The Central Bank of Turkey removing the first-tier threshold of the security maintenance ratio requiring banks to hold a defined percentage of government securities as reserves against loans is welcomed by Moody’s.
“We expect the move will allow banks to lend at more profitable interest rates, easing pressure on their core margins, a credit positive,” the rating agency said.
The move follows the central bank raising its main policy rate to 17.5% from 8.5% in June and July, which raised the rate cap for new loans and returns on banks’ floating-rate loan portfolios.
“The move towards orthodox monetary policy after a prolonged period of unorthodox policy is positive for Turkish banks because the macroprudential environment constrained their margins,” said Moody’s analysis.
Macroprudential measures introduced last year effectively capped rates a bank could charge on commercial loans to certain sectors by requiring high-security maintenance ratios for loans with rates above a set rate.
For loans at 1.4x the reference rate, banks had to set aside 20% of the loan as Turkish government securities, while loans with rates higher than 1.8x necessitated a 150% security maintenance ratio.
Bank loans to government-defined strategic sectors, such as small and medium-sized enterprises and the agricultural sector, were exempted.
As a result, the systemwide weighted average loan rate fell to as low as 15% as of May from 27% a year earlier.
With the policy rate now 17.5%, removing the loan caps’ first-tier threshold (lending rates 1.4x higher than the reference rate) will allow banks to raise loan rates to around 30% without setting aside government securities.
“This will align the banking sector’s effective loan rate cap with weighted average deposit costs.
“The policy rate hikes in the past two months have already improved the weighted average loan rate by 690 basis points in July to 24.5%.”
Lower lending rates and higher deposit costs have made banks’ core margins (the spread between loans and deposits) negative on new business since the first quarter of this year, pressuring credit growth, particularly for private banks.
Nevertheless, gross margins (the spread between all interest-bearing assets and liabilities) remained positive, mainly reflecting the contribution from inflation-indexed government securities.
“Together with earlier regulations that reduced the security maintenance ratio requirements against foreign currency deposits, which led to some moderation in local-currency deposit costs, the new measures will reduce pressure on Turkish banks’ margins.
“Following the easing of regulations on the deposit side, the deposit costs started to ease in July, and the policy rate hikes have led to higher lending rates.
“However, because the caps on commercial loan growth were lowered to 2.5% from 3% on 25 July and the banking sector is reluctant to originate fixed-rate loans that are well below the inflation rate, we expect credit growth to remain subdued, limiting banks’ revenue growth.”
Banks have significantly increased the proportion of floating-rate loans in their loan book and shortened the duration on the fixed-rate loan book, increasing their ability to reprice loans in the rising interest rate environment.
“Macroprudential measures to combat deposit dollarisation have led banks to increase the returns paid to local-currency depositors to significantly above their lending rates and the policy rate, reducing exposure to interest rate risk in the run-up to elections in May.”