Turkey’s banking sector hasn’t been caught unprepared for the COVID-19 crisis that hammered the world economy but instead displayed strong responses by weathering the challenging period and is expected to further spearhead economic recovery, a report by the leading supervisory and advisory group KPMG said Wednesday.
The report that evaluated what awaits the sectors in Turkey in the post-coronavirus period said that the banking sector was the readiest sector for such a crisis.
The support packages announced by both the Central Bank of the Republic of Turkey (CBRT) and the government played an important role to limit the negative effects of the pandemic on the economy, the report said, along with support from high-level institutions in the financial sphere, namely Turkey's banking watchdog the Banking Regulation and Supervision Agency (BDDK) and the Turkish Banking Association (TBB).
The country’s public and private lenders also stepped up, announcing loan packages for their customers that include some flexible payment options and corporate debt restructuring, especially for the badly hit tourism and transportation sectors.
Such moves as providing cost-effective loans and grace period applications given by public banks were also stated in the report as crucial in terms of offering support to the real sector and individual customers.
The CBRT backstopped much of the country’s financial response to the pandemic, including buying a record TL 33.5 billion ($4.8 billion) of government bonds in secondary markets since the end of March, including TL 21.6 billion from the unemployment fund.
The bank has also provided funding below the policy rate and ramped up its quantitative easing measures by doubling its effective limit on purchases this year to 10% of its total assets.
KPMG's Financial Services Sector leader Kerem Vardar, whose statements were included in the report, said that the COVID-19 pandemic inflicted a much heavier blow than expected on the world economy, almost completely disrupting global activity, and there are strong reflections expected on banks as well.
Vardar said that the first impact on the banking sector is expected in the credit growth wing.
“The rapid deterioration of the economic outlook and the complete change of risk perception negatively affected both banks' lending appetite and demand for loans,” he said. Meanwhile, “the measures to ensure the uninterrupted continuation of the loan flow and to support the exporters of the goods and services affected by the outbreak within the scope of the SME-oriented approach is aimed at increasing the lending appetite of the banks at this point,” he added.
Vardar went on to explain that the strong credit growth in the first quarter of 2020 constitutes an important base for the sector and it is not expected that the possible credit contraction in the second and third quarters of the year will harm the interest income.
In addition, the lowering of interest rates and deposit costs by both the United States Federal Reserve and the CBRT is a positive development for the sector's income statement, Vardar said.
The CBRT slashed its policy rate by a more-than-expected 100 basis points to 8.75% at April-end, in a bid to keep stimulating the economy. The central bank has cut its policy rate by 200 basis points since mid-March, in a muscular bid to keep stimulating the economy and mitigate the fallout from the pandemic, in addition to 1,325 basis points of monetary easing since July 2019.
Banking watchdog assists
Turkey’s banking watchdog has also announced new regulations to push private banks to give more credit and purchase government bonds to support the economy during the coronavirus pandemic.
According to a statement released earlier by the BDDK, banks are required to maintain a new consolidated and individual asset ratio of at least 100% starting at the beginning of next month; otherwise, they will have to pay an administration fee. The ratio will be calculated by banks and will be reviewed weekly by the BDDK, the statement said.
The measures taken by the BDDK will be effective on the income side, Vardar said, highlighting that the steps such as limitation of credit closure commissions, will decrease the revenues to a certain extent but this is not expected to create a major problem when the banks' abundant liquidity positions are considered.
According to the sector's February 2020 data, total revenues of banks increased by 56%. Banks increased their net profits by 120% annually despite the 19% increase in operating expenses and the limited contraction in net interest margins. The change on a monthly basis is at the level of minus 9%.
Pointing to the importance of managing the risk side correctly, Vardar said: “The deterioration of the general outlook and the deterioration in the financial statements of the borrowers will increase the banks' provision expenses. The deteriorated global risk perception will also cause banks to bear additional costs in their foreign borrowings.”
He said that the process is challenging but controllable for the banks.
“Global and local interest policies also allow banks to better manage their costs. After the virus is completely brought under control, we can expect growth in bank balance sheets again,” Vardar stressed.
The abundant liquidity environment offers a positive perspective for the rapid loan growth process, he said, concluding that the banks showed that they had the financial and technical equipment to survive such a global crisis.