What are financial markets doing today?

I’ve recently met with a group of CEOs from the banking sector. The latest developments in funding market were discussed in this meeting that gathered together economists, banking professionals and the representatives of Regulatory Authorities. Obviously, I won’t go into the details of the meetings here but I think there is no harm in sharing my own opinions with you.

When we take a look at the funding market, we can see that there is something going on that is worthy of notice. The interest rates for loans provided by banks and non-bank financial institutions are falling faster than their cost of funding. The profit margin of the latter is rapidly decreasing.

Their debt to total assets ratio clearly shows why banks hesitate to provide loans. Obviously, an apparent decline in revenue can’t be tolerated while costs remain constant. So, under the circumstances, it looks like banks will have to choose between two options:

  • They will either keep reducing their balance sheet, or;
  • Start growing their loan portfolio again

The CEOs of financial institutions might feel the pressure of deposit liabilities, not to mention the increasing decline in performance and profitability levels. However, the roles and responsibilities, the corporate mission of Public Banks put them in a different position than private banks.

“Interesting developments in Deposit, Loans, Rates trio…”

The recent personal loan marketing campaigns led a decline in consumer loan rates when compared to auto loan rates. In the meantime, commercial loan rates and home loan rates seem quite competitive as both keep going down. We accordingly see that Public Banks could grow their loan portfolio by more than 25%, at least 10 points higher than their private counterparts. Having seen the fact that private banks were reluctant to provide loans especially to firms engaged in exporting, Banking Regulation and Supervision Agency of Turkey introduced a new set of regulations to push banks to offer loans to exporting companies.

Similarly, according to average yield for 13-week, it can be seen that Public Banks have boosted their deposit up to 40% vis-à-vis Private Banks that are unwilling to cut their deposit interest rates because of their current debt to total assets ratio.

The reluctance of private banks in terms of loan offering can easily be seen in their loan to deposit ratio. While this ratio hits above 120% in Public Banks, it remains below 90% for Private Banks.

I don’t know how much longer private banks can go on like this. As I mentioned above, sooner or later, banks and financial institutions will have to make a critical decision as to whether downsize or grow their loan portfolio. Medium-sized banks will probably opt for the second choice while large-sized banks, on the other hand, seem to have more advantages in terms of total number of customers and financial instrument diversity. I think medium-sized banks can hold on for a little while longer. It is also possible to monitor their progress from loan interest rates that show volatility depending on their bank size.

Tonight at 9.30pm, Dan Levent and I will talk stock and commodity markets, exchange rates, gold, silver, oil and bitcoin as well as the Fed’s Chair latest press release about interest live on Instagram where you are all welcome to join us.