This is not a typical research report: The purpose of our September Special on Turkish banks is to discuss the opportunities and risks of six potential strategies (Section 1) and to address some of the key issues regarding these lenders (Section 2). There are no Buy, Sell or Hold recommendations on individual securities in this report.
Section 1: Six potential strategies: Our selection of Turkish bank securities consists of over 70 US$ and EUR bonds. Most securities have widened versus the sovereign, and many subordinated bonds have performed worse than senior securities. Here is a summary of six potential strategies:
- Short-term focus: 2018 and 2019 bonds: Some short-dated bonds such as the ISCTR 5.5% 2019s are quoted well below par. Disclosures from Turkey’s major banks and comments from the authorities suggest that maturing bonds will be repaid.
- Owners’ corner: Focus on foreign-owned banks: We expect most foreign owners to support their operations in Turkey. Qatar has already pledged its support but the ALNTF 2026 bond is still quoted at distressed levels.
- Only the brave? Tier 2s and gone concern loss absorption: Imposing losses on Tier 2 securities of a major bank could make an already challenging situation worse. There are some risks, however.
- Back to basics: Fundamentals for the win: We ranked the banks based on 21 ratios. Within the top five, Ziraat Bank’s senior bonds and Akbank’s subordinated bonds offer the highest yields, on average.
- The downtrodden: >1,000bp club: Almost thirty bonds are over 1,000bp off the tights. The YKBNK 2026 bond makes this list.
- Rock solid? Focus on most resilient bonds: There are downside risks in Turkey. One way to express this view may be through bonds which have held up best.
Section 2: Addressing some of the key issues: The banking sector in Turkey faces a number of challenges including a weaker TRY and slower growth. Here are the six key issues we discuss:
- Now vs then: Capital and liquidity metrics are not as strong as before, but the major banks’ fundamentals still compare relatively well with many peers.
- Liquidity is more important than ever: Reported HQLAs exceed amounts due this year and next at most Turkish banks with Eurobonds outstanding. Further, the CBRT will take ‘all necessary measures to maintain financial stability’.
- Asset quality – putting buffers to test: We have stressed asset quality metrics at the banks, and Akbank and Garanti fare best. Regulatory forbearance may mean NPL ratios do not rise by as much as some anticipate.
- TRY weakness means capital ratios may fall further: All banks which have commented on exchange rate sensitivity have said that further TRY weakness will lead to lower CARs. Regulatory forbearance may reduce the magnitude of these effects, and banks themselves may take measures to limit the impact.
- Buybacks are a possibility: Vakifbank’s board has authorised Eurobond buybacks. Isbank and Halkbank have announced share buybacks. All this suggests that some banks are not averse to repurchasing their own Eurobonds.
- US relations – Halkbank in focus: Concerns about a potential fine and about possible sanctions have weighed on HALKBK bonds. Turkey’s Finance Minister has stated that the government would provide support to Halkbank if needed, but this hasn’t been enough to allay the concerns.
Risks include sanctions and rating downgrades: Further deterioration in the relationship with the US is a key risk. We acknowledge that there may be no adequate way to factor in punitive sanctions (even though we attempt to do this in the Halkbank case). IG ratings are a distant memory at most lenders. Triple-C is now a reality for some and is a threat elsewhere. Given some market participants’ rating requirements, further downgrades may still have a negative impact on valuations.