Turkish banks are facing a liquidity crunch amid rising global interest rates, a situation that could accelerate an outflow of investor capital, analysts said.
As major central banks around the world tighten monetary policy, the liquidity available for emerging markets will become scarcer and more expensive, raising refinancing risks for Turkey's banks, according to S&P Global Ratings.
Turkey's banking sector is heavily reliant on external funding despite a reduction in recent years, with a total of $143 billion in 2021, Ratings estimated in a June report. Türkiye Vakiflar Bankasi Türk Anonim Ortakligi, or Vakifbank, Yapi ve Kredi Bankasi AŞ and Türkiye Is Bankasi AS, or Isbank, each have more than $8 billion in external funding, according to S&P Global Market Intelligence figures.
Investors are likely to show less interest in senior and subordinated bank bonds in the future, even though banks were able to roll over almost all their syndicated loans with foreign counterparties between April and mid-June, according to Ratings. They are "highly vulnerable" to negative market sentiment, and the refinancing risk is exacerbated by very high domestic inflation, unpredictable monetary policy and high commodity prices driven by Russia's war in Ukraine. This could erode liquidity buffers, Ratings said.
"In this environment we might expect some funding cost increase, but we believe that the demand [will stay] solid in the market," a spokesman for Spain's Banco Bilbao Vizcaya Argentaria SA, the owner of Turkiye Garanti Bankasi AS, told Market Intelligence via email.
Garanti is "continuously deleveraging" its foreign currency balance, the BBVA spokesman said, noting its swap amount at the central bank had fallen to about $5.5 billion from more than $8 billion. The amount could decline further.
Garanti has $6.8 billion of wholesale funding maturing to the end of 2023, of which $3.5 billion would mature within the next 12 months.
Other Turkish banks and the banking regulator did not respond to requests for comment.
Carrying the burden
Banks may have reduced foreign borrowings, but rising global interest rates and tightening liquidity remain a threat, said Batuhan Ozsahin, an investment strategist at Ata Yatırım in Istanbul.
"Foreign-controlled Turkish banks shouldn't have liquidity problems because of their strong owners, [who] can help them out. But in the bigger Turkish macro picture, banks are carrying the burden of all the macro risk," he told Market Intelligence. "If there's a balance of payments problem, then no bank will have sufficient liquidity."
Large Turkish banks' liquidity coverage ratios ranged between 152% and 229% at the end of the first quarter, compared to an average of 199% for banks in European emerging markets. The ratio refers to the level of highly liquid assets held by a bank divided by its total net cash flow over a 30-day period.
Total liquid assets in foreign currency should be enough for Turkish banks to cover upcoming funding maturities until next June, Ratings said. But it warned that nearly half of these are held by the central bank, which poses a risk as the country battles to stem the devaluation of the Turkish lira.
Many banks more than doubled their cash and balances at the central bank in 2021. As of Dec. 31, 2021, Garanti's was 123.9 billion lira, Denizbank Anonim Sirketi's was 80.9 billion lira and QNB Finansbank's was 70.3 billion lira.
The central bank could theoretically stop banks accessing some of this money given its depleted foreign currency reserves, pushing banks to default, according to Ratings.
"This is another measure the central bank could use to try to stop the outflow of money from Turkey and stabilize the lira," Per Hammarlund, chief emerging markets strategist at Sweden's SEB, told Market Intelligence. "They could simply appropriate foreign currency holdings in the banking system."
The Turkish lira slumped to 0.0573 to the dollar at the end of July 13, compared to 0.5523 to the greenback on the same day in 2012. In response, many account holders keep savings in dollars — as of May 2022, 58% of total deposits were in the U.S. currency. Should depositors seek a significantly greater amount of foreign currency, it could force the central bank to impose capital controls, Ratings said.
Inflation risk
As well as BBVA, other major foreign investors include Qatar National Bank (QPSC), which owns QNB Finansbank AS, and BNP Paribas SA, which owns Türk Ekonomi Bankasi AS. Italy's UniCredit SpA sold its remaining stake in Yapi Kredi to Istanbul-listed Koç Holding AS in April.
"Managing the foreign exchange risk and also domestic interest risk are the main problems for Turkish banks," said Ozsahin. "When you're at nearly 80% inflation, it's not sustainable — your equity will erode over time. You need to be growing [return on equity] at least as much as inflation."
Garanti's return on average equity was 19.1% in 2021; Denizbank's was 14.0%, and Finansbank's was 18.9%.
The price-to-book ratio at the largest Turkish banks was below the median at banks in European emerging markets in the first quarter of 2022, S&P Global Market Intelligence data shows. Garanti's ratio of 61.18% was the closest to the median of 72.67%. Akbank's ratio was 46.40%, followed by Yapi ve Kredi's of 46.07%. Vakifbank had a ratio of 32.75%.
"Banks are trading at extremely low price-to-book and price-to-equity ratios — they're very cheap and so should be attractive to all fund managers, but there's little interest from foreign investors because the macro risks are too high for them," said Ozsahin. "Foreign investors are selling their positions in Turkish banks because they think the lira could devalue further."
As of July 13, US$1 was equivalent to 17.45 Turkish lira.