Growing Turkish debt may spell trouble for banks – Bloomberg

A growing mountain of foreign currency debt could spell more trouble for Turkish banks, Bloomberg reported on Monday.

There is a surge in demand to restructure loans by some of Turkey’s biggest corporations, adding to a jump in bad debt, which is already pressuring banks’ finances, Bloomberg’s Ercan Ersoy and Fercan Yalinkilic said.

The debt load of corporates has climbed to 40 percent of gross domestic product, almost double the proportion in Eastern Europe’s 10 biggest emerging markets and South Africa, which equates to 22 percent, according to Bloomberg data.

A decline in the lira has made the loans more expensive to repay – the currency fell 28 percent against the dollar last year and has fallen 7 percent from that level in 2019. A large shortfall in dollars leaves Turkish corporations exposed as they also struggle with an economic recession and inflation of almost 20 percent.

“The key question for Turkish banks is how much further bad debts will deteriorate in the face of deteriorating growth and political uncertainty,” according to Tomasz Noetzel, a banking analyst at Bloomberg Intelligence. “Another bout of weakness and big swings in the lira would only add to the risks for the industry.”

The capital buffer set aside by banks to withstand further shocks looks “dangerously thin,” Noetzel said.

Much could depend on the actions of the Turkish authorities, which have given the banks a clean bill of health.

Treasury and Finance Minister Berat Albayrak is due to announce a new economic plan this week designed to allay the fears of investors. The government has ruled out applying to the International Monetary Fund for financial assistance.

Meanwhile, Albayrak’s father-in-law, President Recep Tayyip Erdoğan, is seeking to overturn an opposition win in on March 31 elections to choose a new mayor of Istanbul, a decision that is pressuring the lira. He is also embroiled in a political spat with the United States over the purchase of Russian S-400 missiles.

NPLs have grown some 13 percent this year to $19.3 billion, which will translate into a deeper-than-anticipated economic contraction or more pressure on the lira, Ersoy and Yalinkilic wrote. That in turn could erode a cushion of about $27 billion in pre-provision operating profit at the banks, they said.

Cukurova Holding, the founder of Turkey’s biggest mobile phone operator Turkcell, may ask Ziraat Bank, a state-run lender, to restructure a $1.6 billion loan. Ferry firm IDO is negotiating with Lazard to restructure $500 million, Bloomberg reported.

Bad loans now constitute more than 4 percent of total loans, up from less than 3 percent at the start of last year. The banking regulator says that ratio could rise to 6 percent in 2019.

Energy companies alone have more than $51 billion in outstanding debt. All of Turkey’s largest infrastructure projects, including a new mega airport in Istanbul, were financed with foreign currency loans, mainly secured from local banks.

Ratings agency Fitch is among institutions that have warned that NPLs could worsen significantly, pointing to a pile of restructured lending totalling tens of billions of dollars and that could turn sour.