Turkish banks facing tough decisions as bad loans grow

Turkey’s banks are facing tough decisions as bad loans in the economy increase, Nick Corbishley said in an analysis for wolfstreet.com.

The troubles were reflected in banks’ third quarter earnings this month, when İşbank, one of the country’s largest non-government banks, said non-performing loans in its portfolio may reach 7.5 percent of total loans by the end of the year, Corbishley, a writer and journalist, wrote at the weekend.

Bad loans in Turkey have almost doubled since a currency crisis last year. Credits in foreign currency, which have become more expensive to repay, make up about 40 percent of the industry’s total assets.

Many of the loans have been restructured, partly with the help of state-run banks. But lenders had hoped that the government would do more to shield them from losses made from defaulting loans, similar to measures taken in Italy following the global financial crisis. That hasn’t happened, Corbishley said.

“Without such assistance, banks in Turkey could face tough decisions in the months ahead over whether to sell or restructure the souring debt on their books, most of which are a hangover from the cheap loans, often denominated in foreign currencies, that the banks extended to the construction sector, which is dominated by government cronies,” he said.

At the same time, President Recep Tayyip Erdoğan is urging banks to lend more to support his ambitious targets for economic growth and has instructed state-run banks to slash interest rates on consumer and business loans. The central bank is penalising lenders who do not meet an annual loan growth goal of between 10 percent and 20 percent.

While there are tentative signs that these incentives are starting to bear fruit – mortgage lending has increased by more than 10 billion liras ($1.75 billion) since the end of July, there could be a price to pay for this largesse, Corbishley said.

Corbishley cited the case of Ziraat Bank, Turkey’s biggest state-run lender, which saw its profits decline by almost one third in the first three quarters of the year. Ziraat is controlled by Turkey’s sovereign wealth fund, which is chaired by Erdoğan.

https://wolfstreet.com/2019/11/17/as-bad-loans-explode-in-turkey-government-tries-to-recreate-debt-fueled-boom-that-let-to-its-financial-currency-crisis/