Turkish financial crisis – a potential threat to European banks

August 17, 2018

Europe’s excess exposure to financial instability in Turkey should act as a warning to developers, who may want to reconsider their current borrowing strategies.

 The Eurozone’s chief financial watchdog, the European Central Bank (ECB), is troubled by the exposure of some of the area’s biggest lenders to Turkey after the Lira lost about a quarter of its value against the Dollar.

Spain, France and Italy have an estimated exposure of around €135 billion to Turkey’s banking sector. With the Spanish BBVA lending $83.3 billion, $17 billion borrowed from Italy’s UniCredit and $38.4 billion from the French BNP Paribas, as well as loans from Britain’s HSBC and the Dutch bank ING, the ECB is becoming increasingly concerned about the extent to which Turkish borrowers are hedged against the weakened currency and whether their ability to repay amid the slower growth.

The increased risk of default on foreign currency loans (c.40% of the Turkish banking sector’s assets) has resulted in JPMorgan Cazenove analysts cutting their 2019-20 earnings per share by 6%. This negative sentiment is spreading further, with Deutsche Bank predicting that under a worst-case scenario HSBC might lose $400 million, or 0.3% of total group equity, whilst BBVA may suffer greater blows, with an estimate of a 12% loss in their group equity. The same scenario may translate into a c.4% hit for ING’s book value, due to the loss of equity and of intragroup funding.

Erdogan’s reluctance to implement the measures that would be desired by international investors, such as requesting an emergency bailout from the IMF, or reducing his growing interference in monetary and economic policy decisions, is pushing away foreign investors. However, the banks currently involved would find it difficult to walk away form Turkey, for example, with BBVA risking a loss of approximately 13% in its tangible book value if it were to abandon their investments.

Given the development of the Turkish Lira, this exposure may have severe outcomes for European banks, with the global financial system is deeply interconnected, this instability would result in an increased risk of contagion into the British and the US financial system. Increased conservativeness by some of Europe’s biggest lending providers would felt by local developers, given their extensive presence in the UK, as well as the impact this would have on the lending behaviour of British banks.

Developers should be weighing in the possible developments of this situation and attempt to act before the increased uncertainty impacts the European banks’ lending capacity, as compliance to the ECB and BofE capital requirement ratios would probably prevent the banks from partaking in further lending activities.

Tiger Financial is a specialist broker for bridging loans in the UK.