WOOD Flash – Turkish banks: in the trenches of Levent*

We were on the ground last week, meeting the Turkish banks and people from the industry. However, we soon realised that the banks also have little insight. Without doubt, something is coming their way, but the magnitude and the implications of any shock(s) are unknown. The banks’ alarmed stance on liquidity, asset quality and capital creates its own feedback loop and the credit crunch is continuing. This is likely to have major repercussions for economic growth. The overall mood is dim due to the top-down outlook, political issues, and the credibility gap. Albeit meagre, we had assumed that the Turkish economy could post growth in 2019E and we have also argued that this growth would outweigh most of the problems in the investment case. The likely hard landing scenario will clearly call for drastically different models and train of thought. Although the CBT’s recent rate hike and the plausible Medium-Term Programme (MTP) help to lower the risk premium, the outcome in the Brunson case may be the ultimate litmus test in 2018E.