Turkey's Isbank CEO sees challenges ahead, November rate cut

Turkiye Is Bankasi AS

25/08/2024 08:45

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      CEO Aran outlines foreign expansion plans in interview
    

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      Says banks paying price of Turkey's battle with inflation
    

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      Net interest margins, asset quality to worsen - Aran
    

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      Expects easing to begin in November with 250 bp cut 
    

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      Expects to expand payments, digital, service banking
    

  
    By Ebru Tuncay
       ISTANBUL, Aug 25 (Reuters) - Turkish banks will pay the
price throughout next year as challenges linger from the
country's economic turnaround, the chief executive of lender
Isbank said in an interview, adding he expects the central bank
to begin cutting interest rates this November. 
    CEO Hakan Aran told Reuters that Turkey's largest private
bank by assets plans to expand its footprint in payment system
infrastructure, digital platforms and service banking, where it
will make new partnerships and acquisitions abroad. 
    The growth plan comes as Isbank marks its 100-year
anniversary, and as Turkish authorities seek to stamp out
soaring inflation with high interest rates and other tightening
measures that have squeezed financial-sector balance sheets. 
    "I think difficulties will also continue throughout 2025. We
all will continue to pay the price for the sake of ensuring
price stability and lowering inflation," Aran said in the
interview at Isbank's Istanbul headquarters.
    "Banks will overcome this process with a deterioration in
net interest margin this year, and a deterioration in the asset
quality next year." 
    Asset quality already began eroding in July, while net
interest margins are under serious pressure, Aran added. 
    "Banks' return on equity is decreasing. If we were mandated
to do 'inflation accounting', many banks would probably be
reporting losses," he said. "Banks seem to be profitable right
now because there is no inflation accounting." 
    The government last year excluded banks from companies
applying inflation-adjusted accounting methods to their balance
sheets over concerns it would result in tax revenue losses.   
    Since June last year, the central bank has hiked its policy
rate  TRINT=ECI  to 50% from 8.5% to reverse years of unorthodox
easy-money policies under President Tayyip Erdogan, who
supported the U-turn. 
    Inflation dipped below 62% last month and is expected to
continue easing, setting up potential rate cuts in the months
ahead. 
    Aran predicted the central bank would begin easing monetary
policy in November with a 250 basis-point cut, roughly in line
with analysts' expectations. The rate would fall to 45% by year
end and to 25% by end-2025, he predicted.
    
    ANNUAL INFLATION  
    September inflation data, released in early October, will
"most probably see annual inflation below 50%, while the policy
rate would remain above that. So I think there could be a
gradual rate cut starting ... in November," Aran said. 
    Inflation has remained well above the central bank's 5%
target for years. Aran predicted a drop to about 42% by year end
and to 20% a year later, a bit higher than official forecasts. 
    He said household price expectations should converge toward
the much lower central bank expectations in 2025. 
    The central bank will maintain its tight monetary policy
stance unless there is an "extraordinary" risk, or re-emergence
of a dollarisation trend, Aran said. 
    He sees the lira  TRYTOM=D3  weakening to 38 to the dollar
by end-2024. It touched 34 for the first time on Friday.  
    Isbank, founded in 1924 to primarily fund industrial
development and expand household savings, now has a market value
of nearly $10 billion. It has ambitious international plans. 
    CEO since 2021, Aran said the lender aims to be among the
top banks globally, in terms of the breadth of geographies in
which it operates and the number of clients it serves.
    Isbank is evaluating possible acquisitions and partnerships
related to digital banking and payment systems abroad,
especially in the United Kingdom and European Union, he said.
    In the medium term, he said, a significant portion of income
would come from payments infrastructure, digital and service
banking. Isbank also aims to be a regional fintech hub, boosted
by the recent merger of its subsidiary Moka Payment Institution
with Birlesik Odeme Hizmetleri, he said. 
    "Currently, 90% of income comes from traditional banking and
10% from such new platforms," Aran said. "We are taking steps to
bring this ratio closer to each other in the next five years." 

 (Reporting by Ebru Tuncay; Writing by Huseyin Hayatsever;
Editing by Can Sezer and David Holmes)
 ((Huseyin.Hayatsever@reuters.com))