Turkish Bank Bonds Trading in Distress Defy Erdogan’s Optimism
Turkish Bank Bonds Trading in Distress Defy Erdogan’s Optimism
(Bloomberg) -- President Recep Tayyip Erdogan says Turkey’s banks are “doing fine.” But as the lira spirals ever lower, debt investors are taking a less sanguine view.
The bonds of three Turkish lenders are trading at distressed levels, which shows the deteriorating opinion of investors on the ability of the companies to repay their obligations, even though the banks remain profitable and highly capitalized. That’s the same number of firms as serial-defaulter Argentina, according to a Bloomberg Barclays Emerging Markets index.
Early last month, no corporate bonds in Turkey were at these levels. Now, the average risk premium demanded by investors to hold dollar-denominated notes of Turkish businesses is higher than Bahrain, Ukraine and Nigeria. The lira’s decline is invoking memories of the 2018 currency crisis, when billions of dollars of credit had to be restructured as borrowers struggled to repay foreign debt.
“Banks are a lot more driven by macro-economic fundamentals,” said Ksenia Mishankina, director of emerging-market fixed income at Union Bancaire Privee in London. “Given the currency weakness, there is a risk of weaker credit quality for the banks in the form of increasing non-performing loans.”
Turkish corporate bonds worth $2.2 billion are trading in distressed levels, with yields on debt sold by Turkiye Is Bankasi AS, the nation’s third-largest lender, Turkiye Garanti Bankasi AS and Akbank TAS now more than 1,000 basis points above U.S. Treasuries. Add the securities of company debt above an 800 basis-point spread and that figure surges to $5.3 billion.
That’s even as Turkey’s banks, which are accustomed to market turbulence and policy flip-flops, had average capital adequacy ratios of 20% at the end of June, above the regulator’s 12% requirement. All three lenders reported second-quarter profit that beat estimates.
Rapid lending growth and payment holidays to cushion customers from the economic fallout of the coronavirus helped to keep non-performing loans steady at 4.4% of total credit at the end of June, according to data compiled by the banking regulator.
But bank asset quality will swing back into focus toward the end of the year as grace periods for clients run out, said Cagdas Dogan, a banking analyst at BGC Partners in Istanbul. He estimates that every 10% slump in the lira reduces capital-adequacy ratios by 50 basis points.
The lira has weakened 18% this year to 7.2246 per dollar as of Tuesday’s close. Goldman Sachs Group Inc. expects the currency to slide to between 7.75 and 8 in the next three to six months.
A spokesperson for Istanbul-based Garanti Bank said the company’s bonds reflect limited liquidity, which exaggerates moves, as well as changing risk appetite following the recent market turmoil. Isbank and Akbank declined to comment.
“Those are subordinated bonds and investors always ask some risk premium for those,” said Trieu Pham, a strategist at ING Groep NV in London. “In good times, the additional risk premium demanded declines, and in times of concern, it tends to expand.”
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