Citigroup Sees Souring Loans Eroding Turkey Bank Profit

Citigroup Inc. (C) said rising bad debt at Turkish banks will erode second-half profit, as a slowing economy prompts more consumers to default on loan payments.

“Provisions against bad debt in the banking sector will be revised up in the coming period,” Luis Costa, an emerging markets strategist at Citigroup in London said in an Aug. 14 telephone interview. “We expect some sort of detrimental effect on the bottom line of banks’ balance sheets.”

The number of Turkish consumers who didn’t repay credit- card loans rose to 343,428 in the first half, 10 percent more than the figure for all of 2011, according to the central bank. Non-performing consumer loans rose by 13.9 percent at the end of June from end 2011, while total consumer loans in the period rose 6.3 percent to 179 billion liras ($99.4 billion).

Turkey, which grew faster than every major emerging market except China last year, is forecast to expand 2.3 percent this year, down from 8.5 percent in 2011, the International Monetary Fund said in April. It had its first quarterly contraction in three years in the first quarter.

The central bank and regulators may need to act should bad loans in the nation’s financial system worsen, Suleyman Aslan, chief executive officer of Turkiye Halk Bankasi AS (HALKB), Turkey’s biggest listed state-run bank, said earlier this month.

Banks’ total loans rose by 8 percent to 748.2 billion liras in the first six months of 2012 from end-2011. Banks’ non- performing loans rose by 6.1 percent to 20.1 billion liras in the same period, according to banking regulator data.

Bad Loan Growth

“Growth in bad loans has not really kept up with the growth in total loans,” Ilker Yoney, investments director of LBT Varlik Yonetim, which buys bad loans from banks, said in a telephone interview on August 10. “But we expect the slowdown in economic growth to soon start changing this balance.”

Banks’ loan loss provisions, or expenses set aside to cover bad loans, which might reflect a deterioration in banks’ credit quality, increased 57 percent to 3 billion liras in the first half of 2012 from a year ago, according to regulator data.

Banks have to wait 90 days before they can officially declare a loan as “non-performing,‘‘ according to the banking regulator’s rules, Sadrettin Bagci, analyst at Istanbul-based brokerage Yatirim Finansman, said in a telephone interview.

‘‘Bad loans forming in the first half will be reflected on balance sheets starting from the third quarter,’’ he said.

Lower Interest Loans

Borrowers may be paying off credit card debt with lower- interest consumer loans and then defaulting on those, according to Bagci and Hakan Aygun, of Ak Investment, a brokerage. The highest monthly charge Turkish banks can apply to credit cards is 28.08 percent annually, while the weighted average annual interest rate on cash loans is 17.7 percent, on housing loans 12.3 percent and 14.5 percent on commercial loans, according to central bank data.

Bad loans to small-and medium-sized enterprises have not yet increased, ‘‘but it will pull down our profitability when they do,’’ Ergun Ozen, chief executive officer of Turkiye Garanti Bankasi AS (GARAN), Turkey’s biggest bank by market value, said in April.

Such loans make up 37 percent of Garanti’s total loans while loans to small businesses compose 22 percent of the total at Turkiye Is Bankasi (ISATR) AS, Turkey’s biggest bank by assets. Loans to so-called SMEs compose 27 percent of total loans of Akbank TAS (AKBNK), owned by Citigroup Inc. and Haci Omer Sabanci Holding, according to the banks’ earning statements.

Not a Problem

Rising bad loans are not a problem for Isbank, chief executive officer Adnan Bali said.

‘‘Turkish banks’ bad debt may rise slightly in the third quarter,‘‘ he said at a news conference in Istanbul on August 9. ‘‘But I don’t think it will pose any substantial problems for us.‘‘

Turkey’s main banking index was little changed at 2:34 p.m. in Istanbul today, having dropped as much as one percent in earlier trading.

Unpaid loans rose to 25 percent of total lending in 2002 after a banking crisis in 2001 that prompted Turkey to recapitalize its banks and introduce tighter regulation.

‘‘Banks’ CEOs’ recent remarks are a warning as to what may happen if bad loans increase,’’ Bagci said. ‘‘The first half really gives no alarm, but they’re trying to tell the authorities to take precautions before things go bad.’’

To contact the reporter on this story: Sibel Akbay in Istanbul at sakbay@bloomberg.net

To contact the editor responsible for this story: Dale Crofts at dcrofts@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.