Turkish banks make hay while sun shines

Turkish banks booked big profits as inflation escalated but could feel the pinch as the country's price growth slows. As a result of lower earnings from bonds linked to inflation, Turkish banking shares are likely to take a dip, HSBC said. The lure of inflation-linked bonds increased as the country's inflation rate doubled to 10.2 per cent in April from 5.1 per cent in October. But inflation slowed for three months to 7.6 per cent last month, reducing returns on the bonds.

Yields on the banks' debt will decline in the third quarter from the second, returning 1.2 billion liras less for five banks. Akbank will be most affected, followed by Turkiye Is Bankasi, Turkiye Garanti Bankasi, Turkiye Halk Bankasi and Turkiye Vakiflar Bankasi, the Istanbul analysts Tamer Sengun and Erol Hullu wrote in a report to clients. "Third-quarter earnings weakness in large-cap banks may result in a temporary weakness in banking sector stock prices," the HSBC analysts said.

"Despite their fluctuating yields, [inflation-linked bonds] are still highly profitable products for the banks as they offer a real interest rate ranging between about 4 per cent and about 10 per cent, translating into an annual yield ranging between 12 per cent and 18 per cent," the note said. Yields on February 2012 inflation-indexed bonds dropped to an annual 2.23 per cent on Monday from 3.11 per cent at the end of the second quarter. The yield was 7.19 per cent a year ago.

The impact on profit of the lower yields on inflation-linked bonds will be the equivalent of 50 per cent of Akbank's second-quarter net income, 29 per cent of Isbank's second-quarter net income and 25 per cent of Garanti's profit in the period, HSBC said. Yapi Kredi Bankasi has "almost no exposure", it said. Yields on inflation-linked bonds will return to second-quarter levels in the fourth quarter. The bank "maintains its valuation and ratings for Turkish banks", it said.

* Bloomberg