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ANALYSIS: Public Banks Shoulder Turkey’s Growth

Leaving almost the first four months behind, we have at hand signs of slowdown evident from the pace of industrial production, details of PMI and confidence indices. Of course the best indicator that mirrors where growth is heading to come from the banking sector; that is from the details of loan growth.

ANALYSIS: Public Banks Shoulder Turkey’s Growth

We now all know that Turkey’s deteriorating economy has played a major role in President’s Erdogan’s call for a very early election on June 24th.  With 7.4 percent GDP growth last year, Turkey’s economy had in fact made a very fast start to 2018 as well.  Yet today, leaving almost the first four months behind, we have at hand signs of slowdown evident from the pace of industrial production, details of PMI and confidence indices.

Of course the best indicator that mirrors where growth is heading to come from the banking sector; that is from the details of loan growth.

FX adjusted, 13-week moving average, annualized loan growth rate had engaged to a soaring trend starting from last year’s end of March until well into July 2017.  The push from the government’s Credit Guarantee Fund (CGF) had pulled up loan growth rate for both the public and the private banks.  In figures, during March 2017 until 4Q17, loan growth rate of public banks ranged in 35-50 percent.  While a similar uptick for the private banks was observed for the private banks, its momentum was weaker with 35-30 percent while the boom had also lasted shorter squeezed into April-July 2017.  Afterwards, private banks’ loan growth rate had sank into single digits until the end of 2017 and the public banks relatively emerged as the sole front in the banking sector that kept supporting Turkey’s growth.

Now looking at the loan growth details starting from 2018 and onwards, we notice an even more interesting picture.  While the loan growth rates for both the public banks and the private banks appeared stable at 15-16 percent as of end of January, during January and April loan growth rates for public banks soared to 25-30 percent.  In contrast during the same period amidst higher cost of borrowing both at home and abroad the loan growth rate for the private banks dived to 9-11 percent.

In summary, Turkey’s GDP growth is being shouldered by the public banks -read that as the government- since the end of January 2018.  While the public banks is stepping on the gas to give a boost to the economy, there is no available data on whether the loan quality is healthy or nor.  On the other hand, with already limited fund available in the banking sector for extensive loan growth, the public banks’ responsibility or obligation to continue extending loans is already pushing up the interest rates in Turkey.  Thus, even if the central bank is absent from the picture not hiking the rates for the sake of controlling lira and inflation, the general rise of cost of funding in the economy has already pushed loan rates to 14-20 percent range. As for the distribution of loans, we see the corporate loan growth rate at 20 percent dominating the growth in consumer loans and credit cards.

As has been in the press recently, many Turkish big corporates are applying to banks to restructure their debt.  A few big size construction sector companies which President Erdogan considers as among the fundamental sectors to lead Turkey’s GDP growth have been applying for debt restructuring showing how critical it is to follow loan side developments in Turkey over the coming months. It should be stressed however that such debt restructuring is far from creating a negative domino effect for the Turkish banking sector for the time being.

We now have very early elections ahead scheduled on June 24. With almost 60 days of countdown for the general and the presidential election, it would be a realistic expectation that the public banks will keep on debt restructuring efforts adding to their loan growth momentum.   Yet, things can get more critical with regards to corporates’ debt problems once the elections are over and the Turkish economy expectedly engages in a notably slower growth trend. Especially in the case that the central bank hikes its policy rate in an effort to tackle its lost grip on inflation and lira to serious extent after the election, faster pace of economic slowdown will negatively affect corporate sector that has been heavily borrowing from the public banks.  The companies that are restricting their existing debt from the current higher rates will have further difficulty as GDP growth slows down tangibly.

We will keep a close eye on loan developments in the coming months.  As for now what the loan details tell us is that starting from 2019 news on restricting are likely to be accompanies by insolvency news as well.

GA.

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