the sputtering mid-sized Audi-style Turkish economy to achieve superior Ferrari growth rates,” he said.

Fitch Ratings Ltd. echoed some of Hakura’s concerns in its assessment of the economy on July 13, when it cut Turkey’s sovereign rating into deeper junk.

“Tougher financing conditions and a weaker economy will likely hit the performance of the banking sector, heightening pressure on asset quality, capitalization and liquidity and funding profiles,” the ratings company said.

©2018 Bloomberg L.P.