Turkish Banks Say They Can't Lend If Profit Squeeze Drags On

  • Isbank CEO Bali Is Latest to Rail Against Crunch in Margins
  • Policy Makers Show Few Signs of Heeding Lenders' Complaints

The crunch in Turkish bank profits is turning from a question of profitability into a question of survival, according to the head of the country’s largest non-state lender.

Declines in earnings will soon make it pointless to extend loans, Adnan Bali, chief executive officer of Isbank, said in an interview with Hurriyet newspaper Tuesday. "It’s not a question of whether banks make a profit, it’s a question of not being able to function,” he told the newspaper.

As the squeeze on interest margins has been compounded by regulatory limits on what fees banks can charge, Bali says it would be more profitable to give up banking altogether. Turkiye Is Bankasi, to give the lender its formal name, would earn more than its yearly profits by closing branches, firing 25,000 workers and parking its 30 billion liras’ ($10.3 billion) capital in deposits. “The system’s mathematics don’t work,” Bali said.

He’s not the only banking executive railing against disappearing profits after a two-year period in which regulators introduced rafts of legislation to curb the pace of borrowing. The measures banned at least 20 kinds of bank fees, and limited installments on consumer loans.

Meanwhile, the average cost of central bank funding has gone up to 8.7 percent over the same period, having hardly breached 7 percent in the preceding year, leading to compressed net-interest margins. They’ve fallen to 3.5 percent from 5.8 five years ago, according to Bali. "We’re worried we won’t be able to do more business," he said.

Costly Regulations

If Turkish government bonds are offering an annual return of about 10 percent, bank profitability needs to be above that level, Hakan Binbasgil, the CEO of Akbank, said at the end of October. The head of Ziraat, the largest state-owned lender, said regulations imposed in the past five years have cost the bank a year’s worth of profit.

While the banking regulator took the rare step of relaxing a recently introduced rule last month, tolerating installments of 12 months on some goods rather than nine, policy makers have largely rejected calls by banks to ease off on these strictures.

Former Deputy Prime Minister Ali Babacan publicly rebuffed Ziraat CEO Aydin’s pleas for respite in May, saying the economic frailties the measures were designed to address still persisted. His successor in charge of economic policy, Mehmet Simsek, signalled Tuesday that he’d maintain a similar tack.

Contradicting Bali, he said bank metrics are solid in an address at the Istanbul stock exchange. The rapid pace of lending growth remained a problem, said Simsek, who was finance minister until he became deputy prime minister last month. “There’s a limit to how much lending can grow without the system growing, without resources growing.”

While Turkey’s loan-to-deposit ratio passed 100 percent in 2011, and had been climbing every year since, the regulations reining in banks appear to be having the desired effect. Adjusted for the decline in the lira, 2015 represents the first time since the global financial crisis that the total amount of loans extended by Turkish banks has fallen.

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