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Difficult process for bank shares on the Istanbul Stock Exchange

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Baris ERKAYA

The measures taken by the Banking Regulatory and Supervisory Agency (BDDK) especially for loans and then the rules between real sector currency positions and TL loans resulted in a change in the entire accounting of the banking sector. All estimates of real profitability for the banking sector have changed, while profits have grown due to high inflation, on the one hand, and the limits of the Banking Regulation and Supervision Agency and the new conditions for extending the loan, from ‘other. Of course, this will also affect bank stock valuations.

In June, the direction of the economy adopted new measures for banks in response to the acceleration of the depreciation of TL. Of course, these measures have more than one purpose. For example, the measures taken to convert companies’ foreign exchange surpluses into TL in response to the excessive depreciation of TL, reducing the growth of credit risks, creating fewer lending opportunities for the Treasury and introducing some measures to address the liquidity problem in foreign currency banks later among them can be counted rising CDS rates.

Subsequent measures

We recall the measures adopted in June:

To begin with, the Banking Regulatory and Supervision Agency made companies’ access to TL loans dependent on the level of their foreign currency assets. At first glance, this aims to reverse the demand for foreign exchange and prevent a new demand for foreign exchange. Second, the fact that banks are obliged to buy long-term TL bonds at a fixed rate in the reserve policy of the Central Bank of the Republic of Turkey (CBRT) allows the Treasury to borrow at low rates, expands negative yields.

The reserve requirement for commercial loans was doubled and short-term lending rates for working capital were reduced to 40%.

Measures that seem independent are interconnected

At a first stage, these regulations, which appear to be independent of each other, have some very interrelated results when viewed from a broader perspective. For example, after the introduction of the demand for currency protected deposit with a package of tax benefits, many companies actually placed a significant amount of foreign currency assets in currency protected deposits in the first quarter of 2022. For the most part of these currency-protected deposits, the maturity date coincides with the months of July and August. So what about the money that will be fixed from here? Considering that the motivation for the money, which was converted from foreign currency into TL and passed to exchange rate protection, was to benefit from foreign exchange returns, it can be expected to return in foreign currency.

However, after the regulation of the Banking Regulatory and Supervisory Agency, this currency conversion operation has become a big risk especially for companies that are obliged to renew TL loans. In this case, there are two possibilities. Either continue with the currency-protected deposit or place the dissolved money in Eurobonds. The level of the exchange rate is important when making a deposit protected by the currency. For example, a dollar exchange rate of 16.75 TL must rise above 18.17 TL to provide more income than a monthly return of TL at average levels of 17% and, in addition, it must be at a much higher level to avoid being squeezed by inflation, which does not seem to have slowed down. . It is not unlikely that companies that would not find it attractive will take the direct currency risk and focus on Eurobond returns. In other words, the bottom line is that the Bank’s Regulatory and Supervisory Agency’s latest decision actually affects many different variables, from the maturity date of currency-protected deposits. Especially in the reports of foreign investment banks, it is believed that in the next period there may be a serious slowdown in the disbursement of the banks’ TL loans. Already the news from the field is that banks have very clearly pressed the pause button in their new lending.

negative pressure on real return

Under another regulation, banks are obliged to hold fixed-rate bonds in TL with a maturity of more than five years at the time of issue for foreign currency liabilities. It should be noted that most of the fixed rate TL bond portfolios held by the banks will not be sufficient to meet the new required reserves. In other words, banks will reorganize their bond portfolios and freeze instruments with negative yields of 36% and five-year maturities. This, of course, has created an explosion in demand in new long-term bond issues.

According to HSBC estimates, the liquidity required for these bond purchases may have increased the cost of resources in the banking system by 3 percentage points. This means that banks will already write a slight loss on new positions. Considering that the risk of borrowing costs is upside as the real yield is severely negative, it is argued that banks’ losses from these positions could increase.

The return of the trade unions

Another expectation is that banks will prefer not to roll over debts due after the CDS rate hike. The banking sector has a total of $ 40 billion in foreign loans, of which $ 7 billion has very serious costs. It seems likely that this section will be refunded rather than renewed. Increasing the maximum maturity limit for consumer loans and the minimum monthly payment for credit cards can also be seen as lower business volume and lower interest income for banks. As a result, Turkish banks trade with the lowest PD / DD and P / E multipliers in their history compared to their international counterparts. However, after very high inflation and a very high risk premium, the conditions that can reveal this potential for bank stocks seem limited. Analysts’ expectations on the profitability of the banking sector have indeed increased. However, expectations for the realization of this increase, mainly due to the inflationary environment and rising capital costs, have generally been kept low. Again, according to analysis from domestic and overseas brokerage firms, this could be the biggest obstacle for bank stocks to act as a locomotive in a possible stock market rally.

The problem of the dilution of the shares of public banks

Although public banks appear to have indeed strengthened their relatively weakened financial statement structure after the capital injections, the injection has produced mixed results for equity market stocks. Judging by Vakıfbank and Halkbank, the injection made without pre-emption rights on the bank shares caused more securities to circulate in the market. This created a dilution problem in terms of stock valuations. Therefore, in the latest analyzes carried out, there appears to be a weakness in the valuation of bank stocks for minority shareholders. Normally, public banks trade with significantly lower price multipliers. However, this stock dilution keeps future expectations for these multipliers low.

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