Azernews.Az

By Bloomberg

Turkish banks are showing little indication that the biggest currency depreciation in emerging markets is hurting them as much as analysts expected. Deutsche Bank AG says that barring catastrophe, it probably won’t.

Risks posed by the nation’s foreign currency exposure have been exaggerated by most investors, according to Deutsche Bank economist Kubilay Ozturk. All three of the nation’s five biggest lenders that so far reported earnings beat expectations, with none revealing a deterioration in bad loans.

“There could be a chasm between markets’ understanding of risks emanating from firms’ currency liabilities and the reality,” Ozturk said in an April 28 report. “Probably we need to go through another catastrophic event – to the tune of Lehman’s collapse – for Turkish firms’ net open FX position to turn into a serious problem.”

That runs counter to a chorus of warnings from analysts and credit rating companies, which have said a rapidly weakening lira makes it hard for Turkish companies to repay loans. Fitch Ratings said last month that the country’s firms are most vulnerable in emerging markets to currency fluctuations, while Moody’s Investors Service predicted rising problem loans would pressure banks’ asset quality and profits.

Bad Loans

The bad loan ratio at Turkish banks has stayed level with 2014, and profits are stronger than last year, according to regulatory data and public filings. While a sector-wide non- performing loan ratio of 2.9 percent is padded by banks selling packages of NPLs to asset management companies, it compares favorably with 5.6 percent in Russia and 8 percent in Poland, where numbers are also net of NPL disposals.

The bad loan ratio at Garanti, Turkey’s largest bank by market capitalization, improved since the last quarter, partly due to collections that were stronger than any quarter in 2014.

“A strong NPL collection performance was the main reason for the earnings beat,” according to Burgan Securities’ analyst Duygun Kutucu.

Garanti reported net income of 785 million liras ($296 million) on April 28, higher than any of 14 estimates in a Bloomberg survey of analysts. State-run Turkiye Halk Bankasi AS earned 583 million liras in the quarter, beating the mean estimate by 10 percent. Akbank TAS reported 732 million liras net income, also beating estimates.

The lira weakened 10 percent in the first quarter, and extended its decline through Thursday to 12 percent, the most among 31 major world currencies. It’s 21 percent lower against the dollar than it was 12 months ago.

‘Muddle-Through’

“Frankly speaking, we haven’t seen any customers get into trouble just because of the depreciation of the Turkish lira,” Hakan Atilla, a deputy chief executive officer at Halkbank, said on an April 27 earnings call. Adopting “speculative positions” is the main risk for banks on strong lira fluctuations, he said.

Central bank data show that non-financial companies’ net foreign exchange open position reached a record $182.1 billion in December, before a slight decline in January. The headline statistics mask the fact that most companies with foreign currency-denominated debt also have foreign-currency receivables, Deutsche Bank said.

“I guess some companies could get into trouble, but I doubt it’ll be so many as to cause a systemic breakdown,” Cagdas Dogan, a banks analyst at BGC Partners Inc. in Istanbul, said by e-mail on Wednesday. “A prolonged muddle-through is the most likely scenario.”

Single Quarter

Still, one quarter may not be enough to see an impact of the lira’s depreciation, and elections scheduled for June 7 may be a concern for some investors as stalwarts in Turkey’s economic administration are scheduled to retire from the government. Halkbank and Akbank said they would revisit their end-of-year guidance after the second quarter.

Garanti said on its April 28 earnings call that it would also revisit guidance, but that that its fee income projections could even be revised up.

“Banks have not experienced any roll-over problems on their long-term external debt since the collapse of Lehman,” Deutsche Bank’s Ozturk said, even as the currency has weakened 53 percent since then.

Still, with the U.S. Federal Reserve expected to raise interest rates for the first time since 2006 at some point this year, he sounded a note of caution: “Favorable historical performance does not mean that firms’ currency mismatch won’t become binding at some point.”