Turkish Banks on a Roll as Investors Focus on the Bright Side

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(Bloomberg) -- Shares of Turkish lenders just finished their best quarter in more than two years thanks to jumbo interest-rate cuts that worked up investors’ appetites.

The Borsa Istanbul Banks Index climbed 13% through Sept. 30, the biggest three-month gain since June 2017 and the fourth straight quarterly advance.

“Investors decided to be optimistic and see the glass half full as far as banking stocks are concerned, thanks to rate cuts and the lira’s resilience,” said Can Oksun, senior manager of institutional sales at Global Securities in Istanbul.

Oksun also pointed to the sector’s low valuation, with the lenders’ gauge trading at a more than 48% discount to its peer MSCI EM Financials Index.

Turkish Banks on a Roll as Investors Focus on the Bright Side

Turkey’s central bank cut the policy rate by 750 basis points in the quarter. Not only that, the bank’s new governor also managed to strike a balance that kept lira bears away as he promised “a reasonable rate of real return” for investors. With the big global central banks also trimming policy rates, capital continued to flow into the nation’s banking stocks, led by Akbank and Garanti BBVA.

The next few quarters may not be as easy as this one though. For momentum to continue, “investors will seek new stories, such as a rating and/or outlook upgrade or some sort of compensation for the loss that will be incurred on some banks’ balance sheets after the regulator’s bad debt plan,” Oksun said.

Turkey’s banking watchdog told lenders to reclassify 46 billion liras ($8.2 billion) of loans as non performing by the end of the year and set aside enough provisions to cover them, which analysts see as eroding the banks’ earnings and share prices.

On top of that, rate cuts will moderate as signalled by the central bank’s governor Murat Uysal last week, and there are other potential negatives that need to be digested including lower remuneration on required reserves, and a cut in the maximum interest rate that can be charged on credit cards and mortgage loans.

“All these could weigh on the stocks when sentiment turns sour,” Oksun said.

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