Fixed Income Analysis /

Turkish banks: All eyes on subordinated bonds

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    6 January 2020
    Published byTellimer Research

    Turkish delight: Christmas came two days early, thanks to a phenomenal (albeit not totally unexpected) gift to the market from Turkey. On 23 December, Vakifbank announced that the US$500mn VAKBN 6.875% subordinated bond will be redeemed next month. Vakifbank had until 3 January to exercise the call on the bond, which was the first Basel 3-compliant Tier 2 security to be issued by a Turkish lender. Most Turkish banks’ subordinated bonds have tightened since the Vakifbank announcement. For some Tier 2 and Tier 1 securities, spreads are now at or close to historic tights. Ordinarily, this could mean that investors ought to consider taking profit on at least some of these securities. Regional tensions and the impact this has had on oil prices may support this. However, there may be further room for these bonds to perform.

    Many months until the next call: The US$250mn Albaraka Turk (ALBRK) 10.5% security is callable at the end of November. This is the next call date for a Turkish bank subordinated bond we track and is clearly many months away. While this means that we do not have the very near-term catalyst of another potential call, it also means, we think, that spreads may continue to tighten as the market may ignore the possibility of other Turkish lenders choosing not to exercise a call option (at least for now).

    Considering sub vs senior spread differences and multiples: Based on the most relevant bond pairs, Tier 2 to senior spread multiples range from 1.4x at Kuveyt Turk to over 2x at banks including Akbank and Garanti. These multiples are lower than in Russia, but we do not believe this means that subordinated bond valuations look stretched – the difference between Tier 2 and senior bond spreads still exceeds 300bps at most Turkish banks. Based on subordinated versus senior spread differences and multiples, the Akbank 6.797% 2028, Garanti 6.125% 2027 and TSKB 7.625% 2027 bonds look most interesting.

    Mid YTC vs Mid YTM: For all but four callable Turkish bank bonds, the mid YTC is lower than it was prior to the Vakifbank announcement. In a previous report, we showed how yields to the first call and yields to maturity on Turkish banks’ subordinated securities compared. We have updated this comparison, which shows that following Vakifbank’s decision, the difference between mid YTC and mid YTM is still greatest for the Odeabank 7.625% security. For Fibabanka, this difference has declined, but is still almost 2ppts.

    Odeabank stands out in more ways than one: As mentioned above, the difference between YTC and YTM is greatest at Odeabank. The ODEABK 7.625% bond is priced at c74.4 and yields just over 21% to the 2022 maturity. This security remains well over 1,300bps off the tights. As Odeabank is majority-owned by Bank Audi in Lebanon, what happens with Lebanese sovereign bonds, and by extension Lebanese banks, may have implications for this bank. We note recent performance has been surprisingly resilient. We cannot exclude some form of intervention by the Turkish regulator, to safeguard domestic financial stability, should the situation in Lebanon take another turn for the worse.