The Irony of Being a Profitable Commercial Bank in Turkey 2

Corporate profits are a key input for analysts and investment managers when zeroing in on buying and selling positions in equities. While using the bottom-up approach, it is quite possible that a company posting healthy profits finds a place in investment portfolios even if the country of its domicile is struggling with its macroeconomic fundamentals.

Turkey’s banks have been quite profitable this year, but that, according to the government, is not a good thing.

Profitability is bad?

The government has been trying to push economic growth and has been desirous of low interest rates in order to spur consumer spending.

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The graph above shows the rise in household loans by deposit money banks. Data for 2017 is as of end-June – the latest monthly data made available by the central bank.

However, the government is not happy with the country’s deposit money banks; it wants them to lend out more, especially in light of the tremendous profit growth they have witnessed in recent times.

In a speech to the Chamber of Commerce and Industry in Trabzon on August 8, President Recep Tayyip Erdoğan alluded to bank profitability as a problem. Al-Monitor quoted him saying, “Last year, after all the distress we went through, banks had a profit growth of 40%, which means there is a problem here. … Moreover, banks have almost doubled their profits this year. This is a disaster.”

He further stated “Banks are not behaving themselves. We keep saying that interest rates must come down, but banks are using the citizens’ deposits almost as a means of fleecing them.”

These strong words have come at a time when the government’s policies themselves were responsible for boosting bank profits in the first place. The encouragement to lend more, apart from reducing reserve requirements, has led to increased business for banks, which, in turn, has resulted in sizable profit growth.

A second helping

A day after the President came down heavily on banks for not reducing rates on credit, Economy Minister Nihat Zeybekci, in a meeting with businesses, was quoted as saying, “Our discourse on interest rates is quite clear. In order for Turkey to see further economic growth, to produce more, to create new jobs and to raise exports, financing must be abundant, cheap and easily accessible.”

He added that, “We have seen that Turkish lenders are profitable enough that they have room to make sacrifices in their profit margins…they should gain from the rising demand rather than the rising interest rates.”

Banks find themselves in a difficult spot: while profits are good, especially for investors, they were incidental to government policies. And now, they’re being chastised by the government for not doing enough for the economy.

This issue becomes even more crucial considering that a free flow of loans starts becoming risky for banks by raising the possibility of bad loans.

Apart from the issue of bad loans, there is a risk that Turkey may be slowing down going forward. Let’s look at this aspect in the next article.

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