(Bloomberg) -- U.S. criminal charges brought against a state-owned Turkish bank risks spilling over into the rest of the industry, pushing up borrowing costs for lenders dependent on foreign funding.
Turkiye Halk Bankasi AS was indicted by federal prosecutors last week for an alleged multibillion-dollar scheme aimed at evading Iran sanctions. Halkbank denied wrongdoing. The move adds to already tense relations between Ankara and Washington amid Turkey’s military operations in Syria, and a push for more sanctions against President Recep Tayyip Erdogan’s administration.
The action reinforces the view that “Turkey carries a high compliance risk,” said Jonathan Friedman, a partner at Wallbrook Advisory Ltd. in London. “The danger for other Turkish lenders is that compliance teams often find it easier to issue broad risk ratings for countries and sectors.”
Foreign investors have dumped $2.2 billion worth of Turkish assets this year, according to central bank data, while the lira is the worst-performing emerging-market currency in 2019 after Argentina’s peso. The indictment comes as Turkish lenders struggle to recover from the lira’s crash toward the end of last year, a wave of debt-restructuring demands from companies and a slowing economy.
What Bloomberg Intelligence Says:
“An early accord might have cost in the low billions of dollars. Now that charges have been filed, we think any potential settlement -- if one is reached -- might be on par with, or exceed, the $8.9 billion BNP Paribas paid in 2014 for sanctions violations.”
-- Elliott Stein, senior litigation analyst
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Other state-owned lenders such as TC Ziraat Bankasi AS, Turkey’s largest bank by assets, and Turkiye Vakiflar Bankasi TAO, might be hardest hit, Friedman said. Turkish lenders have $83.7 billion of external debt maturing in the next 12 months, according to central bank data.
The yield on Halkbank’s $500 million of bonds maturing in July 2021 surged to a one-year high of 13.5% last week after trading at 9.46% before the indictment was announced on Oct. 15. That compares with yields of 6.18% for similar notes issued by Ziraat.
Halkbank’s shares fell 3.4% as of 5:05 p.m. in Istanbul, the biggest drop on the Borsa Istanbul Banks Sector Index. That extended losses this year to 22% this year, the worst performer on the 13-member gauge, which is up 17%.
Moody’s Investors Service said on Friday it will review Halkbank’s ratings for a possible downgrade amid the increased likelihood of the firm needing “extraordinary support due to legal risks.”
Fitch Ratings placed Halkbank on negative watch on Monday, citing uncertainty over whether Turkish authorities would be able to support the lender in the event of a material fine or other punitive measures.
“The real danger will be global banks’ reduction of syndicated loans and the expansion of spreads following Halkbank charges and the U.S. sanctions,” said Atilla Yesilada, an economist at Global Source Partners in Istanbul.
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