Turkish banks’ funding costs to likely drop after rate cut: Moody’s

LONDON

Turkish banks’ funding costs are likely to decline after Central Bank’s rate cut, but if the Turkish Lira is pressured by expectations of a further rate cut, it could reverse the benefits to the cost of funding, said Moody’s in a note on April 25. 

On April 20, the Central Bank cut its overnight lending rate 50 basis points to 10 percent. 

“Turkish banks will likely benefit from lower funding costs on Turkish lira short-term borrowings, which are pegged to the Borsa Istanbul interbank rate [BIST] and which the banks use to fund their loan portfolios,” said Moody’s.  

The 10 percent overnight lending rate marks the upper end of Turkey’s so-called interest rate corridor and its reduction will narrow the corridor for the BIST, the key reference rate for Turkish banks.

“We expect Turkish banks to gradually reduce their rates on Turkish lira customer deposits, which are approximately 34 percent of total liabilities. Given that the Turkish banks’ deposits tend to be predominantly shorter term [up to three months] compared with longer-term bank assets, the banks’ lower funding costs will benefit their net interest income. However, repricing lira-based customer deposits could be hindered by competition for lira customer funding, which may keep interest rates elevated despite the reduction in key reference rates,” it noted. 

“Notwithstanding the credit-positive rate cut, the financial fundamentals of Turkish banks remain under downward pressure owing to an economic slowdown and dependence on confidence-driven wholesale market funding. Furthermore, given that foreign currency funding in the banking system accounts for up to 50 percent of total liabilities, the Turkish lira exchange rate has a direct bearing on banks’ profitability,” it warned. 

“If the lira is pressured by expectations of a further interest rate reduction, it could reverse the benefits to the cost of funding which are due to the rate cut. In the past, lira depreciation has been accompanied by a growing dollarization of liabilities and increased cost of funding for Turkish banks,” the Moody’s note concluded.