The central bank more than doubled their borrowing costs last month to cap loan growth at 25 percent in 2011 while raising reserve requirements for short-term liabilities to encourage lenders to seek longer-term deposits. Turkish financial stocks had their biggest monthly sell-off since October 2008 on concern the measures will curb earnings.
“Even if they may have negative effects on liquidity and profits in the short term, we believe that these measures will prove positive for the system in the longer term as they will reduce the build-up of credit risk,” Goksenin Karagoz, an S&P analyst, said in a telephone interview from Paris yesterday.
The ISE Banks (XBANK) index of 16 lenders fell 1.6 percent to 108,597.6 at 5:22 p.m. in Istanbul, extending last month’s 14 percent decline. The MSCI Emerging Markets Financials Index advanced 15 percent in October.
Yields on Turkey’s two-year benchmark debt rose by 133 basis points in October in their biggest monthly increase since October 2008, hurting banks’ profits from the securities, as the outlook for inflation deteriorated and speculation grew that the central bank would take more measures to stem lending and a decline in the lira. The lira has weakened 14 percent this year against the dollar, performing worse than all other emerging-market currencies tracked by Bloomberg this year except for the South African rand.
The lira fell to an all-time low against the dollar on Oct. 4, forcing the central bank to sell $750 million to shore up the currency.
“All of the measures that have been taken since late 2010 are aimed at encouraging banks to stay within 25 percent credit growth limit, and to increase the term structure of their funding base,” Karagoz said.
The central bank is driving up interest rates by restricting funding at its 5.75 percent benchmark interest rate, forcing banks to borrow at higher costs, under a policy announced last week. Governor Erdem Basci said tighter monetary policy conditions are needed to contain inflation and prevent excessive lira depreciation. Bank lending grew 38 percent on Oct. 21 from a year ago, according to data on the Ankara-based regulator’s website, versus a target of 25 percent.
“We understand that the reason for the central bank taking these measures is the rapid system-wide credit growth which has reached worrisome levels,” Karagoz said. “Understandably, the authorities are trying to slow down this. One should note that similar trends created severe systemic problems in other countries like Kazakhstan, and some eastern European countries and put banks into serious systemic deadlock.”
Turkish stocks were cut to “modest underweight” from “neutral” yesterday by Bank of America Merrill Lynch, which cited “rising complexity” and mixed messages from the central bank. Morgan Stanley downgraded Turkish banks in its regional banking portfolio on Oct. 27, citing deteriorating earnings outlook and rising inflation. JPMorgan Chase & Co. cut Turkish stocks to “underweight” the same day.
A new central bank policy to change interest rates on a daily basis “introduces significant uncertainty and volatility” and “is negative for the stock market overall and may hurt the bank sector in particular,” JPMorgan analysts including David Aserkoff said in an e-mailed report on Oct. 27.
Banks’ profits should be shielded by an adjustment in the prices of banks’ services, S&P’s Karagoz said.
“Turkish banks have adequate pricing power and we understand that they already started reflecting the reserve requirement changes together with that of policy rates to their lending rates accordingly,” Karagoz said. “We expect this adjustment to bring stability to the banks’ margins.”
“If we see a rating upgrade for Turkey’s foreign currency sovereign credit, then this might have positive implications for some banks’ ratings,” Karagoz said.
Turkey’s foreign-currency debt is rated BB by S&P with a positive outlook and Ba2 by Moody’s Investors Service, two levels below investment grade. Fitch grades Turkey BB+, one level below investment grade.
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