Turkish bank shares hit hard by concerns of slower rate cuts

Turkey's banking index (.XBANK) extended losses to slide more than 3% on Thursday amid growing concerns that the central bank may delay or pause future interest rate cuts following Wednesday's sharp lira tumble.

After opening 0.6% higher, the benchmark BIST-100 XU100 index experienced swings and was up 2.55% at 0835 GMT.

The banking index initially dropped 1.68% in early trade before selling pressure intensified. It plunged as much as 5.9% by 0725 GMT before paring some losses to trade 2% lower at 0835 GMT.

The lira USDTRY traded at 37.9975 against the U.S. dollar at 0835 GMT. On Wednesday, the lira tumbled to a record low of 42 per dollar before recouping most of the day's losses, after authorities detained President Tayyip Erdogan's main political rival.

The main BIST 100 share index closed 8.72% lower at 9,860.29 points on Wednesday.

Bankers calculate that the Turkish central bank sold a minimum of $5 billion in FX after the lira's crash, while some say it may have already reached $10 billion for the day.

Serhat Baskurt, head of algorithmic trading at ALB Yatirim, attributed the decline in banking stocks to fading rate-cut expectations following the central bank's FX sale.

"The central bank sold around $8-9 billion after strong FX demand yesterday. There is still uncertainty about whether this demand will persist. If FX demand continues and carry trade outflows accelerate, the expectation for an April rate cut could shift towards a hold. In fact, I believe an implicit rate hike might even be on the table," Baskurt said.

He noted that selling pressure was concentrated in banks with significant foreign investor positions.

Yusuf Dogan, treasury director at Trive Menkul Degerler, said any delay or pause in the expected monetary easing cycle in 2025 could disrupt the projected 200-400 basis point recovery in banks' net interest margins.

He added that such a scenario could also put at risk the rebound in return on equity, which has been a key driver behind the banking sector's more than 20% rally since the monetary easing cycle began in December.

International bonds issued by Turkey's government clawed back some of the previous session's losses. Longer-dated maturities were up as much as 0.7 cents with the 2045 bond bid at 86.026 cents on the dollar, retracing more than half of Wednesday's decline, Tradeweb data showed. (US900123CG37=TE)