Reuters: Banks are conducting stress tests for possible exchange rate and interest rate shocks after the elections

The banks, which were exposed to numerous restrictions introduced in the last year and a half to establish the Turkish Economic Model based on low interest rates, began to stress test a possible exchange rate and interest rate shock after the elections.

As a side effect of the regulations, it seems inevitable that the gap between interest on deposits and loans will cause banks to incur losses in their interest income after the second half of the year.

Four senior bankers, who gave information to Reuters, stressed that current practices in the economy are “unsustainable”, regardless of which side wins the election, the government or the opposition. The bankers, stating that ‘orthodox policies have become a necessity’, asserted that the transition to these policies should be gradual rather than abrupt.

The policy based on low interest and investment, exports and current account surplus, initiated by AKP President and Chairman Recep Tayyip Erdoğan under the name of Turkish Economy Model, has been implemented for a year and a half. In this context, while the credit activity of banks is restricted by the rule, the number of which exceeds 100, it is considered inevitable that the rule will cause damage to the item of interest income.

MEHMET ŞİMŞEK’S MEETING WITH ERDOĞAN ATTRACTS ATTENTION

Although the economic administration has described its policies as successful in its statements so far, the meeting of Mehmet Şimşek, one of the former finance ministers and known as a practitioner of orthodox policies, with Erdoğan raised the question of whether he would make a change. in economic policy.

The Central Bank lowered interest rates from 19 percent to 8.5 percent in a year and a half, causing inflation to reach its highest point in 24 years.

The regulations changed the behavior of prices in the banking sector. While cheap loans were made for export-oriented investments, banks were forced to allocate required reserves and bonds for other loans. Eventually, this obligation was carried over to individual loans as well. With the regulations, while average interest rates on business loans hovered around 14-15 percent, interest rates on deposits increased to as high as 30 percent.

A DECREASE IN PROFITS IS PROJECTED

The bankers, who see it as “impossible” for these unconventional policies to continue, began to carry out stress tests “in the face of a possible exchange rate, interest and credit shock in a bad scenario.”

While capital adequacy ratios are expected to decline with the exchange rate and interest rate shocks that may occur in the worst case scenario, the sector whose balance sheet items were negatively affected by the latest regulations is expected to yield move to a contraction of profits in the second. half of the sector’s profit increase, which was 366 percent last year.

STRESS TEST AGAINST CURRENCY AND INTEREST RISK

Noting that banks are stress testing, a senior banker said: “Banks have their own scenarios. It tests your balance sheets against currency, interest and credit shocks. Overall, the state of banks remains strong, but risk may arise in public banks, which have significantly increased their market share in the lending market since 2018.

Underlining that the current economic and interest rate policy is ‘unsustainable’, the same banker said: “If it continues, this will trigger other problems. What you need to do is very simple: instead of taking these risks, you will raise interest rates,” he said.

NET INTEREST INCOME WILL BE A LOSS IN THE SECOND HALF

Another senior banker, who pointed out that after the second half of this year, the banking sector will start to write off losses due to the interest differential between deposits and loans, said: “After the second half, the sector will start to write off with these policies . . There are risks that could cause the country to remain below last year’s profit. Banks will not be able to catch up with last year’s earnings with a 90 percent probability, and will even announce a profit that is at least 20 percent below last year’s figures.

According to BRSA data, the sector’s net profit increased by 366 percent to 433 billion lira last year, helped by the valuation of inflation-indexed bonds and supported by rising net interest income.

In the field of the economic model applied, the banking sector has been exposed to more than 100 regulations that will change the structure of its balance sheets in the last year and a half. The most important of these was the obligation to hold mandatory Treasury bonds in exchange for loans, which began with some types of loans and eventually included individual loans.

According to information provided by bankers, the size of long-term, low-interest T-bills that banks must hold in exchange for loans has reached the level of TL 350 billion.

Bankers had drawn attention months ago to the risk that these bonds could create on bank balance sheets in the face of any rise in interest rates.

Polina Kurdyavko, head of developing countries at BlueBay Asset Management, asserted that Turkey’s economic problem cannot be solved easily, “regardless of who comes to power and whatever policies are put in place,” saying: “Relax the current policy by reintroducing orthodox policies means that someone will inevitably suffer in this process.”You can’t devalue the currency 100% overnight and say, ‘Okay, now you’re competitive again,’ because that will have significant consequences. in all sectors of the economy,” he said.