Finance

Lionel Laurent is a Bloomberg Gadfly columnist covering finance and markets. He previously worked at Reuters and Forbes.

Turkey's financial industry is under pressure after this weekend's attempted coup. It's too early to gauge the economic impact -- but analysts are already warning of the threat of higher funding costs, currency volatility and loan losses to the country's banks.

Bank Pain
Top Turkish bank share prices fell on Monday after a failed coup over the weekend
Source: Bloomberg
Intraday times are displayed in ET.

That spells trouble for the European banks that bet big on Turkey's growth prospects -- and vindicate Citigroup's decision to quit at a loss in 2015.

On paper, Turkey should be an attractive market for overseas banks: its economy and population are growing, demand for lending is increasing and the country is on a path that could conceivably lead to European Union membership.

In practice, profit has proven elusive. In 2014, HSBC's Turkish unit made a bigger loss than any of the 46 banks in the country, according to Bloomberg News. Currency weakness has hit even the biggest players, such as Spain's BBVA, which last year wrote down its investment in Garanti -- one of Turkey's top banks -- by about 1.8 billion euros ($2 billion) due to the falling lira.

So far, most banks have held on to their Turkish operations. Demand for these assets is limited and the cost of a hurried exit has seemed high.

Big Bets
European bank exposure to Turkey as a percentage of group loans
Source: Deutsche Bank

In February, HSBC decided to keep its Turkish operation and shrink it after failing to find a buyer. Italy's UniCredit had been mulling a sale of its stake in Yapi Kredit Bank, Bloomberg News's Sonia Sirletti reported in May.

By contrast, BBVA has doubled down on the country, boosting its stake in Garanti to 39 percent last year. The lender expects the acquisition to boost profit by more than 250 million euros this year. That's still not impossible, given the bank's profit from Turkey was 133 million euros in the first quarter -- more than it earned in the U.S.

But the after-effects of the failed coup may vindicate those that managed to back out of their Turkish bets, such as Citigroup. The U.S. lender sold its stake in Akbank in stages after writing down the value of the holding by $1.2 billion in 2012.

Banks in the country are facing greater political influence. President Recep Tayyip Erdogan's on Monday halted the operations of Bank Asya, an Islamic lender linked to political foe and exiled preacher Fethullah Gulen.

There's also the risk of more currency volatility, which is a threat to an economy that relies on foreign investment to finance a current account shortfall. While the lira has already clawed back almost half of its losses from Friday, Goldman Sachs has lowered its three-month forecast for the currency against the dollar. That could be a problem for Turkish borrowers with loans denominated in other currencies: Non-lira lending makes up about 42 percent of Turkish banks' $402 billion of corporate loans, according to Bloomberg Intelligence.

Funding Stretch
Turkish bank loans as a proportion of deposits have soared, increasing reliance on market funding
Source: BBVA Research (2005 to end-September 2015)

Rapid lending growth has also made Turkish banks more dependent on wholesale market funding -- and therefore more vulnerable to sharp changes in investor sentiment, according to Fitch. Loan-to-deposit ratios rose to 117 percent from 60 percent between 2005 and 2015, according to BBVA research, with reliance on short-term funding from abroad rising in recent years.

Will BBVA and UniCredit cut and run? It's unlikely for now. But if the economic outlook deteriorates, Citigroup's retreat may end up looking increasingly timely -- regardless of the cost.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Lionel Laurent in London at llaurent2@bloomberg.net

To contact the editor responsible for this story:
Edward Evans at eevans3@bloomberg.net