Reuters’ EXCLUSIVE: Turkey’s banks set for capital healing after pandemic battle -sources

This is only a segment of the Reuters report, which PA Turkey is re-publishing, because it has vital importance for creditors and investors


Turkey is considering a fresh capital injection for state banks but they also need a plan to deal with lingering bad debt after the lenders depleted their resources helping Ankara’s battle against COVID-19, senior bankers and government officials say.


While privately-held peers were more conservative, the state banks nearly doubled their lending last year, helping the $720-billion economy avoid a contraction and mount a strong recovery helped by a speedy coronavirus vaccination campaign.


Now, authorities want the lenders to be ready for another burst of credit later this year or next to meet pent-up demand from builders and other borrowers, the six sources told Reuters, requesting anonymity.


But their depleted capital requires a boost, especially given they need provisions ahead of an end-September deadline when more soured loans – including from the hard-hit service sectors – will need to be classified as non-performing loans (NPLs).


“The state banks went above and beyond last year financing large projects. There was an excessive use of resources and they need to be strengthened with capital support,” said one official with knowledge of the matter.


“As some past loans are paid back, there will be a need for further credit growth for some sectors of the economy at least for next year,” the person said.


The bankers and officials said, however, no final government decision has been taken on a capital injection, nor has one been made on what to do about the unpaid so-called Stage 2 loans and NPLs, most of which have been lingering on the balance sheets of both private and public lenders since a 2018 currency crisis.


Shifting them to one or more asset management company, or a “bad bank”, remains a leading option, two of the sources said.


Turkey’s Treasury had no immediate comment.


A Turkey Wealth Fund official said banks’ capital adequacy ratios “are currently at a good level”, adding the fund “is always ready to support banks if there is a need”.


The fund injected 21 billion lira ($2.5 billion) of capital into the big three state banks in early 2020, just before their lending shot up by 90%, including low-interest loans meant to ease fallout from the pandemic.


The public lenders are booking losses in the face of high costs and the central bank’s 19% policy rate, which is meant to tackle inflation that is nearly as high.


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They  (banks) urgently need capital in order to generate another credit expansion later this year or next, said a senior banker.


“It’s not a matter of capital adequacy ratio or liquidity needs. It’s a matter of their ability to boost new loans for growth. That’s why state banks need an urgent capital increase,” the banker said.


A second senior banker told Reuters: “Growth cannot be achieved with the current capital levels.”




Despite the economic upturn and a low sector NPL ratio of 3.7%, the BDDK bank regulator extended a forbearance period – introduced last year – to Sept. 30, after which many Stage 2 loans must be classified as non-performing.

Banking association data shows “watch list” loans rose by 23% to 370 billion lira by the end of last year.


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The bankers told Reuters the deadline made a capital injection more urgent especially given state banks’ relatively low loan-loss provision ratios.


“Banks may face a significant increase in provisions for NPLs if the grace period … is not extended again,” said a third banking source.


In an official decree published early on Thursday, the BDDK bank regulator asked banks to prepare a three-year NPL management strategy including resolution units and annual operational plans, in order to reduce them in a reasonable time.


A year ago Ernst & Young submitted to banks a blueprint for an asset management company (AMC) that would house billions of dollars of NPLs and ease the long-simmering problem, though some lenders are cool to the plan.


“It may be possible to resolve these issues through the asset management company. It doesn’t look easy otherwise,” said a second government official. The NPL forbearance “cannot go on forever. We have to face reality.”


Reporting by Ebru Tuncay and Orhan Coskun; Editing by Jonathan Spicer and Emelia Sithole-Matarise


Original article is here

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 and has contributed to the financial daily Referans and the liberal daily Radikal.