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52 Opinion ISTANBUL BLOG:
Can Turkey shake its addiction to soft credits?
William Conroy in Prague
Turkey’s TRY250bn ($70.7bn) credit guarantee
fund (CGF) has driven one of the best stock market rallies seen around the world this year and has helped reset an economy many analysts thought would be on the slide. But is the fuel about to run out and send much of what has been achieved into reverse?
An update issued in early August by The Banks Association of Turkey (TBB) showed that in the short nine-month life of the CGF some TRY207bn, or 80% of its credit, had already been earmarked for guaranteeing bank loans.
Writing for The Daily Sabah on August 1, Cemil Ertem, one of President Recep Tayyip Erdogan’s economic advisers, insisted that “the CGF is not a structure that has been launched as a Band-Aid solution for the Turkish economy for a certain period of time, but is a new way to finance the economy and this path will continue to deepen”.
But there are investors who are clearly anxious about the depletion of the fund. London-based Blackfriars Asset Management has, for instance, advised clients that while it is positive on Turkey it must ask the question of whether “the government has any more cards up its sleeves to keep this [bourse] rally going into 2018?”
The CGF has clearly played a key role in the stock market boom by boosting bank stocks. The bourse’s benchmark index, the BIST 100, is bank heavy, at around 50% banking.
With a gain of 40%, the Borsa Istanbul Banks Index has risen more than twice as much as the MSCI Emerging Markets Financials Index this year. According to some forecasts, the BIST 100 could grow by 21% this year, five times the rate anticipated for South African and Russian stocks.
Morgan Stanley analysts said on August 15 that bank stocks will continue to benefit, despite Turkey’s borrowing costs having risen to their highest in six years. They anticipated that the return on equity (RoE) for Turkish banks its analysts cover will climb 11-17% over the next two years. That would be 3-5 percentage points up from the 2015 trough.
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Talking to bne IntelliNews, Metin Esendal, a vice president and research analyst at Renaissance Capital in London, is relatively sanguine about overall prospects for the exchange, at least for the short term, because bank stocks will remain robust.
“I don’t think the stock market will lose steam this year because the banks are still trading at below their book value,” he says. “If you look at the last five years they have tended to trade at 1 x price to book value. Right now they are trading at
“The Borsa Istanbul Banks Index has risen more than twice as much as the MSCI Emerging Markets Financials Index”
0.9 x and if you look at current profits you see around a 16% RoE for the Turkish banking industry.”
It is really hard to be negative on other sectors when the banks are doing so well, added Esendal, adding: “A main thing is that if we see some disinflation in the second half of this year and the first quarter of next year, the financials will continue to perform well.”
Rising expectations
The CGF also helped boost GDP growth to 5% in Q1 via expanded lending. Morgan Stanley estimates the CGF will add a percentage point to 2017 Turkish GDP growth.
“It is really hard to quantify it, but yes, from the banking perspec- tive the majority of the [outperformance] surprise is related to the CGF because most of the banks were guiding for slow lending growth at the beginning of the year and also expectations were much worse than what they are right now,” says Esendal.
Esendal is not among those analysts who fear that the availability of the CGF may have lowered the quality of the banks’ lending. He points out: “When I talk to banks they always tell me they have not changed the way they are