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Here's What to Watch as Turkish Banks Kick Off Earnings Season

  • Linker portfolios to safeguard lenders’ profits as prices soar
  • Banks are needing to boost provisions as lending slows

A government-backed credit boom that underpinned Turkish bank earnings last year is fizzling out and investors are about to get their first glimpse into how lenders are coping.

Banks start reporting fourth-quarter results this week against the backdrop of lending growth that has stalled to its slowest pace in a year. Profit levels are expected to remain relatively flat compared with the third quarter, according to data compiled by Bloomberg based on the median estimate for the six-biggest listed lenders.

A slowdown in Turkey’s economy is also forcing banks to set aside more cash for potential bad loans. To defend their profit margins, lenders have been raising interest-rate charges on loans, while benefiting from runaway consumer-price increases that is boosting the yield on their inflation-linked bond holdings.

Turkiye Sinai Kalkinma Bankasi AS will kick off the earnings season on Friday, followed by Akbank TAS and Turkiye Garanti Bankasi AS next week. Year-on-year earnings will probably increase 25 percent in the quarter, the Bloomberg data show. Lending in the industry peaked during the second quarter, spurred by the government’s Credit Guarantee Fund, which is nearing its limit.

Here’s a closer look at some of main drivers and points of interest that investors will keep an eye on as they assess the outlook for the lenders, which rank among the cheapest in emerging markets.

Protecting Margins

Borrowing costs in Turkey climbed to their highest levels in more than five years as the central bank jacked up policy rates to stem the lira’s depreciation. Lenders have responded by repricing their loans, with average interest-rate charges climbing 400 basis points over the past year while payments on deposits have increased by only 300 basis points.

Istanbul-based BGC Partners banking analyst Cagdas Dogan said he expects the fourth-quarter to show a “marginal improvement in core margins, supported by upward loan repricing.”

Inflation Linkers

Consumer inflation jumped to a 14-year high in November, a boon for banks holding inflation-linked bonds. Yields on the debt, known as linkers, rise as the pace of inflation accelerates. The instruments make up about a third of the debt securities held by the nation’s six biggest-listed lenders, according to BGC’s Dogan.

Istanbul-based brokerage Garanti Securities is predicting that revenue from linkers will rise almost fourfold in the fourth quarter at the banks it covers.

Higher Provisions

While the industry’s non-performing loans ratio dipped back below 3 percent last year, a slowing economy and the risk of political upheaval are weighing on the outlook, spurring concern among analysts that most banks will need to set aside higher provisions as a buffer against future losses.

Garanti Securities is penciling in a 17 percent increase in fourth-quarter provisions and expects banks to use cash from their inflation-linker portfolios to build extra reserves.

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