(Bloomberg) -- A bad loan headache is brewing for Recep Tayyip Erdogan.
The Turkish president has urged the central bank to lower interest rates and told lenders to bring down borrowing costs. But his quick fix for the country's economic woes risks backfiring as the lira's 18 percent slump this year, the third worst in emerging markets after the Argentine and Mexican pesos, is making it harder for local companies to service debt in foreign currency. That, in turn, is putting the country's banks in a bind.
Troubled loans have risen to the highest in seven years, with some lenders, such as Akbank TAS and Turk Ekonomi Bankasi AS, a unit of BNP Paribas, reporting a jump of as much as 30 percent in just the last quarter. In a move designed to ease some of the pressure on banks' earnings and allow them to keep handing out money, Turkey's regulator last week proposed cuts in provisioning ratios, including halving the amounts set aside for potential bad loans to commercial and small-to-medium scale enterprises.
“We are seeing a serious risk here,” Vedat Mizrahi, head of research at Istanbul-based investment bank Unlu & Co., said of the surge in troubled loans. Even if just half of the stressed loans end up deteriorating, “we will have the biggest non-performing loan levels since 2009,” in the aftermath of the financial crisis.
Turkey's banks have been relatively well capitalized since a consolidation after 2001, when a capital crisis amid hyperinflation resulted in about two dozen lenders failing or being taken over. They became a magnet for international lenders after surviving the 2008 financial crisis unscathed. HSBC Holdings Plc, ING Groep NV, Banco Bilbao Vizcaya Argentaria SA and Sberbank of Russia invested in the industry to benefit from robust lending growth, which picked up almost immediately after crisis.
“The sector seems relatively healthy for now with NPL's manageable and capital ratios at comfortable levels,” said Vikram Gill, a credit trader at MUFG Securities in London. Still, “asset quality seems likely to deteriorate in the near term.”
Non-performing loans have risen to 3.34 percent at the end of October, from 3.01 percent a year earlier, though they remain low in an international comparison. Stressed loans, formally known as loans under close watch -- where the borrower is no more than 90 days late on a payment -- have been surging recently as the lira weakened.
Fitch Ratings in a report Wednesday revised the outlook for Turkish banks next year to negative from stable, saying investors should expect “heightened risks to political stability and the operating environment to put pressure on bank credit fundamentals and increase the potential for further currency and interest-rate volatility.”
Dollar Borrowing
The problem is that much of the borrowing done by local companies has been in dollars, meaning they need to use more of their lira revenue to service the debt if the currency weakens. Non-bank companies' foreign currency borrowings from local lenders rose to an all-time high of $148.7 billion, or 53 percent of their total loans, at the end of September in the most recent data from the central bank, compared with $139 billion at end-2015.
“Foreign-currency lending makes up about a third of total loans and is at risk as the Turkish lira has fallen sharply since 2013 and could fall further,” Fitch Ratings Ltd., wrote in a report Wednesday, revising its outlook on the Turkish bank sector to negative from stable. “Many borrowers are likely to be hedged only in the fairly short term or partially.”
The lira's slide prompted the owner of Turkey's biggest telephone company to miss a $290 million payment on a $4.75 billion syndicated loan in September. The troubled loan was the biggest syndication in Turkish history when it was issued in 2013, with all of the country's largest lenders as well as international banks participating.
Staying Away
Now global lenders are increasingly staying away from Turkish syndicated loans after the government seized companies and fired workers allegedly connected to a plot to overthrow Erdogan. Renewals of foreign-financing facilities reached the slowest pace since January 2013, and almost every Turkish bank that's rolled over a syndicated loan in the second half of this year has seen a decline in participating lenders.
For more on the retreat of global banks, click here.
The lira's slump last month prompted the central bank to raise interest rates for the first time in almost three years, defying warnings by Erdogan. Yet the impact proved short-lived as traders speculated policy makers will hesitate to deliver further increases. Within hours of the Nov. 24 announcement, the lira reversed gains to hit fresh lows against the dollar.
Erdogan, who's purged more than 100,000 adversaries since a failed coup in July, has made it clear he won't tolerate higher interest rates to support the currency. He said in a speech on Nov. 23 that while he has “nothing to say against the central bank's autonomy,” he wouldn't “consent to having my people's rights and resources wasted through high real interest rates.”
The 62-year-old president has led a chorus of voices in government who speak of interest rates as tools of oppression used by foreign powers to keep Turkey's economy weak.
The lira weakened to a fresh low after Erdogan on Friday said there's no other solution than to cut rates. On Tuesday, its loss this year was at 14.4 percent.
“In order to stabilize the currency we think the central bank will need to deliver one large hike,” said Inan Demir, a London-based economist at Nomura International Plc. “Obviously, this will have negative effects on growth, which is already slowing. But the growth impact of letting the currency depreciate further and wreak havoc with corporate balance sheets would be much more severe.”
To contact the reporters on this story: Ercan Ersoy in Istanbul at eersoy@bloomberg.net, Constantine Courcoulas in Istanbul at ccourcoulas1@bloomberg.net. To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net, Christian Baumgaertel
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