Turkey’s biggest bank, Garanti, is trading at just over half its 2013 peak in US dollar terms.


Is it cheap enough? The answer to the question depends on whether you believe the bank’s statement of its own financial condition. Garanti shows provisions for loan losses climbing at the same overall rate as revenue. In other words, it claims to be able to grow its way of loan loss problems.


Asia Unhedged isn’t persuaded. The trouble is that Turkey’s aggregate loan numbers have run so far ahead of GDP growth that a great deal of credit probably capitalizes interest on old loans.


Nominal GDP growth was running at around 10% during Q4 of 2014 (just 2.4% in real terms), yet total bank credit was growing by more than 20% YOY. During the bubble years of President Tayyip Erodogan’s rule, nominal GDP growth reached 20%, while bank credit growth grew by as much as 50% year on year.

If it looks like a bubble, flies like a bubble, and quacks like a bubble, it’s probably a bubble. A quick comparison to the United States is instructive.


During the bubble years of the mid-2000s in the United States, total bank credit grew at over 10% a year while nominal GDP grew around 5% a year. That’s tame by Turkish standards, but we all know what happened: non-performing loans soared from 1% of total loans to almost 6% in 2010.


Turkish borrowers have to be hurting. The hangover from the staggering rates of credit growth of 2010-2013 in a stagnant economy is enormous. The average commercial loan carries a 12% rate of interest, higher than the rate of nominal GDP growth. Even worse, the devaluation of the Turkish lira leaves foreign-currency borrowers with higher debt servicing costs. As the Turkish daily Hurriyet wrote on Dec. 29, 2014, “The nearly 15 percent increase in the dollar exchange rate experienced in 2014 first troubled those institutions that had loans in dollars. Two-thirds of the foreign debts that were announced to be $402 billion in 2014 belong to the private sector and nearly 40 percent of it is due in less than 12 months. This means, for dollar debtors, that in each rise in the dollar, the debts are increasing with no other factor required.”

The numbers just don’t add up: Turkish nonperforming loans are reportedly just 2.7% of gross loans, down from a recent peak of 5% in 2009. There are lies, damned lies, statistics, and Turkish banking statistics, in descending order of credibility.

Turkey is up to its eyeballs in foreign debt, and the banks are the biggest debtors. Until 2008, Turkish bank foreign assets and liabilities were roughly equal. After 2008, foreign liabilities of banks ballooned to $125 billion while assets shrank to just over $25 billion. Turkey financed a large part of its current account deficit (which ranged between 6% and 10% of GDP during the period 2011-2014) through interbank borrowing. Turkish banks are on the hook for a lot of foreign currency loans that Turkish companies may have trouble servicing, particularly after the lira’s free fall during 2014.

Source: BIS
Source: BIS

Turkish banks are trading at 8 to 10 times earnings. Asia Unhedged considers them dicey at these valuations, particularly when the Hong Kong stocks of the big Chinese banks are trading at multiples of 5 to 6 times earnings.

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