Photographer: George Osodi/Bloomberg

Toxic Mix of Terrorism, Low Oil Risks Turkish Bank Profits

  • Non-performing loans surge to five-year high as tourism wilts
  • Risks mount as tourism slump poised to infect other industries

Terrorism and a slump in energy prices are proving a toxic cocktail for Turkey’s banks.

Loans not paid for longer than three months surged more than 33 percent in May to the highest level in five years, according to data compiled by Bloomberg from the bank regulator. Those on the verge of being classified as non-performing loans doubled in the first quarter, while bankruptcy-protection filings in the country have soared 63 percent.

Debts owed by the tourism and energy industries -- which together account for more than 13 percent of company borrowings -- are among the most vulnerable as bomb blasts from Ankara to Istanbul deter visitors and power companies struggle to repay loans amassed during an acquisition spree as prices slump.

“The likelihood of a surge in bad loans is quite high,” said Ercan Uysal, a banking analyst at Istanbul-based research firm Integras. “Although their profitability would be hurt significantly, Turkish banks have sufficiently large capital buffers to absorb a potential credit shock.”

The deterioration in asset quality comes as the economy cools from the fastest quarterly expansion in more than four years. That may hurt bank profits if growth flounders, with businesses from the construction industry to retailers under stress because of the local currency’s depreciation,  according to BGC Partners.

The weakness of the lira is also threatening bank loans in foreign exchange, which account for about 42 percent of corporate borrowings, according to Tomasz Noetzel, a Bloomberg Intelligence analyst in London. 

The currency has lost more than 19 percent against the dollar since the beginning of 2015, depreciating 0.3 percent to 2.8971 by 3:30 p.m. in Istanbul. That has weighed on bank stocks, with the 11-member Borsa Istanbul Banks Sector Index declining 12 percent over the period. Valuations have also dropped, with the gauge trading at 6.95 times future earnings, compared with 8.1 for the MSCI Emerging Markets Banks Index.

Non-performing loans worsened to 3.35 percent of overall credit in May, compared with 2.88 percent a year earlier, according to the Banking Regulation and Supervision Agency in Ankara. Industry assets increased 13 percent to 2.47 trillion lira ($853 billion).

“NPLs show no sign of slowing down,” Noetzel said in e-mailed comments. “Slower economic growth, high rates and the lira’s level are not helping.”

Bad Debts

Most of the pressure is coming from companies, which account for about 75 percent of all borrowings. Bad debts among retailers jumped 54 percent in April from a year earlier, while the ratio of soured loans in the construction industry, which account for 12 percent of loans, increased to 4.2 percent from 3.4 percent.

The rise in NPLs at a time when “gross domestic product growth has been fairly strong, could be alarming if the economy starts to falter in the second half of the year,” said Cagdas Dogan, a banking analyst at BGC Partners in Istanbul.

The economy expanded 4.8 percent in the first quarter, compared with 5.7 percent in the final three months of last year, and may ease to 3.2 percent in the second, according to the median estimate of 30 economists surveyed by Bloomberg. So far, earnings haven’t suffered, with industrywide profit increasing 27 percent in the five months through May compared with a year earlier, according to central bank data.

Tourist arrivals to Turkey dropped for a record 10th month in May as attacks damage an industry that employs 8 percent of the workforce. A suicide bomb at Istanbul Ataturk airport that killed at least 40 people and wounded 200 on June 29 dents chances of a recovery, said Wolfango Piccoli, co-president of Teneo Intelligence in London.

Knock-On Effect

The impact will be seen from the first quarter of 2017 because loan repayments start at the end of the tourism season in October, according to Sadrettin Bagci, an analyst at Istanbul-based brokerage Deniz Invest. The knock-on effect on other sectors, such as transportation, food and construction, will result in a further deterioration in loan books in the second half, he said.

Risks are mounting in the power industry as companies seek a possible restructuring of their debt, according to a research by Tusiad, the country’s top business community grouping. The review may be completed this year.

Companies are trying to sell stakes in projects bought when the government started selling off assets in the early 2000s or refinance loans. Firms are struggling to cope with prices for natural gas -- which accounts for more than half of Turkey’s power production -- that have tumbled about 30 percent over the past two years, reflecting a more than 50 percent decline in Brent crude.

“There is no quick fix,” said Integras’s Uysal. “The parties involved will seek to kick the can down the road and hope that the economy will improve in the next few years.”

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