Turkish banks in breather, but dangers remain

Turkish banks are finally getting a breather as the country’s currency crisis ebbs, but the relative calm may not last.

The central bank’s decision to raise interest rates by 425 basis points to 24 percent earlier in September has helped steady the lira, which has slumped almost 40 percent this year.

Consequently, the additional yield that investors demand to own the debt of Turkish banks compared with comparable government bonds has dropped sharply, said Bloomberg columnist Marcus Ashworth.

But in order for the rally to stick, Turkey needs to set up a bad bank to deal with the mounting non-performing loans of its finance industry, said Ashworth, former chief markets strategist at Heitong Securities in London. This will be a “vital element in alleviating Turkey’s distressed debt situation,” he said.

Last week, Turkish Treasury and Finance Minister Berat Albayrak announced a new economic programme for the country. As part of the measures, he promised a full assessment of banks’ balance sheets and financial help for the lenders, if needed. But no vehicle to deal with the worst of the companies’ NPLs was mentioned.

The Turkish banking industry faces a litmus test this week – Akbank, one of the largest listed lenders, is set to sign a rollover of a one-year foreign currency loan, Ashworth said.

“But make no mistake. This is no return to normality in the long term. A spate of mass bankruptcies has been averted, but lenders’ profits will be severely squeezed in the long term as non-performing loans climb,” he said.

Turkish banks also face financial pressure because their short-term borrowing rates in liras are higher than their long-term lending rates.

“So far, Erdogan’s ministers have been able to soothe investors’ nerves — but they will need to follow through with their promises of help if they are to avert another financial crisis,” Ashworth said.