President Erdogan’s chief economic advisor Mr. Cemil Ertem told state-run broadcaster TRT that patience with banks have run out, signaling yet another intervention by the presidency to lower loan rates. Loan growth has decelerated since the beginning of the year, while prime rates soared to post-2008 highs. Rising bank profits, reaching TL4.5 bn in January according to BRSA, is the focus of the Presidency, which demands “patriotic sacrifice” from banks to help the government boost growth. Lower bank profits combined with Moody’s recent rating cut could impair banks’ capacity to borrow abroad.
Cemil Ertem: We are at the end of our rope
According to Ahval News, advisor Ertem was extremely incensed by bank behavior:
Turkey’s government has run out of patience with banks, said Cemil Ertem, senior economic adviser to President Recep Tayyip Erdogan.
“We’ve reached the end of the road and our patience,” Ertem said in an interview with state-run TRT television on Friday, according to Vatan newspaper. “We are beyond the point of debating whether or not regulations are sufficient.”
Erdoğan’s government is calling on the nation’s banks to lower interest rates on loans, which have reached as much as 20 percent after inflation accelerated into double digits and opportunities to raise financing for additional lending waned.
The government is working on measures to ensure banks do not act like oligarchs and the sector should get its act together, starting with state-run banks, Ertem said.
Turkey’s credit guarantee fund, established by the government to distribute subsidised loans, should tell lenders to not give credits above certain rates of interest, he said.
Loan growth declines visibly
According to a research note by Yatirim Finansman, total loan growth declined to 2.2% in 1Q18 vs. 4Q17 of 5.3%. The growth trend (13w-annualized) in retail loans decelerated to 8.3% from 10.1% a week ago. TL commercial loan growth decelerated to 18.4% from 18.6% a week ago.
According to analysis by PA Intelligence, bulk of the growth emanates from state banks, with private remaining reluctant about adding to their assets.
So far, low loan growth had not hurt banks’ bottom line. According to Turkish regulator BRSA, aggregate gross bank profits reached TL 4.5 bn in January (monthly), rising by 22% vs. the same month of 2017.
It is this profitability that angers Erdogan’s team, which maintains that using their cartel power banks are bleeding industrialists dry.
Intervention could prove costly
Erdogan had been signaling an intervention since the beginning of the year, but it is not clear what can be done, given that despite average deposit rates reaching 14% pre-tax, TL deposit growth has come to a near standstill. Total deposit growth was only 1.6% in 1Q18 vs. 4Q17: 4.7%.
Banks’ weighted equity-to-asset ratio is estimated at around 15%, which is robust, but it needs to be remembered that credit risk might be significantly underreported. Moreover banks need to maintain high equity buffers to secure new loans from abroad. After Moody’s cut Turkey’s rating to two notches below “investible”, banks will need even stronger balance sheets to compensate for higher country risk.
Banks can’t be forced to lend at cheaper rates, but may be “persuaded” to do so with implicit threats of legal action. Similar methods had been used in 2017 to boost mortgage loans, which did result in lower rates across the industry, but private banks largely abandoned the business.
It is clear that Ankara has no intention to cool off the economy or combat inflation to bring down interest rates. Market-disrupting methods are likely to be used “to tame the banks”.
Equity analysts should revisit their projections regarding 2018-2019 if Erdogan is serious about lowering loan rates.
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