Turkish authorities reportedly plan to curb interest rate race for deposits

By bne IntelliNews May 29, 2017

Turkish authorities are set to step in to end a potentially dangerous race among the country’s banks to attract deposits, fearing the aggressive strategy may hit the economy through higher lending costs, Sabah newspaper reported on May 28.

The central bank, working with banking industry watchdog BDDK, is to announce measures aimed at reducing deposit interest rates, according to the daily. Sabah did not detail what those measures might be.  

President Recep Tayyip Erdogan has been calling on banks to offer more loans at more affordable rates to boost economic activity. On May 24, Erdogan renewed his attack on interest rates by saying that he sees high interest rates as a tool of exploitation.

The average interest rate paid on one-month deposits offered by local banks has risen by 43 basis points in two weeks to 13.1%, BusinessHT reported on May 26, while Sabah said that consumer loan rates had hit 17%.

According to central bank data, the average interest rate on commercial loans was 15.6% as of May 19, down from 16.16% in the previous week. The rates stood 16.4% on May 5.

Total TRY deposits held at local banks increased to TRY867bn as of May 18 from TRY854bn on May 12 and from TRY807bn on May 5, while loans stood at TRY1.84tn on May 18, up from TRY1.82tn on May 12, the latest central bank data show.

The loan to deposit ratio rose has increased to a record 125%.

Some of the loans extended under the Credit Guarantee Fund (CGF) may be parked in deposit accounts, analysts told BusinessHT.

Haberturk newspaper in April reported similar complaints, adding that some companies and business owners had used loans provided under the CGF to buy luxury cars or property.

Mehmet Ali Akben, head BDDK, has promised to look into the allegations.

“The banking system's 29% currency adjusted loan growth trend seems to have concerned investors,” UBS said in a report published on May 23. “Many were questioning whether 1) the recent growth implies relaxed underwriting standards; 2) CGF loans are simply delaying any asset quality problems in the SME segment; 2) the unguaranteed part of CGF loans could create further asset quality problems later.”

UBS thinks loan growth is likely to normalise in the second half of this year given the system's funding constraints.

In a similar vein, HSBC argued in a May report that the recent uptick in credit activity is not sustainable. “The obvious concern is that as the amount lent via the CGF scheme approaches the limit, from 2018 onward banks will only be rolling over their existing loans. We expect loan growth of 20% this year, falling to 11% in 2018,” it said.

Turkish banks are still profitable and their NPL/total loans ratios are at around 3%. But, on May 3 Moody’s Investor Services cautioned that the challenging macro environment may drive problem loans to above 4% over the next 12-18 months from 3.2% at end-2016.

Ersin Ozince, chairman of Turkey’s largest-listed lender Is Bankasi, warned on May 8 that Turkish banks’ funding costs were rising, endangering 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,” Ozince said in an interview with Bloomberg.

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