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Turkish banks:  How to flatten the NPL Curve?

Our model predicts a 4pp increase in Turkish banks’ NPL ratio to 9.3% to June 2021 followed by a 0.5pp drop by year end

Turkish banks:  How to flatten the NPL Curve?

HSCB Research Department updated its views on the Turkish commercial banking industry after the outbreak of Covid-19 epidemic. Turkish banks play an important role in government’s efforts to mitigate the economic damage of the virus. In return for generous loan making, macro-prudential rules are relaxed to slow down NPL accrual. HSBC answers the question of how these changes will affect bank profitability.

 

These are excerpts from its report:

We update our NPL curve with HSBC’s reduced GDP growth estimates

We incorporate HSBC Economics’ latest GDP forecasts for Turkey of a 3.2% contraction this year and 3.7% growth in 2021. Our model predicts a 4pp increase in Turkish banks’ NPL ratio to 9.3% to June 2021 followed by a 0.5pp drop by year end.

We then allow for the recently announced forbearance measures and CGF guarantees. They smooth the curve and pull the peak down to 8.5% (Figure 8). Regulatory forbearance and CGF programme may smooth the NPL curve …

The government’s and BRSA’s announcements of a three-month payment holiday and extension of past due criteria for NPL recognition from three to six months should slow the increase in NPL ratios. Moreover, the newly introduced CGF programme, which could provide TRY80bn of fresh credit initially, should help contain the increase. We estimate that almost one-fifth of loans in the system could have Treasury guarantees in some form by the end of this year.

 

… but not the CoR curve. We raise 2020e CoR by 25bps for private banks

Although forbearance may delay NPL recognition, the procyclicality of IFRS-9 models may require frontloading of provisions. We had already raised our CoR forecasts in Turkish Bank: Looking Oversold, 26 March 2020, but after incorporating HSBC’s new GDP forecasts, we now raise our 2020 CoR estimates for private banks by 25bps to c.270bps; we leave our 2021e CoR unchanged at c.160bps. Any delay in the economic recovery due to the pandemic is an upside risk to our CoR forecasts.

We reiterate our Buy ratings on Akbank, Garanti and YKB

Our higher 2020e CoR leads to an average 8% reduction in our 2020 earnings estimates for private banks; our 2021-22e earnings and target prices are unchanged.

We reiterate our Buy ratings on Akbank, Garanti and YKB given their defensive balance sheets and attractive valuations. We maintain Hold ratings on the rest.

 

 

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