Turkey banks face possible return to troubled past

As if a currency crisis wasn’t enough.

Turkey’s banking industry, the bedrock of an economic and financial revolution just over a decade ago, is now in troubled times.

And it could get worse.

A double-edged sword of last year’s lira slump, which forced many companies into default, and highly questionable government policies, is drawing negative attention from ratings agencies.

Just as profit margins are tightening, the government is coercing bank executives into lowering interest rates and lending more to cash-strapped businesses and consumers.

Part of that plan involves starving banks of normally high-yielding Treasury bonds. The government is doing that by both selling less debt on the open market and artificially lowering interest rates. State-run banks are heavily involved, buying up billions of liras through non-competitive bids.

It doesn’t stop there. 

On Friday, the biggest state-run bank, Ziraat, announced it would dish out loans to consumers at below the rate of inflation – 1.53 percent interest per month across the board. Consumer price inflation was an annual 20.4 percent in January. 

Such moves – and these are just the latest -- are designed to corner Turkey’s once strong and prudent listed banks and make lending, however risky, the only high-profit option. And with negative economic growth – the economy contracted by 1.1 percent on a quarterly basis in the three months to September – more risk it is becoming.

Also on Friday, Treasury and Finance Minister Berat Albayrak said that the government had arranged to provide small and medium-sized enterprises with 25 billion liras ($4.7 billion) in loans via 17 banks at 18.5 percent annual interest. Eighty percent of the loans will be guaranteed against default by the Treasury.

Standard & Poor’s warned two weeks ago that a possible surge in bad debt (non-performing loans in Turkey make up 4 percent of total loans and are growing) could prompt it to review credit ratings.

S&P said bad loans could double in size within a short timeframe. It pointed to a stockpile of tens of billions of dollars of “loans under close watch” that banks could soon declare in default. Much of that debt has already been restructured.

Unsurprisingly for some, S&P added that the currency crisis ravaging the economy -- industry is in an 11-month slump, according to a survey by IHS Markit — could return.

Fellow ratings agency Moody’s warned last week that cheap lending by Turkey’s state-run banks was misguided and could lead to downgrades. It cited another scheme announced by Vakıfbank, which has also slashed consumer loan rates to below inflation. Meanwhile, Ziraat Bank is busy restructuring the credit card debt of consumers too, inviting them to bring over their arrears from other lenders.

The government and the banking watchdog (basically state-run after an all-too-brief period as an IMF-approved independent body), say all is well with the finance industry. The credit ratings agencies have got it wrong, they claim. 

Woe betide any financial journalist at a pro government newspaper – there are many of those – if they argue otherwise.

It was only recently that foreign investors were piling money into Turkey’s listed banks knowing that responsible economic policy and strong balance sheets would both protect their investments and grow them handsomely. The Turkey of the 1990’s, with its bank failures and $20 billion IMF-backed bailouts of state-run banks, was almost forgotten.

But no longer. 

Coincidentally, President Recep Tayyip Erdoğan has revived one of those failed banks. Its name is Emlak Bank. And just like in the troubled 90’s, Emlak Bank and a handpicked CEO will dish out lending to the real estate industry, where many of Turkey’s most troubled companies operate.

Then there is İşbank, perhaps Turkey’s most successful and respected financial institution.  Erdoğan wants parliament to seize some of İşbank’s shares and hand them over to the Treasury. It is no surprise then that foreigners no longer see İşbank as a lynchpin of their Turkey investment strategy.

And foreigners are no longer selecting today’s Turkey as a place to dump serious money. The reasons should be blindingly obvious to most. 

Just like the Turkey of the 1990’s, Erdoğan’s new Turkey is on shaky ground. 

Sense might prevail as the year progresses. The government may return to prudent policies in April, when it has finished campaigning for local elections on March 31 and the results are clear. 

Or so the story goes...

But best ask Erdoğan, who not only leads Turkey, but its sovereign wealth fund as well, which in turn controls its generous state-run banks.