Ziraat Bank

Turkey Wealth Fund (TWF) completed the processes for a total of TRY 11.7bn capital injections to the largest three public deposit banks, namely Ziraat Bank, Halkbank and VakifBank. The financing of the capital injections is provided by the cash generated from the debt securities issued by the government as private placement to the TWF.

Leading public deposit banks Ziraat Bank, Halkbank and VakifBank will raise capital by a total of TRY 111.7bn. This is the fourth round of capital boost to state banks since the currency crisis of 2018. The government has relied increasingly on public banks for its pro-growth policy in recent years.

All-round solid performance:Ziraat (TCZIRA) reported results for Q1 20 on 15 May. Net income of TRY2.5bn was about 50% higher than a year ago, primarily reflecting strong net interest income. This will be an important thing to monitor over the next few quarters. Ziraat Bank also disclosed TRY943mn in ‘other’ allowances, up from TRY207mn in the previous year (we include this in total costs). In all, operating expense of TRY4.2bn was over 40% higher than a year ago. The qoq decline in capital ratios primarily reflects the impact of balance sheet growth.

Wide-ranging policy and regulatory changes have been announced in Turkey, which seem set to impact almost every line of lenders’ income statements. CET1Tier 1CARCET1Tier 1CARZiraat13.58%15.40%16.39%13.22%13.22%14.23%Halkbank9.32%11.08%13.65%10.36%10.36%13.36%Vakifbank10.26%13.26%16.22%11.34%13.32%16.47%Turk Eximbank13.10%14.60%19.10%13.40%13.40%18.70%Source: Company statements. Introduction of this ratio has contributed to a significant decline in the yield of TRY-denominated government securities this week. CBRT estimated that this would release FX and gold liquidity of cUSD5.1bn.

No more Buys:US charges on Halkbank raise the prospect of a sustained period of negative headlines impacting one of Turkey’s largest lenders. As a result, we have downgraded all Buys to Holds. Further, US authorities state that in mid-2014, ‘the then-Prime Minister of Turkey and his associates […] instructed Halkbank to resume the [sanctions-evasion] scheme, and Halkbank agreed.’ We cannot exclude the State offering more support to the bank, to mitigate the impact of the US charges.

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. Operating revenue impacted by high swap costs:At most banks, operating revenues were lower than in the previous quarter. Some positive developments on costs:Only five of the banks we track reported qoq rises in operating expenses. Although non-performing loans rose qoq at most banks, NPL ratios at all banks remain below 10%, and most lenders have kept coverage ratios above 100%. This was clearly a positive development.

TCZIRA bonds have widened relative to some peers:We are assigning Buy recommendations to the three US$-denominated Ziraat Bank (TCZIRA) senior eurobonds. Focusing on the positives: Consolidated net income of TRY1.2bn was down almost 50% yoy, reflecting higher swap costs and operating expenses, as well as elevated provisions. Very high swap costs led to qoq decline in revenues:Operating revenue of TRY5.5bn was flat yoy but 12% lower than in the previous quarter. Core spreads improved in the quarter, driven by the foreign currency business. In TRY, the loan-deposit spread was flat qoq. TCZIRA vs AKBNK, GARAN, ISCTR and YKBNKSource: Bloomberg.

Istanbul elections now just days away: Near-term headline risk in Turkey remains elevated. Moody’s downgrades are just the latest in a series of ratings adjustments:Turkey is now rated B1 at Moody’s. There have also been multiple downgrades at Fitch in that time. More on sanctions: Bloomberg suggests that US authorities are considering three sanctions packages, one of which would ‘all but cripple’ Turkey’s economy. Events involving UC Rusal suggest that sanctions which prevent issuers from making payments on existing securities seem less likely. In contrast, subordinated bonds – particularly Isbank securities – recorded the most significant price changes.

Yapi Kredi reported results for Q1 on 3 May. Like Akbank, Garanti and TSKB before it, Yapi Kredi’s performance was better than expected. Net interest income and net fee and commission income were both stronger than a year ago. On capital – which has almost always been a focus at Yapi Kredi – the equity/assets ratio is back below 10%, but the recent AT1 issue added 113bps to the bank’s Tier 1 ratio, which was 12.1% at end-March. Please see Table 1, which shows key Q1 figures for four major Turkish banks. It is unlikely that the decision to re-run the vote would have come as a complete surprise to most people.

The Turkish state-owned banks, Privatbank, Dubai Islamic Bank, Noor Bank and Zenith Bank have all featured in the news over the weekend and/or today. Turkish banks (TCZIRA, VAKBN, HALKBK, EXCRTU):Following the announcement of the New Economy Plan earlier this month, the Turkish state has said it will issue EUR3.7bn in new debt to recapitalise banks it owns. These estimates are based on end-18 capital and risk-weighted asset disclosures and exchange rates. As many will recall, in late 2016, Privatbank’s eurobonds were bailed in along with the bank’s shares. DIBUH has also said other acquisitions in the UAE may be considered. We note there is no certainty the deal will proceed, however.

Nostrum Oil is an E&P company operating in north-west Kazakhstan. Nostrum’s bonds sold off in Q4 when management released downbeat 2019 output guidance in light of complications at its main producing field. We rate the NOGLN 22s and NOGLN 25s as buys. If the benchmark oil price (Brent) is in the range of US$60-65/b and production increases to c45,000 barrels of oil equivalent per day (boepd) in 2019f-22f, we expect Nostrum would refinance US$725mn in 2022 for a five-to-seven-year term, maintaining interest at 8%, without write-down of the principle.

DAMAC is a pure play residential property developer,generating essentially all its revenues from the sale of villas and apartments in Dubai. We regard the credit risk associated with the DAMACR 19s as low and assign a Hold recommendation. If the windfall of completions and handovers produces a material amount of cash for DAMAC in Q4 18-Q1 19 and the Dubai property market does not deteriorate further, DAMACR 22s and 23s would be likely to be supported and might even deliver positive returns. Both bonds were issued at par. Ziraat Bank:Unconsolidated results for Ziraat Bank (TCZIRA) were published on 12 February.