Capital to fund the expansion of Turkish banks is scarce and getting more costly, according to the chairman of Turkey’s biggest publicly traded lender by assets.
“Capital erosion is the most important issue in the Turkish banking industry, because capital has become the most important limited resource,” Turkiye Is Bankasi AS’s Ersin Ozince said in an interview with Bloomberg on Thursday in Istanbul. “Even the best banks are looking for subordinated debt,” showing investors are reluctant to inject capital as returns on less risky investments rise.
Average return on equity for Turkish deposit banks was 13 percent last year, compared with an average yield on 10-year sovereign debt of 10.2 percent, according to data compiled by Bloomberg. Facing government pressure to increase credit after the economy expanded at the slowest pace since 2009, lenders have turned to subordinated debt, which supports capital buffers, carries higher risk for investors and costs more.
“This isn’t a bad thing, but it shows that investors prefer not to be a shareholder due to better alternative yields plus risks,” Ozince said. “Return on equity is approaching 14 or 15 percent, but when you add risk, this is even lower than government bonds,” he said.
Among the risks: another bout of currency weakness after a 17 percent drop in the lira against the dollar last year, higher interest rates due to soaring inflation, and the possibility of a jump in non-performing loans.
“We have to manage those risks because it’s not just the banking sector, but also the real sector that’s exposed,” he said.
Turkish companies’ net foreign currency liabilities were around $200 billion as of the end February, according to the central bank data, or about 25 percent of gross domestic product. In an attempt to better monitor that exposure, Deputy Prime Minister Mehmet Simsek said the government is working on a model for the central bank to gauge the impact of currency fluctuations on corporate liabilities.
While a credit guarantee fund helped boost lending in the first quarter, other initiatives floated by the government may not have the intended impact, according to Ozince. Nurettin Canikli, another deputy prime minister, told Bloomberg last week that legislation would be introduced to allow banks to securitize and sell off their loan portfolios, letting them raise cash to fund new loans. Ozince is skeptical.
“We’ve always wanted securitization,” he said. “The reason it’s not being done is because it’s thought that there wouldn’t be enough demand. What’s important is stability in the country. If we have that, of course the demand will also come.”
All of that leaves banks reliant on foreign financing to spur domestic growth, he said. “I don’t see a risk in roll-overs, but we can’t say there’s no problem,” he said, citing “markedly” higher borrowing costs.