Weekly Credit Risk Monitor /
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Weekly Credit Risk Monitor

    Stuart Culverhouse
    Stuart Culverhouse

    Head of Sovereign & Fixed Income Research

    Tellimer Research
    12 September 2019
    Published by

    In Focus: Turkish banks – What a difference a year makes 

    Re-emerged market: We have assigned recommendations to 12 Turkish banks’ bonds, ranging from Ziraat to Alternatifbank. We first commented on the banking sector a year ago today. We are generally constructive on the sector, with a mix of Buys and Holds on the bonds covered. Valuations do not appear particularly stretched – indicative mid z-spreads for most US$-denominated bonds are still at least 100bps off historic tights. Key risks to our view include escalation of tensions between the US and Turkey, significant TRY weakness and asset quality shocks. We note that most Turkish banks have already managed significant challenges quite successfully.  

    ROEs – half up, half down: ROEs fell qoq at half of the banks we track. However, more than 50% of the group still generated double-digit ROEs, with the ROE at one lender – Kuveyt Turk – exceeding 20%. All banks were profitable in Q2, except Sekerbank.  

    Foreign currency liquidity metrics improved: Liquidity coverage ratios were better than at end-18 at many banks, suggesting that liquidity conditions have improved. Loans/deposit ratios improved qoq at a number of banks. In some cases, this was driven by strong deposit growth, partly due to the introduction of CPI-indexed deposit products. In other cases, loan books continued to contract, leading to the improvement in LDRs. Recently-introduced loan growth-linked reserve requirements may mean LDRs are less likely to improve significantly in the near term, as loan book contraction at several major banks is expected to be reversed.  

    Capital ratios mostly higher qoq: State-backed/parent-sponsored capital injections and strong internal capital generation meant that most lenders reported higher capital ratios than at the end of March. This was clearly a positive development. We believe the probability of support for banks in which the state is a shareholder remains high. In addition, some foreign owners such as QNB and Commercial Bank Qatar have shown their willingness to support their Turkish subsidiaries. Questions about UniCredit’s commitment to Yapi Kredi remain. 

    Read the full report here.

    Recap of the week’s key credit developments

    Ukraine (UKRAIN): On Friday, Fitch upgraded its long-term foreign currency rating to B from B-. This makes Fitch’s rating the highest of the three main rating agencies; S&P has rated Ukraine B- since October 2015 and Moody’s Caa1 since December 2018. Fitch cited access to financing, macroeconomic stability, expected declining government debt and a shorter electoral period that reduces political uncertainty as key reasons. The outlook is positive, as Fitch expects further improvements in creditworthiness.  

    Kazakhstan (KAZAKS): On Monday, the National Bank of Kazakhstan (NBK) unexpectedly increased the base rate to 9.25% from 9%, reversing a 25bps cut in April. The NBK press release cited inflationary pressure caused by increasing consumer demand. With this rate hike, inflation in 2020 is expected to slow and remain within the target band. Expanding domestic demand is expected to continue as the main driver of inflation, but medium-term inflation should remain within the target band, and may require further monetary tightening. This hike was unexpected as the President has recently demanded that government policy support growth. The next rate decision is due on 28 October. 

    Mozambique (MOZAM): The economy and finance ministry reported on Monday that 99.5% of bondholders approved the restructuring of the US$727mn MOZAM 2023 bond, which forms part of the country’s defaulted debt. The early deadline for the consent solicitation was 6 September. The new bond will mature over 2028 to 2031, with no payments related to natural gas revenues; gas production and exports are expected from 2022 and will become a key component of government finance. After obtaining the required vote in the consent solicitation, we understand that final closing is now conditional on local approvals, but these should be a formality. A successful restructuring of the bond will bring to a close part of this long sorry saga, and the focus will then shift to the two loans.  

    IHS Netherlands Holdco BV (IHSHLD): On Tuesday, the telecoms company with operations in Nigeria priced a two-tranche US$ bond deal; US$500mn due 18 March 2025 was priced to yield 7.125%, compared with guidance of 7.25% (+/-0.125%), and US$800mn due 18 September 2027 was priced to yield 8%, compared with guidance of 8.125% (+/-0.125%). Both bonds were priced at par. IPG was +200bps and +225bps, respectively for the 2025 and 2027 bonds versus the Nigeria sovereign curve. Although this tightened to +165bps and +170bps, it was still a significant spread to the sovereign.  

    Pemex (PEMEX): After almost a year without tapping the bond market, Pemex is set to make a big comeback. The company has mandated a number of investment houses to issue a series of USD-denominated bonds in three tranches: a 7-year, a 10-year, and a 30-year offering. The proceeds from the new three-tranche bonds will be used to fund a portion of the refinancing of outstanding short-term debt and US$ bonds. The series of bonds  will be launched concurrently with the sovereign (the United Mexican States or UMS), which is contributing cUS$5.0bn to Pemex in the form of a capital injection. We believe this is a good starting point for Pemex and Mexico’s Ministry of Finance to “defend Pemex’s ratings”, as stated by Finance Minister Arturo Herrera. However, we also believe that these amounts might be insufficient, particularly since the latest results showed the company producing less oil per day than the 2020 budget envisaged. We reiterate our Hold recommendation on Pemex’s bonds for purely technical factors.