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Bad loan write-off to trim earnings

More could be underway, as several analysts commented that there are much more distressed assets in bank balance sheets which need to reclassified and provisioned for.

Bad loan write-off to trim earnings

Two Turkish investment banks commented on the new instruction by Turkey’s banking regulatory authority BRSA to bank to write-down loans worth TL46 bn, or roughly $8bn.  The action is needed to provide full transparency to bank balance sheets and to breathe some life into the launching of two funds to buy and then dispose assets. But, earnings losses would be costly. In fact, Thursday’s 1.5% drop in BIST-100 was led by bank stocks. More could be underway, as several analysts commented that there are much more distressed assets in bank balance sheets which need to reclassified and provisioned for.


TEB Invest:  NPLs rising

Turkey’s Banking Regulation and Supervision Agency announced that TRY46b of loans, predominantly energy and construction sector-related exposure, should be transferred to NPLs. These loans must be classified as NPLs by the year’s end and necessary provisions made. The BRSA has calculated that the additional provisioning would lower CAR by 50bp to 17.7% from 18.2% as of July 2019. We believe these loans are 65% provisioned and the potential nominal impact on the sector’s equity would be TRY16b.

Assuming a 50bp impact on CAR for the banks under our coverage, we calculate an average negative net earnings impact of 31% (-19% if adjusted for free provisions), while the equity impact would be an average of 2.9%. The incremental positive impact we expect from widening spreads on net earnings in 2H19 will be way short of compensating for these additional provisions, in our view.

We deem the additional provisioning negative in the short term for banking stocks. Yet we believe that the move is constructive in terms of improving the transparency of bank financials. We believe this is an initial step to sell NPLs to a third party, presumably in 2020. In our view, banks could now tolerate higher haircuts when divesting these problem loans as they will be fully provisioned for.

(By Ovunc Gursoy)


YF Securities:   BRSA provisioning call to result in TL12bn additional provisioning

Head of Banking association Huseyin Aydin (Ziraat Bank CEO) has given some details regarding BRSA’s decision to ask banks to categorize TL46bn loans as NPLs by year-end. In line with our comments yesterday, banks have already provisioned some portion of the said loans, leaving TL12bn additional provisions to be set aside during the remainder of the year. This figure corresponds to 18% of our net earnings estimate for the sector and is in line with our estimated impact of 15-20%. Also, note that our current annual earnings estimate, including the TL12bn is TL39bn, top of the range of TL35-40bn given by Mr. Aydin.

While the TL12bn figure may be regarded as positive versus the worst case scenario of TL46bn in additional provisioning, Mr. Aydin has also revealed that only half of the TL46bn is related to loans extended to the energy sector; and USD13bn of loans extended to energy companies still need restructuring. This confirms our view that the system profitability would likely be pressured by additional provisioning requirements in 2020 and 2021 as well. We maintain that the sector would need additional capital in 2019 (state banks) and 2020 (private banks with maybe the exception of AKBNK and GARAN). Negative.


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