A frightening predicament for banks from S&P

Turkey is in the midst of a mind-blowing credit boom, with loan growth having reached 21% YTD and proceeding at an annualized rate of 71.5%.  Erdogan administration has given sate banks carte blanche to loan at will and at a loss to companies and consumers to tide the economy over the Covid-19 induced stagnation. Private banks are pressured via jawboning and daily changes in Central Bank and BRSA regulations to force faster loan growth too,.  Great economists like Carmen Reinhart and Kenneth Rogoff has taught us the lesson that prolonged credit expansion in excess of nominal GDP always ends up in tears.  This new report by S&P credit rating agency suggest that the Rubicon has been crossed.  

S&P: Problem loans in Turkish banking sector to exceed 20% by 2021

S&P Global Ratings said on Tuesday it estimated problematic loans at Turkish banks would rise to more than 20% by next year, citing pressures from the country’s economic recession and the slide of the lira, reported Reuters.

Despite a relatively low level of reported non-performing loans (NPLs) of 4.6% at the end of May, the ratings agency cited a number of pressure points faced by Turkey’s banks, including high corporate sector indebtedness compared to other emerging markets.

“Risks are further exacerbated by some specific characteristics … namely, the accelerated lending through the Credit Guarantee Fund (CGF), and more recently via state banks, as well as the high proportion of foreign currency lending,” S&P added, saying foreign currency lending stood at almost 37% of gross loans.

“We expect NPLs to reach 11%-12% by 2021, while problematic loans (NPLs plus restructured loans) will pass to more than 20% of loans from about 10% in September 2019,” S&P said in a note.

Earlier on Tuesday, Turkish Finance Minister Berat Albayrak called on banks to speed up restructuring of loans and said the government would support the formation of an asset management company to take on loans of problematic companies from all banks.

S&P added it considered checks and balances within the Turkish institutional system weak, which raised questions about the quality of regulation and perceived independence of the watchdog and the central bank.

You can follow our  English language YouTube videos  @ REAL TURKEY:   https://www.youtube.com/channel/UCKpFJB4GFiNkhmpVZQ_d9Rg

And content at Twitter: @AtillaEng

Facebook:  Real Turkey Channel:   https://www.facebook.com/realturkeychannel/ 

Published By: Atilla Yeşilada

GlobalSource Partners’ Turkey Country Analyst Atilla Yesilada is the country’s leading political analyst and commentator. He is known throughout the finance and political science world for his thorough and outspoken coverage of Turkey’s political and financial developments. In addition to his extensive writing schedule, he is often called upon to provide his political expertise on major radio and television channels. Based in Istanbul, Atilla is co-founder of the information platform Istanbul Analytics and is one of GlobalSource’s local partners in Turkey. In addition to his consulting work and speaking engagements throughout the US, Europe and the Middle East, he writes regular columns for Turkey’s leading financial websites VATAN and www.paraanaliz.com and has contributed to the financial daily Referans and the liberal daily Radikal.