Top Turkey Banker Frets Over Capital Getting More Scarce, Costly

  • Capital erosion the top challenge, Isbank Chairman Ozince says
  • Subordinated debt sales indicate reluctance to inject capital

Turkish banks’ funding costs are rising, says the chairman of the nation’s largest-listed lender by assets, threatening government efforts to engineer a credit boom.

“Capital erosion is the most important issue in the Turkish banking industry, because capital has become the most important limited resource," Ersin Ozince of Turkiye Is Bankasi AS said in an interview with Bloomberg on Thursday in Istanbul.

Ersin Ozince

Source: Turkiye Is Bankasi AS

Profitability measured by the average return on equity for deposit-taking banks was 13 percent last year, compared with a typical yield on 10-year sovereign debt of 10.2 percent, according to data compiled by Bloomberg. Facing government pressure to increase credit after the economy expanded at the slowest pace since 2009, lenders have turned to subordinated debt, which supports capital buffers, but carries higher risk for investors and costs banks more.

“This isn’t a bad thing, but it shows that investors prefer not to be a shareholder due to better alternative yields plus risks," Ozince said. “Return on equity is approaching 14 or 15 percent, but when you add risk, this is even lower than government bonds,” he said.

Currency Risk

Among the risks he cited: another bout of currency weakness after a 17 percent drop in the lira against the dollar last year, higher interest rates due to soaring inflation, and the possibility of a jump in non-performing loans.

“We have to manage those risks because it’s not just the banking sector, but also the real sector that’s exposed," he said.

Turkish companies’ net foreign-currency liabilities were around $200 billion as of the end February, according to the central bank data, or about 25 percent of gross domestic product. In an attempt to better monitor that exposure, Deputy Prime Minister Mehmet Simsek said the government is working on a model for the central bank to gauge the impact of currency fluctuations on corporate liabilities.

While a credit guarantee fund helped boost lending in the first quarter, banks are working at “full capacity" and other initiatives floated by the government may not have the intended impact, according to Ozince. Nurettin Canikli, another deputy prime minister, told Bloomberg last week that legislation would be introduced to allow banks to securitize and sell off their loan portfolios, letting them raise cash to fund new loans. Ozince is skeptical.

“We’ve always wanted securitization," he said. “The reason it’s not being done is because it’s thought that there wouldn’t be enough demand. What’s important is stability in the country. If we have that, of course the demand will also come."

Rollover Risk

All of that leaves banks reliant on foreign financing to spur domestic growth, he said. “I don’t see a risk in rollovers, but we can’t say there’s no problem,” he said, citing "markedly” higher borrowing costs.

Isbank shares are up 35 percent this year, extending gains over the past 12 months to about 62 percent, more than double the return on the Turkish banking index and triple the benchmark Borsa Istanbul 100 index. That’s despite verbal attacks by Yigit Bulut, an adviser to Turkish President Recep Tayyip Erdogan, who said last year that the bank should be nationalized because of its ties to the opposition.

Isbank was established by the founder of modern Turkey, Mustafa Kemal Ataturk, whose will gave a 28 percent stake to the Republican People’s Party, now the main opposition.

“Unfortunately, public authorities haven’t shown enough of a reaction to these rumors," Ozince said, describing the comments about the company as baseless.

Ozince said he was also concerned about declining interest from foreign banks in their Turkish units.

“I’m not sure foreign banks are happy about their operations in Turkey,” he said. “They don’t seem to have as much appetite as they once did, and I can’t say it makes me happy to see some of them trying to leave.”

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