Strategy Note /
Global

Turkey banks: Hyperinflation will take its toll

  • For international investors in Turkey, lira weakness is eroding the value of their holdings

  • Galloping inflation (c80%) will force firms to adopt hyperinflation accounting; Qatar’s QNB has already taken this route

  • QNB's Q2 22 profits took a 6% hit due to its Turkey exposure (Finansbank). Total comprehensive income halved

Turkey banks: Hyperinflation will take its toll
Rahul Shah
Rahul Shah

Head of Financials Equity Research

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Tellimer Research
12 July 2022
Published byTellimer Research

The weakening Turkish lira, allied to global supply chain issues and the impact of Russian sanctions, has driven the inflation rate in Turkey up to 79%. According to convention, a cumulative 100% inflation rate over the previous three years can trigger a need for firms to present their financial statements using hyperinflation accounting rules. 

Turkey's inflation rate is approaching 80%

The rationale for hyperinflation accounting rules

The existence of hyperinflation can make it difficult for investors to use financial statements based on historical cost principles, because the loss of purchasing power over time, even within the same reporting period, can distort underlying trends. To address this issue, in 1989, the International Financial Reporting Standards Foundation issued International Accounting Standard 29 ‘Financial Reporting in Hyperinflationary Economies’.

The basic principle of IAS 29 is that comparative data for non-monetary items in prior periods should be restated, based on the development of a general price index, with any gain or loss arising from this restatement posted through the income statement. 

QNB highlights how hyperinflation is eroding value for international investors

Qatar National Bank (QNB) is the largest bank in the Middle East and Africa, with over US$300bn assets, and is also regularly one of the first in the region to report its financial results. It has operations in over 30 countries, including Turkey.

In its recent Q2 results, the bank indicated that it had applied IAS 29 to the results of its Turkish subsidiary, Finansbank. Net profit was reduced by QAR0.3bn (ie 6%), which reflected the restatement of non-monetary assets and liabilities during the quarter. H1 profit was reduced by c10%, for the same reason. The Q2 hit to total comprehensive income, was much larger, at QAR1.9bn (ie approximately half of reported profits), which reflected the cumulative impact of the restatement of non-monetary assets and liabilities in prior periods.

Impact of hyperinflation on QNB's Q2 22 results

The adjustment factors used by the bank for this purpose are shown below.

Hyperinflation accounting adjustment factors

It is worth noting that these sizeable effects on QNB’s financial performance arose from an operation that accounted for 10% of group assets and 13% of group profits in 2021.

Further insights into the impact of hyperinflation accounting in Turkey will likely be provided by Spain’s BBVA Group (the main shareholder of Garanti Bank), which reports Q2 results on 29 July. The firm has previously indicated that Turkey will make a minimal contribution to its bottom line this year.