Elif KARACA
James Longsdon, Global Head of Bank Ratings of the international credit rating agency Fitch, said that the world’s largest banks are also going through a difficult period, there are dollarized banking sectors elsewhere, but Turkey is the most vulnerable country to currency risks in a wide region. Stating that banks’ access to foreign currency liquidity has become more dependent on the CBRT, Lindsey Liddell, Fitch’s Director for Turkish Banks, said that they expect credit growth to slow down in the short term, given the macroprudential regulations. “Pricing constraints on local currency loans to commercial and corporate borrowers undermine banks’ ability to price loans. This will weaken banks’ appetite for lending. Credit growth continues to be sensitive to the weakening macro outlook, market volatility and announced regulations before the election. Liddell also stated that the CBRT will eventually tighten its monetary policy in 2023, as the current policy mix is unsustainable due to increasing macroeconomic imbalances (inflation and current account deficit), weak global growth, worsening external environment, rising interest rates all over the world and low external liquidity buffers. also added.
INCREASING INTEREST WILL PRESS THE QUALITY OF ASSETS
■ What awaits banks in developing countries like Turkey in the face of the tightening policies of major central banks?
JAMES LONGSDON: High interest rates will contribute to bank profitability in developing countries. Net interest income is typically a larger share of bank total incomes in developing countries than in developed markets (70%+ on average). However, rising interest rates along with rising inflation will also suppress asset quality. The rise in the dollar poses an additional risk for developing country banks, because first; Strong one dollar, depresses developing country credit ratings, and secondly; While financing and foreign currency deposit risks increase in dollarized developing country banking sectors, the debt service burden for dollar borrowers increases. The revaluation effect on balance sheet assets and unhedged dollar positions may also depress capital. However, although there are relatively dollarized banking sectors in other countries, we are more focused on the EMEA region including Turkey, CIS+ countries and some African countries. Among these, Turkey is the most vulnerable country to exchange rate risk.
■ Can you make a general assessment of the recent performance of the Turkish banking system? What are the strengths and weaknesses of Turkish banks?
LINDSEY LIDDELL: Risks to banks’ credit profiles remain significant, as reflected by the negative outlook of Turkish banks despite their downgrades this year. Despite the banks’ financial indicators for the first half of this year, the risks are high. of banks foreign currency Their access to liquidity has become more dependent on the CBRT, with a high share of currency swaps, which can be uncertain in times of market stress. FX government bonds, which make up about a quarter of the sector’s FX liquidity, can be less liquid in volatile conditions. Despite the capital ratios and strong profitability in the sector, the capital risks of banks are high due to the sensitivity to losses in TL. In addition, we expect a weakening in the sector’s profitability due to regulatory restrictions and the tightening in the net interest margin. The sensitivity of the profitability of Turkish banks to the macro outlook and weakening in asset quality continues.
BANKS’ LOAN APPEAL WILL WEAKNESS
■ Despite the low policy rate in Turkey, the loans of banks do not increase and companies have difficulties in accessing credit. What could be the reasons and how can it be resolved?
LINDSEY LIDDELL: Loan growth in the first eight months of this year (approximately 35%, or 20% increase adjusted for exchange rate effects) is negative real interest rates and found support from the inflationary environment. Due to macro and financial stability risks, priority was given to short-term local currency loans. We expect a slowdown in loan growth in the short term due to macroprudential regulations that target lending to ‘preferred’ sectors such as SMEs, exporters and agriculture and discourage lending to sectors and segments that are not in the preference group. In addition, pricing restrictions on local currency loans to commercial and corporate borrowers are hurting banks’ ability to price loans and will likely weaken their lending appetite. Credit growth continues to be sensitive to the weakening macro outlook, market volatility and regulatory developments before the election.
■ What would you like to say about the indirect limitation of banks’ loan and deposit interests in Turkey? It was decided to increase the provisions set aside and to keep the provisions as fixed-rate bonds. What do you think are the risks posed by this statement on the banking sector?
LINDSEY LIDDELL: Turkish authorities have announced a number of new macroprudential requirements for banks in recent months. Regulations discourage banks from growing in certain sectors, targeting preferred sectors, and reducing foreign exchange demand, encouraging lira depletion in bank balance sheets. It aims to support the government’s policy agenda at a time when there is no tightening in monetary policy. Banks are required to hold additional reserves or long-term lira-denominated government bonds if they continue to lend to non-preferred sectors and depending on the rate of growth and the level of credit pricing for certain loans. These announced macroprudential regulations have implications for banks’ growth, risk appetite, profitability, capital, funding and FX liquidity. We believe that increased regulatory intervention is causing constraints on banks’ ability to identify strategy and price risk, and also creates an additional operational burden for banks. Combined with the weakening macro outlook, we expect this to lead to further weakening in loan growth and profitability in the sector.
THERE ARE UNCERTAINTY BEFORE 2023 ELECTIONS
■ What do you think about the negative real interest rate in Turkey and its medium and long term effects on the market?
LINDSEY LIDDELL: Negative real interest rate causes constant depreciation pressure on TL, which increases the risks for banks’ credit profiles due to serious dollarization in deposits and high foreign currency debts. We expect the CBRT to eventually tighten its monetary policy in 2023, as the current policy mix is unsustainable due to increasing macroeconomic imbalances (inflation and current account deficit), weak global growth, worsening external environment, rising interest rates all over the world and low external liquidity buffers. However, Turkish banks have benefited from negative real interest rates and high inflation in recent months. Industry profitability increased significantly, driven by a combination of higher loan volumes, significant gains in CPI-backed securities, and higher loan yields and lower lira deposit costs. However, we expect bank profitability to weaken as loan growth slows, with margins tightening and inflationary pressure on costs. Macroeconomic and regulatory developments will also continue to have an impact on profitability. Regarding the government’s ‘liraization’ strategy; If it can limit further TL depreciation, it could reduce risks to Turkish banks’ credit profiles by reducing short-term risks to the stability of finance and foreign exchange demand and increasing investor confidence. However, the announced macro-prudential measures are due to the sharp deterioration in domestic confidence that weakened the lira – high inflation, deep negative real interest rates, lack of a reliable policy anchor and to be followed before the 2023 elections. economy Uncertainty about policy – does not address. Fitch predicts that inflation will reach 75 percent by the end of 2022 and fall to 55 percent by the end of 2023.
Rising interest rates and inflation will cause defaults to rise as we enter 2023
■ The state of the global economy, finance What will be the outlook for the global banking system in the upcoming period, considering the risks regarding the banking sector and the expectations of recession?
JAMES LONGSDON: With few exceptions (such as Japan, China), major central banks respond to global inflation pressures by raising policy rates. This has different implications for global banks. On the one hand, it offers them the opportunity to grow their net interest margins and increase their net interest income after long periods of low or even negative interest rates. However, on the other hand, rapidly rising interest rates and inflationary pressure will curb the demand for credit and cause defaults to increase as we enter 2023. Risks and returns will emerge unevenly and will depend on the speed of interest rate increases, the share of fixed and floating rate assets and liabilities, and macroeconomic developments. Due to these conditions and the energy supply shock in Europe, we have significantly lowered our global GDP forecasts. Our 2022 expectation for global growth is 2.4 percent, and we expect only 1.7 percent growth in 2023. The eurozone and the UK are expected to enter recession this year, while the US is expected to experience a mild recession in mid-2023. With these, however, entering a more challenging environment, many of the global banks are in a relatively strong position thanks to low bad loans and strong capital positions.