Not much room for Turkish banks to maneuver

This year’s one million dollar question is whether non-financial companies will be able to rollover their loans and secure new funds and whether the banks have additional resources to help those companies.

The answer to this question is “the price” of interest rates on loans, to be precise. Over the past four weeks, interest rates on loans have increased to 18 percent. This is the highest level since March 2009 when the global financial crisis was at its peak. Over the past 13 weeks, the trend for loan growth was 13 percent per annum. This is the lowest pace recorded over the past year and it is even below the expansion rate seen in the same period last year.

According to data from the Banks Association of Turkey (TBB), the banks’ return on equity is 14.7 percent at a time when inflation has hit 12 percent. The banks’ return on equity (ROE) is less than the interest rates they charge from their loan customers.

Are the banks “a monster” that sink companies? The sheer size of profits the banks make alone is not indicative. It makes much more sense if we look at the returns on capital and equity. The banks’ return on equity has increased 1.5 points from a year ago.

Interest rates that were kept at levels below inflation rate and Treasury-guaranteed loans extended under the Credit Guarantee Fund (CGF) made a considerable contribution to the banks’ ROE. Both interest rates and loans are directly related to government policies.

Let us go back to our question. More and more data and news stories are suggesting that companies’ problems with rolling over debts are deepening and spreading.

For some time, the credit rating companies have been warning about rollover risks at Turkish companies, which have a lot of debt. But when they downgraded ratings the rating agencies caused outrage.

Bloomberg provided the best story regarding companies’ rollover problem when it reported that Yıldız Holding sent a letter to 10 banks asking them to postpone the debt repayment by restructuring the debt.

The group, which acquired two global brands for $4.1 billion over the past 10 years, sent a letter and requested that banks restructure a $6.1 billion debt.

The practice of acquiring a company by using credit is called “leveraged buyout” in financial literature. Investors with a strategy and a vision for a particular sector engage in such leveraged buyouts.

What is the problem then? When it acquired those brands, Yıldız borrowed up to $6 billion and it raised this money through spot or short-term credits.

Let us put it differently. These large scale buyouts were carried out through short-term loans. Now, the group is holding talks with the bank on long-term loan restructuring. This means the debt is not only the company’s problem but now it has also become the banks’ problem.

Bloomberg also reported that the repayments required in February are $1 billion. According to Hürriyet, Yıldız Holding chair Murat Ülker told employees that the company asked banks to consolidate their respective loans into a single credit and the company agreed to a long-term loan of $1 billion. However, we do not know yet how its request for “the restructuring” will play out.

Over the past year, two large credit transactions turned out to be problematic for the banks with debtors either requesting a restructuring or having repayment problems. OTAŞ, which acquired a 55 percent stake in Türk Telekom, defaulted on a $4.7 billion loan and creditor banks declassified its debt as closely watched.

These are just but significant examples. For comparison, the total value of those two loans is roughly $11 billion and corresponds to one sixth of the Treasury-guaranteed loans extended last year under the CFG scheme.

In the first quarter 2017, by utilizing the CFG facilities the government saved medium-sized companies from going bankrupt and at the same time it saved the banks from dealing with a poll of bad debt.

The CGF has helped thousands of small and medium-sized companies buy some time. It is unlikely that another initiative like the CGF would be launched because banks do not have enough resources, thus extending additional loans looks dubious.

The banks are under pressure to “extend more loans” and to “lower their interest rates,” but at the same time bad-debts that are still “alive” are growing. Measures put in place are only deferring the problems. What is going to happen later?