Sebnem TURHAN
The new regulation of the Central Bank directs banks to Treasury bonds again. Already in the last period, due to the change in collateral conditions, it turned to fixed coupon bonds and the bond yields had fallen below 17 percent regardless of inflation and risks. The effect of the regulation showed itself immediately and yesterday the two-year and 10-year benchmark bond yields fell sharply. The two-year benchmark bond interest fell from 17.62 percent to 14.23 percent, then rose to 15.75 percent, but the 10-year benchmark bond rate also fell from 16.93 percent to 13.96 percent. On the other hand, Turkey’s 5-year bankruptcy risk premium CDS increased by 800 basis points and reached its highest level since July 29.
What was the Central Bank’s regulation?
At the beginning of the measures it took to bring the commercial loan rates closer to the CBRT’s interest rates on Friday, the Central Bank stipulated that the required reserve facility, which is applied at the level of 20 percent for loans subject to required reserves, should be replaced by a 30 percent security facility. Again, as of December 30, 2022, it was decided to establish a security for one year, equal to the loan amount exceeding the loan growth rate of 10 percent compared to July 29, 2022. And, it has been decided that the excluded credit types will be subject to the establishment of securities if they are not used against expenditure. In addition, from the date of the communiqué’s publication until the end of 2022, commercial loans are 1.4 times higher than the annual compound reference rate published by the Central Bank. interest It was stated that it was decided to establish securities at the rate of 20 percent of the loan amount to be extended at a rate of 1.8 times and 90 percent of the loan amount to be extended with an annual compound interest rate of 1.8 times. According to the calculations of experts, this indicates that banks with commercial loan interest exceeding 22.85 – 29.38 percent should hold additional securities.
75.7 percent of the bonds are in banks
Experts state that the new reserve policy will increase the demand for bonds of banks again, but it is not yet known how much bond demand will be. According to the Treasury data, the total bond stock is 2.4 trillion TL, of which 1.8 trillion TL is in banks. Experts noted that a significant part of these are already held until maturity or given to the CBRT as collateral within the framework of OMO. According to the data of the Ministry of Treasury and Finance, a significant portion of the bonds held by banks, worth TL 1.8 trillion, is above public banks. According to the data, 75.7 percent of the Treasury bonds in total are in the hands of banks. While public banks hold 38.8 percent, private banks hold 20.5 percent and foreign banks hold 9.6 percent Treasury bonds. It is seen that 5.5 percent of participation banks and 1.2 percent of development and investment banks have Treasury bonds.
Could it be risky for banks in the future?
What will happen next? Banking sources reminded that the change in the collateral structure brought about by the macroprudential measures implemented in June led banks to fixed coupon bonds and that banks showed great interest in CPI-indexed Treasury bonds throughout this year. Noting that the amount of bonds that banks can buy from the market is limited with the new regulation, experts noted that the long-term bond auctions of the treasury will be sold in large quantities at low interest rates. However, experts point out that despite the current high level of inflation, investing in long-term bonds at a very low interest rate may force banks in the future.
Will banks tighten their credit taps even harder?
Banking sources emphasized that high inflation and the high risk premium may force banks and that the market will be very selective in commercial loans after a point, which will have a contractionary effect on the loan volume. In addition, banking sources pointed out that more aggressive lending by public banks or some changes in this regulation may be seen in the future.
Rapid pullback in benchmark bond rates
After the regulation introduced in June, benchmark bond rates decreased. While the 10-year benchmark bond rate was 28 percent in March 2022, it fell to 16.93 percent as of Friday’s closing. In addition to the 10-year bond interest, which fell sharply to 13.96 percent with a decrease of 297 basis points yesterday, there was also a decrease in the 2-year benchmark bond interest. The 2-year benchmark bond rate, which was at 17.62 percent at the close of Friday, dropped to 14.23 percent and a decrease of 339 basis points was observed. The same trend was observed in the 5-year benchmark bond interest. The 5-year benchmark bond interest rate, which was 16.77 percent at the close of Friday, fell below 14 percent with 13.98 percent. The decline was 279 basis points. Analysts stated that the decline in bond yields may continue in the coming period.
Commercial loan growth below 25%
At the Central Bank Monetary Policy Committee meeting, he drew attention to the gap between the policy rate and the commercial loan rate, and pointed out the slowing economic activity in the recent period, emphasizing that financial conditions should support the continuation of the momentum and increase in industry and employment. For this reason, he announced that he had cut interest rates by 100 basis points. As pointed out by the Central Bank, commercial loan rates rose to 27.64 percent on average in the week of August 12, excluding corporate credit cards and overdraft accounts. On the other hand, commercial loan growth declined to 24.92 percent, below 25 percent, on a 13-week annualized basis and adjusted for exchange rate effects. While the total loan growth decreased to 34.5 percent, the unadjusted growth in consumer loans decreased to 50 percent. While the 13-week annualized and exchange rate adjusted growth in commercial loans was 38.5 percent in public banks, it was calculated as 13.42 percent in private banks. In other words, the loss of momentum in the growth rate of commercial loans was more remarkable in private banks.
5-year CDSs exceed 800 basis points again
Turkey’s 5-year bankruptcy risk premium CDS, which turned its direction upwards after the 100 basis point interest rate cut at the Central Bank’s Monetary Policy Committee meeting on Thursday, rose above 800 basis points again at the opening yesterday. This level marks the highest level seen since July 29. Turkey’s 5-year bankruptcy risk premium CDS had reached the highest level since 2008 with 900 basis points in mid-July. With the increase in the risk appetite in the global markets and capital inflows from Russia, a relaxation was observed in CDSs below the level of 700 basis points in August. After testing below 650 basis points on August 11, the risk premium started to rise again.
