Turkish crisis takes on global dimension as loans pile up

The sharply weakening currency means the foreign debt of Turkish corporates becomes increasingly expensive to repay.
Sunday 02/09/2018
People walk past a row of automated teller machines in the district of Levent in Istanbul, on August 15. (AFP)
On pins and needles. People walk past a row of automated teller machines in the district of Levent in Istanbul, on August 15. (AFP)

Turkey’s currency crisis, spurred by economic mismanagement and US sanctions, may pose a significant risk to European financial institutions due to their credit lines to Turkish companies.

The lira is leaving European firms exposed to the turmoil in Turkey to the tune of tens of billions of dollars, both via their ownership of its financial institutions and the money they have lent to its once-vibrant private sector.

Figures supplied by one Gulf banker showed that banks in Spain are liable for $83 billion of loans and equity in Turkey, partly through BBVA’s ownership of Garanti Bank, once the darling of foreign portfolio investors in Turkey. France follows with $38 billion, the United Kingdom with $19 billion and the United States with $18 billion. The exposure of Italy — its largest bank, UniCredit, owns Turkish lender Yapi Kredi — is $17 billion, the banker said.

Turkey’s lira has slumped 40% against the dollar this year, falling about 20% in August. The sharply weakening currency means the foreign debt of Turkish corporates becomes increasingly expensive to repay. Long-term foreign currency loans of the companies total more than $220 billion. Both foreign banks and local lenders, including those owned by foreign entities, may take a hit. Construction and energy companies in Turkey are particularly indebted.

UniCredit, BBVA and France’s BNP Paribas, which owns medium-sized Turkish bank TEB, have sought to downplay the effects on their finances of a write-down of their assets in Turkey, saying they are relatively insignificant, the cash is there to cope and the entities constitute a small proportion of their balance sheets.

Banks in Turkey, like some of their emerging market counterparts, however, have taken increasing risks in recent years as quantitative easing by the Federal Reserve and European Central Bank caused a flood of cheap money to flow into developing economies.

As a result, loan-to-deposit ratios have climbed to almost 120% from a little more than 100% five years ago. That means lenders have proportionately fewer liquid resources to call on should borrowers fail to repay loans or depositors withdraw cash.

Furthermore, a large maturity mismatch at Turkish banks between loans and deposits — 20 months on average for loans versus three months for cash, leaves them exposed should financial instability in Turkey reach crisis point.

Paul McNamara, an emerging-market currency and bond investor who works at Swiss asset manager GAM, said the key financial issue facing Turkey was rolling over foreign loans to banks. The rest is just noise, he said in comments on Twitter.

The economic situation in Turkey is serious enough for the Single Supervisory Mechanism (SMM), the wing of the European Central Bank set up to monitor the continent’s banks, to look more closely at lenders’ links with Turkey. While the SMM does not say the situation is critical, it considers BBVA, UniCredit and BNP Paribas to be particularly exposed, the Financial Times reported.

The main concern of the SSM is that Turkish borrowers might not be sufficiently hedged against the weakening lira and start defaulting on foreign currency loans. These loans constitute about 40% of the Turkish banking industry’s assets, data from Turkey’s financial watchdog stated.

Goldman Sachs warned that banks’ capital is disappearing as the lira weakens, meaning they have less financial firepower to deal with problem loans.

Analysts at the US investment firm said in July that Turkish banks’ capital would have largely eroded should the lira weaken to 7.1 per dollar, from around 6.2 currently. The exchange rate was about 3.5 per dollar at the end of 2016, showing the propensity of the currency to weaken further.

Goldman pointed to UniCredit’s Yapi Kredi bank as the weakest bank among financial institutions it covered in Turkey. Data it published showed that the excess capital of Yapi Kredi and Turkiye Is Bankasi would largely disappear should the lira fall to 6.3 per dollar. The next weakest link was Akbank, which would see similar erosion should the lira decline to 6.9 to the dollar.

Turkish banks, like peers around the world, are seeking to exceed internationally recognised capital benchmarks to show that they are solvent and financially strong.

Under the Basel III banking rules, banks are required to meet a minimum CET1 capital ratio of 8.5% in 2019. This ratio, calculated by dividing a bank’s core capital by risk-weighted assets, is designed to protect a financial institution against unexpected losses, such as those that occurred during the 2008 financial crisis. Regulators can require 2.5 percentage points of extra capital in times of high credit growth.

The ratio for Turkish banks was 12.2% at the start of June, above these limits but for every 10% decline in the lira, the ratio falls 0.5 percentage points on average, Goldman said. For instance, the 12% slide in the lira during July reduced the ratio by 60 basis points to 11.6%. August’s 20% fall in the currency means the ratio stands at 10.6%.

In contrast to Goldman’s warnings, Turkey’s Treasury and Finance Ministry, run by Berat Albayrak, the son-in-law of Turkish President Recep Tayyip Erdogan, argued that banks have plenty of capital and their balance sheets were robust.

The government points to the overall proportion of bad loans to total loans at Turkish banks, which totals about 3%, relatively low by global standards, but officials fail to mention a growing pile of restructured loans and loans under close watch, which exceed 10% of total loans at some banks.

In a recent conference call with more than 2,000 foreign investors, Albayrak said banks’ capital adequacy ratios were about 16%, meaning they had plenty of ammunition in case of financial shock. However, the figure he cited appeared to come from an annual report for last year by the banking regulator, published before the lira’s 40% collapse.

(This article was published originally in www.ahval.com.)