Feb 14 2018

Can Turkish banks support growth? Columnist asks

The key question for the Turkish government this year is whether the nation’s banks have the financial capability to support the high economic growth rates it is seeking ahead of elections, a leading Turkish columnist wrote.

Furthermore, do Turkish banks have the resources to ease the growing financing problems of Turkish firms, who are looking to restructure their debts at more favourable terms? Clues to these issues lie in the numbers, Uğur Gürses said in an analysis for Hürriyet newspaper.

Interest rates on Turkish loans currently average 18 percent, the highest level since 2009. The expansion in banks’ lending books stood at 13 percent in the last three months, the slowest increase in a year.

In addition, banks’ return on equity, or how effectively they are generating profit from the money that equity investors put into the business, stands at 14.7 percent, just a couple of percentage points above the rate of inflation, Gürses said. Most analysts see a return on equity of between 15 percent and 17 percent as attractive in mature markets where inflation is at low levels, according to Investopedia.

Banks have also been contending with a government-backed loan guarantee scheme that necessitates low interest charges, he said.

Banks’ difficulties are also exacerbated by non-performing loans and companies that are experiencing problems repaying debt at current rates of interest and terms. This problem has been underlined by credit rating agencies, who have pointed out that Turkish companies are experiencing more and more problems in rolling over debt.

A case in point is the predicament of the Ülker Group, Gürses said. Ülker, after making leveraged buyouts in the confectionary market, including the purchase of the Godiva chocolate brand, has asked 10 Turkish banks to extend the term of some $6 billion of short-term debt. Ülker is now talking with creditors about turning the debt into long-term loans, hence seeking to pass on its financial burden to the nation’s banks.

Furthermore, the owner of national telephone company Türk Telekom is unable to repay $4.7 billion of loans it borrowed to purchase a majority stake through another leveraged buyout, and is seeking to restructure the debt.

To put the above in context, the money owed by the two companies totals about one sixth of the extra funding the government has provided under its loan guarantee scheme.

So, while the scheme provided small and medium-sized firms with the extra time they needed to deal with their outstanding debts, the money available to banks for additional lending to support growth is now somewhat limited, Gürses said.