(Bloomberg) -- Turkish banking stocks are on course for their worst year in a decade -- and third-quarter earnings reports starting this week will show why.
Spiraling inflation, a surge in interest rates and a plunge in the lira amid tensions with the U.S. are battering the economy. Companies and individuals are finding it harder to repay their loans, causing bad debts to swell and eating into earnings as lenders increase provisions and bolster capital buffers to brace for more defaults.
The outlook for next year won’t be much better, with the prospect of slowing price gains knocking the income banks make from buying inflation-linked bonds, robbing them of “one more catalyst,” said Ata Invest Chief Strategist Batuhan Ozsahin.
Bank of America Merrill Lynch (NYSE:BAC) analyst David Taranto expects the drop in third-quarter loan volumes to be followed by “persistently weak” lending activity as banks contend with higher funding costs and requests from companies to restructure their debt. The London-based researcher predicts an average 28 percent quarter-on-quarter earnings contraction.
The gloominess is reflected in the banking stocks. The 13-member Borsa Istanbul Banks Sector Index has slid 32 percent this year through Friday, heading for its biggest annual decline since 2008.
Third-quarter bank profits are expected to show an average 22 percent drop from the previous three months, according to data compiled by Bloomberg based on the median estimates of the six-biggest publicly traded lenders. An increase in provisions to cover rising non-performing loans and damage caused by the lira’s decline to record lows weighed on the numbers, which will probably decrease 5 percent on average year-on-year.
“Earnings calls will likely focus on the lenders’ strategies to defend margins,” said Bloomberg Intelligence analysts Tomasz Noetzel and Jonathan Tyce. “The strategies for 2019, when inflation is set to run at double digits and gross domestic product to slow to less than 1 percent, will also top the agenda.”
Bad loans jumped 37 percent since the beginning of the year, reaching $15.5 billion, even though non-performing loans and capital adequacy ratios remain relatively healthy at 3 percent and 17 percent, according to banking watchdog data at the end of August.
Earnings will drop despite robust income from the linkers, trading gains and higher net interest income from lira-denominated loans, said Sertan Kargin, director of research at Istanbul-based Global Securities.
Akbank TAS will report earnings on Oct. 24, followed a day later by Turkiye Garanti Bankasi AS. Others lenders to follow include Turkiye Is Bankasi, Yapi ve Kredi Bankasi AS, Turkiye Vakiflar Bankasi TAO and Turkiye Halk Bankasi AS.