(Bloomberg) -- Tight monetary policy and limitations on lending are weighing on Turkish banks’ outlook, prompting analysts to predict a later-than-anticipated start of a recovery in their profits.
Analysts’ estimates for Turkish lenders’ earnings in the next 12 months have dropped about 28% since the end of September, the first such retreat since the quarter ending March 2021, according to data compiled by Bloomberg.
Turkish lenders’ net interest margins have been under pressure after the central bank turned to more orthodox policies and gradually raised its policy rate to 50% following the re-election of President Recep Tayyip Erdogan in May last year. Prior to the election, the bank had attempted to control double-digit inflation by cutting rates — rather than raising them — to as low as 8.5%.
Despite the hikes in the rate since then, the stickiness of inflation, which was 49% at the end of September, has led some analysts to push back bets for the start of the rate-cutting cycle to next year, signaling longer-than-expected pressure on bank margins.
“Visible recovery is unlikely before rate cuts,” JPMorgan analysts including Mehmet Sevim and Samuel Goodacre wrote in a report on Oct. 18. “Data indicates only a slight recovery in lira loan-deposit spreads in the third quarter, reflecting limited asset repricing and high lira deposit costs. Additionally, expensive repo and money market funding, used by banks to replace the central bank swap volumes, is creating pressures on net interest margins.”
The weighted average of interest rates on commercial loans stood at 60% while the weighted average interest rate on deposits for up to three months was 59.2% as of Oct. 11, according to central bank data.
Last week, Morgan Stanley analysts also warned of a delayed recovery in lenders’ net interest margins and advised waiting for a more attractive entry point for Turkish bank stocks. The pessimistic outlook is reflected in banking stocks. The Borsa Istanbul Banks Index, a gauge that tracks shares of Turkey’s listed lenders, has fallen 18% so far in October, the biggest monthly decline in more than three years.
‘Rerating Journey’
On the other hand, not all are sounding gloomy about the trajectory of bank stocks. HSBC Holdings Plc, although it sees part of the recovery being pushed to 2026, said most concerns over bank margins are “priced in.”
Bank of America Corp. is even more vigorous in its call, with analysts advising buying into the weakness as high-quality earnings-per-share growth is postponed by two quarters.
“A multi-year rerating journey is not a question of ‘if’ but ‘when’, in our view. This trade is likely to get crowded in 2025,” Bank of America analysts including David Taranto wrote. “We say enjoy the early bird discounts while they last.”
The third-quarter earnings season for banks starts on Oct. 24 with Akbank TAS, which had revised down its year-end expectation for net interest margins to around 3% from 4%. They stood at 2.4% in the first half of the year.
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