The COVID-19 pandemic has caused a huge crisis in Turkey’s economy, from the banking sector to small businesses. Since 2020, the various measures adopted to curb the epidemic have affected all sectors. Last year, loans were handed out through public banks to businesses and individual, especially in favour of the construction sector. Those credits, which were spread in the long run with fixed interest rates induced a situation whereby the interest rates later increased, the economy fluctuated and the lira lost value due to the foreign exchange rate. One of the most important signs of this situation is the loss in the profits of public banks as of April 2021 compared to the previous year.
Public banks lose money
In April 2021, the Banking Regulation and Supervision Agency (BDDK) shared the first quarter of 2021 data on the state of the banking sector. According to the report, net profit of public deposit banks (Vakıf Bank, Ziraat Bank and Halk Bank) fell by 68.3 percent. In other words, the profits of these banks decreased from 4.4 billion Turkish Liras to 1.6 billion liras during this period. The net interest income of the three banks fell from 18 billion liras to 8 billion liras.
While public banks are suffering losses, it is worth taking a look at the profits of private banks. According to the report, private local banks increased their net profits by 26.7 percent in the first quarter, that is from 4.8 billion liras to 6.1 billion liras. Likewise, the profits of private foreign banks rose by 26.1 percent, from 4.6 billion liras to 6.3 billion liras in the same period.
When comparing private and public banks, their statements of profit and loss are similar not in liras but also in dollars. Overall, net profit of banks fell by 17.5 percent to 1.9 billion dollars from 2.3 billion dollars. The net profit of private foreign banks increased by 7.3 percent during this period. These banks had 709 million dollars. They now have 761 million dollars. On the other hand, both local private banks and public banks recorded losses in their dollar-denominated profits. The profits of private banks fell from 1 billion dollars to 737 million dollars, while public banks experienced a record low. In the first quarter, dollar-denominated profits for three public banks fell by 71.4 percent from 674 million dollars to 193 million dollars.
Loans during the pandemic
When the BDDK report on the first quarter is considered, the first question that comes to mind is why public banks lose money while the profits of private banks increase. In an interview with Şebnem Turhan from the daily Dünya, Professor Şenol Babuşcu, head of the Finance and Banking Department at Başkent University, said that the most effective factor that has caused this is housing loans issued in 2020, especially through public banks. In 2020, housing loan support has been added to the scope of the fight against the pandemic. Within this framework, public banks provided loans to consumers with interest rates ranging from 0.9 to 1.5 percent.
However, the chaos in the economy first led to the consecutive dismissal of Central Bank governors, then the “interest rate equals inflation” policy was quietly abandoned and the policy interest rate increased to 18 percent. Professor Babuşçu explained, “Public banks are financing the loans with interest rates ranging from 0.9 to 1.5 percent last year with a deposit rate of 18 percent this year.” Thus, the interest they have to pay on deposits from this year is 18 percent, unlike last year. However, the seriousness of the situation is not limited to only this. The government is dealing with the pandemic by encouraging the community to take loans while driving public banks to a low profitability/loss, which will spread over many years.
Whose debt is it?
Housing loans issued last year were at a fixed-rate and had a 10-year repayment period. Consumer loans had a 3-year term and again had fixed interest rates. Private banks have been reluctant to do so and have kept such loans at a very low level. Public banks, meanwhile, have turned on their credit taps to the fullest in accordance with instructions from the government. At this point, loan interest rates remained low compared to deposit rates.
In line with the direction of the economy, a new interest rate hike will cause an increase in the debts of these banks. As a matter of fact, when the states of these banks in 2020 and 2021 are compared, it becomes clearer. During this period, Ziraat Bank’s profits fell by 48.6 percent, Vakıfbank by 56.3 percent and Halkbank’s profits by 92.8 percent. For example, Ziraat Bank’s profit was 1 billion 871 million liras in the first quarter of 2020, compared to 962 million liras in the first quarter of 2021.
The interest rate differences and the loan equation have affected the interest income and expenses of the banks. Ziraat Bank’s interest income increased by 26.7 percent in the first quarter of 2020, while its expenses rose almost 95 percent. The 18 percent interest rate for deposits took effect and the bank’s interest expense increased by 81 percent compared to the previous year. Unfortunately, a similar situation is also valid for the other two public banks.
There are two reasons for the state of the banks. The first is that these banks were under constant pressure on the orders of the government to issue long-term loans. Indeed, unlike private banks, public banks should not prioritize profits for the public weal. However, this is not the case here. First of all, while poverty increased during the pandemic and youth unemployment was over 25 percent, Turkey was among the least supportive countries in the world in terms of free support. As if that was not enough, why were bank loans particularly directed to housing? Under these circumstances, is buying a home people’s priority?
The “buy a home” policy has become a means of elevating the construction industry, and this loss of the banks is actually public debt. Second, the deposit interest payments of banks are increasing in line with the increase in the Central Bank’s interest rate. The interest rate today is 18 percent. Interest rates and inflation are rising. Moreover, the dollar exchange rate does not lag behind these two. Before we were at this deadlock, almost every sane economist objected to the self-imposed “inflation will rise if interest rates rise” mentality becoming an economy policy.
The Central Bank’s 128 billion dollars of foreign currency reserve was spent to keep the dollar at a certain level while inflation and foreign exchange rate climbed with this low interest rate policy. The government went down this road to make it look like it was not backing down. One wrongheaded policy was compounded by another. As a result, the dollar rate is 8.30 and the interest rate is 18 percent. One in four people is poor and inflation is 17.3 percent with youth unemployment above 25 percent.
The profits of public banks are declining while private ones are increasing. These public banks will start losing money tomorrow. Who will pay for this loss? The contractors who have influenced the government to make banks turn on credit taps so that they could sell their houses? Or will the infamous gang of five pay this loss? These are the top five contractors favored by the government, the tax debts of which are frequently wiped off and the ones, which have guaranteed payments from roads and bridges.