Aug 10 2018

ECB warns European banks exposed to Turkey

The European Central Bank has issued a warning to European banks with entities in Turkey as a currency crisis unfolds in the country.

The Single Supervisory Mechanism, the European banking watchdog run under the auspices of the ECB, has become concerned about the exposure of banks to the country, the Financial Times reported. Those are chiefly BBVA of Spain, Italy’s UniCredit and BNP Paribas of France.

The ECB does not yet view the situation as critical but sees the three banks as particularly exposed, the FT said, citing two people familiar with the matter.

The lira has slumped more than 30 percent against the dollar this year and, at one point, fell more than 10 percent on Friday amid a political crisis with the United States over Turkey’s internment of a U.S. pastor and because the central bank, under government pressure, is refraining to hike interest rates.

The currency’s decline hits the income of banks with big investments in Turkey because their revenue, such as interest earned on loans in liras, is hit. As is the value of their stakes in the lenders.

The eurozone’s chief financial watchdog has become concerned about the exposure of some of the currency area’s biggest lenders to Turkey — chiefly BBVA, UniCredit and BNP Paribas — in light of the lira’s dramatic fall, the FT said.

“We think there are a lot of hidden problems in the banking system,” said Katalin Gingold, a managing director at Cartica, an emerging markets hedge fund, highlighting debts at state-run banks in particular, the FT reported.

Turkish banks, including those of the three European companies, are also exposed to large foreign exchange loans that Turkish companies are finding increasingly expensive to repay because of the lira’s collapse

The proportion of bad loans in the Turkish banking system is officially about 3 percent. But the lenders are also reporting restructured loans and “loans under close watch” that can exceed 10 percent of total loans. That borrowing can also be considered at risk of default.

BBVA CEO Carlos Torres Vila, whose bank owns just under half of Turkey’s Garanti Bank, one of Turkey’s biggest non-government banks, said last month that the company was “really very, very well prepared for the situation”. He added that the bank had reduced the weight of its foreign-currency loans and increased those of inflation-linked instruments, the FT said.

BNP Paribas says that its exposure to Turkey is very limited at about 2 percent of overall commitments, the FT reported. BNP’s exposure is $1.1 billion, it said.

UniCredit said this week that the foreign currency impact on its Turkish subsidiary Yapi Kredi would be absorbed by the unit’s own reserves.

But Goldman Sachs said this week that Yapi Kredi was the weakest of Turkey’s biggest banks in terms of capitalization.