Fixed Income Analysis /

Turkish banks: Never a dull moment

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    3 July 2019
    Published by

    Up, up and away! About half of the Turkish bank bonds we track have tightened by 100bps or more since June 21. At least three factors have contributed to this stellar performance: 

    1. President Erdogan's acceptance of the Istanbul election result, which appears to have been enough for markets to ignore reports that some within the AKP may form a breakaway party, and reports that further limits are being placed on mayoral powers
    2. News that Hakan Atilla, former Deputy General Manager of Halkbank, is to be released later this month, and 
    3. Comments from US President Trump during the recently-concluded G20 Summit, which have helped address concerns about sanctions (in part).

    Still wider than many similarly rated comps: Looking at percentage changes in mid z-spreads versus June 21 levels, bonds including the Vakifbank (VAKBN) 6.875% 2025, Yapi Kredi (YKBNK) 4% 2020, Isbank (ISCTR) 5% 2021 and Halkbank (HALKBK) 3.875% 2020 have performed particularly well. Conversely, bonds issued by Albaraka Turk, Odeabank and Fibabanka appear to have lagged (but almost all bonds are tighter than was the case before the Istanbul election re-run). Turkish bank bonds are still quoted wider than many similarly rated comps. As one example, the Akbank 5.5% 2022 bond is quoted more than 100bps wider than the Zenith Bank 7.375% 2022 security. Valuations suggest strong performance could continue, but we acknowledge that there are risks. 

    Q2 results season starts soon: Overall, performance in the latter part of 2018 and in the first quarter of this year was better than anticipated. In Q1 19, all but one of the banks we follow reported a profit. The second quarter was clearly another challenging period for Turkish banks. It began and ended with elections. However, previous FY 19 guidance from management at Turkey’s major banks suggests that issuers anticipated these challenges. As such, we would not be too surprised to see many major Turkish lenders report above-consensus results again, 

    Primary market activity is expected to pick up: Following the G20 Summit, Turkey has placed a US$2.25bn 5-year bond and QNB Finansbank has tapped its 2024 issue. We expect more issuance from banks including Isbank, which have been absent from the bond market for some time. Focusing on the banks we track, almost US$4.8bn has been redeemed this year while just over US$3bn has been issued so far. 

    Some risks remain: There is still some uncertainty about how the US will react to the S-400 delivery. President Erdogan is reported to have said that President Trump did not mention sanctions during the G20 meeting. However, a Republican Senator was quoted in an interview saying ‘sanctions would be required under law’ if Turkey activates the S-400 missile battery. At least one report has suggested that President Trump may seek to ‘issue a waiver and postpone sanctions.’