January-June 2013

Macro and industry trends

In the second quarter of 2013, the information on confidence indicators in the euro zone appears to be consistent with some recovery in activity; in fact, moderate growth has been reported after the major contraction of previous quarters. Even so, financial conditions have deteriorated recently in a global environment with increasing risk aversion. In contrast, the banking union process, which has been identified as key to strengthening monetary union, continues to move in the right direction.

The Turkish economy has confirmed its recovery shown at the start of 2013, following the soft landing in 2012. GDP grew in the first quarter above market expectations, boosted by progress in domestic demand, thanks to the positive performance of public expenditure, private consumption and industrial output. The boost to growth has in fact been one of the objectives of monetary policy for the Central Bank of Turkey (CBT). Between April and June it cut interest rates by 100 basis points, leaving the official rate at 4.5%. However, this situation has changed in recent weeks as a result of the social conflict in the country and greater global risk aversion, which have led to a depreciation of the Turkish lira, increased market volatility and rises in long-term interest rates, among other effects. Of course, this depreciation in the lira has a negative impact on the contribution from Garanti to the area’s financial statements, though it is partially offset by exchange-rate hedging whose results are included in the Corporate Center.

The banking sector in Turkey maintains solid capitalization levels and a high degree of profitability. The most important factor in the quarter has been the positive impact on bank ratings of the upgrade in Turkey’s rating to investment grade by various credit rating agencies: Moody’s, Fitch, Japan Credit Rating Agency (JCR) and Dominion Bond Rating Services (DBRS). In terms of activity, the country’s financial industry continues to show great strength, with year-on-year growth rates in lending to the private sector close to 20%, following the easing of credit conditions and the cut in interest rates by the CBT. The NPA ratio remains relatively stable (at around 3%).

In China economic growth has slowed somewhat in recent quarters. Much of this slowdown can be explained by the implementation of policies that aim to limit credit growth, although liquidity tensions in the Chinese interbank market over recent months are also having an impact. The Chinese currency has lost its value slightly over the quarter, while in year-on-year terms there has been a depreciation in the fixing rate, but an appreciation in the average exchange rate.

Earnings in the Chinese banking sector are expected to moderate their rise after several years of high growth rates. The steady liberalization of interest rates will bring with it a tightening of margins. This effect should be offset by expanding credit, which will probably post double-digit growth rates. The environment of lower economic growth and buoyant credit in recent years is leading to a moderate upturn in the NPA ratio from very contained levels (NPA ratio of 1.6% at the close of 2012). In any event, the financial system maintains adequate liquidity and capitalization ratios.