Turkish central bank moves to boost profits of state banks

ANKARA/ISTANBUL: A central bank decision that banks with higher loan growth can hold lower reserves will boost profits at Turkish state banks and encourage private banks to follow suit with increased lending, analysts say.

The bank on Monday reduced the required reserve ratio for banks with loan growth rates above 10% and raised the return on those reserves, a move banking analysts described as a shift towards a more growth-oriented policy.

The state-owned banks, including Vakifbank and Halkbank, would outperform the sector in the short term with higher loan growth rates within the central bank's reference range, but private institutions would soon close the gap, they said.

"We may see state banks outperforming their private peers in the short term but we do not expect this to be a long-lived one as private banks will try to catch up the difference towards the end of the year," Deniz Yatirim said in a note.

Turkey's economy, which tipped into recession last year after the lira shed 30% of its value against US dollar, has recorded multi-year highs in unemployment and inflation. Other economic indicators have also suffered.

The central bank move comes as Turkey continues to struggle with problem loans in construction, real estate and energy amounting to roughly $20 billion.

Ankara has tried to revitalise the economy in recent months with steps encouraging state banks to lend even more, backed by treasury-guaranteed loan packages, as well as tax cuts on some consumer goods.

Bank lira-denominated loans grew by 4.8% in the first six months of the year, according to banking watchdog data, with state bank lending increasing by more than 11% in the same period.

The central bank said Monday's move would initially provide 5.4 billion lira ($943 million) and $2.9 billion equivalent of gold and forex liquidity to the market.

"SOLUTIONS NOT STEROIDS"

Last month, the central bank cut interest rates by 425 basis points to 19.75% from 24%, after President Tayyip Erdogan sacked the previous governor, saying he had not followed instructions on monetary policy. A wave of bank offers of cheaper loans followed the easing in monetary policy.

Erdogan wants cheaper borrowing costs to get the economy growing again after two quarters of contraction. Economists say the government has resorted to temporary measures to prop up the economy instead of implementing long-awaited structural reforms.

"Such measures will not lead to well-balanced and sustainable growth over the long-term horizon," said Piotr Matys, an emerging markets forex strategist at Rabobank.

"We remain of the view that Turkey urgently requires a comprehensive package of structural reforms to improve the long-term outlook."

Zumrut Imamoglu, chief economist of the TUSIAD business group, said loan growth was not the answer. "The economy needs a solution, not steroids," she said.

BGC Partners said in a note to clients the central bank move will not lead to "reckless lending" even though it penalizes banks which do not meet the loan growth target.

"We have already been assuming that many banks would reach the 10-20% lira loan growth range by mid-2020 at the latest. These changes could pull that a bit forward, slightly supporting GDP growth in 2H19, but should not lead to excessive lending, in our view," it said.