Turk banks’ profit rally to slow down

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Turk banks’ profit rally to slow down
Oluşturulma Tarihi: Temmuz 07, 2009 00:00

ISTANBUL - As the Central Bank hints that the latest interest rate cut in June may be the last one, banking sector’s profitability may be negatively impacted. With 5 billion liras in profits in the first quarter, banks are expected to obtain less revenue from Treasury securities they hold in the second quarter.

Second-quarter profits at banks in Turkey are likely to take a hit after the Turkish Central Bank signaled that the interest rate cut in June is likely to be the end of an 800 basis point-reduction over eight months.

If interest rates cuts do not continue, the banks, which increased their profits by 32 percent to 5 billion Turkish Liras in the first quarter over a year earlier, will be obliged to operate with low profit margins in the second half of the year due to the Treasury securities they keep in their portfolios. Besides the increase in profits, financial intermediaries grew 10.8 percent, contrary to the contraction experienced most other sectors.

The Bank’s rapid reduction of interest rates has played a role in the banking sector’s growth, said Mete Yüksel, an analyst at EFG Yatırım. "Banks priced deposits lower each month compared to the previous month. Moreover, the rise of bond prices together with the fall of interest rates has created a positive impact."

Noting that banks are operating with a great maturity mismatch, Yüksel said that the average maturity is one month for deposits and one year for loans in the sector. "In a climate marked with low interest, deposits are priced lower each month. But banks continue collecting loans with the interest rates available on contracts."

Yüksel said the prices of the bonds the banks hold have also risen with the interest rate cuts. "Still, I do not think the growth of the financial sector is sustainable, because we are at the end of the declining interest rates. Particularly in terms of profitability, banks have never experienced anything like the first six months of this year."

As interest rates will not continue to drop rapidly, growth in the second half will be more flat, Yüksel said, adding that deposit and bond interest rates will not decline. However, loan interest rates will drop and trigger more economic growth, he said, adding that smaller margins but higher loan growth will be seen in the second half.

"In 2001, banks faced a short position in foreign currency, and the audit was not good. Public banks used to prevent the robust operation of the system," said Sadrettin Bağcı, banking analyst at Finans Yatırım. But the Banking Regulation and Supervision Agency is operating more efficiently now, he added.

Noting that interest rate cuts curb deposit costs in the banking sector, Bağcı said: "This situation is likely to return to normal in the third and fourth quarter. Still, I do not think the financial sector can ever be the engine of the economy, as it is not possible to force banks to open loans."

İnan Demir, chief economist at Finansbank, said the Central Bank’s pre-emptive interest rate cuts positively affected the profitability of the banking sector in the first quarter. "However, a direct relationship should not be established between this growth and interest rate cuts. The interest rate reduction process has come to an end. That will result in a decline of bank profitability compared to the first quarter due to the slowdown in capital revenue obtained from government debt securities and the contraction of the net interest margin between assets and liabilities. "
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