Turkish bank shares hit hard by concerns of slower rate cuts

By Canan Sevgili

March 20 (Reuters) - Turkey's banking index .XBANK extended losses to slide more than 8% on Thursday amid growing concerns that the central bank may delay or pause future interest rate cuts following Wednesday's sharp lira tumble.

Turkish stocks dropped a further 1% after plunging on Wednesday following the detention of President Tayyip Erdogan's main political rival, while the lira was flat.

Having opened 0.6% higher, the benchmark BIST-100 .XU100 stock index was down 0.5% at 1403 GMT in volatile trade.

The banking index initially dropped 1.68% in early trade before selling pressure intensified. It was later down as much as 8.2%.

The lira TRYTOM=D3 traded at 38.0000 against the U.S. dollar. On Wednesday it tumbled to a record low of 42 per dollar before recouping most of the day's losses, after authorities detained the mayor of Istanbul, Ekrem Imamoglu.

Bankers calculated that the Turkish central bank sold a minimum of $5 billion in FX after the lira's crash, while some said it may have reached at least $10 billion.

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," Baskurt said.

"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."

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. Turkey's dollar bond maturing in 2045 is currently bid at 85.88 cents on the dollar, up 0.483 cents, Tradeweb data showed US900123CG37=TE.