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Turkish banks: Pulling back from the brink (again)?

  • The main risk associated with the Istanbul election re-run has not happened; Erkem Imamoglu of the CHP won

  • President Erdogan has congratulated Imamoglu – for now this should help address concerns about political interference

  • Here are our initial thoughts on these events, focused on Turkish banks

Turkish banks: Pulling back from the brink (again)?
Tolu Alamutu
Tolu Alamutu

Credit Research Analyst, Banks

Tellimer Research
24 June 2019
Published by

The main risk associated with the Istanbul election re-run was a marginal victory for either the AKP or CHP, which could have been challenged. That has not happened. Erkem Imamoglu of the CHP emerged the winner, taking 54% of the vote versus the 45% secured by Binali Yildirim, the AKP candidate. Here are our initial thoughts on these events, focused on Turkish banks:

  • President Erdogan has congratulated Imamoglu. For now, this should help address concerns about political interference, and is a marked change on statements made after the local elections in March. On the banks, we do not expect a change in support offered to Turkish lenders (which is sometimes seen as political/elections-driven) or to Turkey’s attempt to limit the impact of slower growth.
  • Ekrem Imamoglu has said he is prepared to work with President Erdogan. Previous statements from the CHP suggested otherwise – after the elections in March, there were reports that the CHP planned to investigate contracts awarded in Istanbul. As we have flagged before, the fallout of any such investigation may have led to additional concerns about asset quality in the banking system.
  • While there was little talk of transferring the c28% stake in Isbank held by the CHP to the Turkish Treasury just before Sunday’s elections, this was still seen as a risk by some, given comments made much earlier. It is possible that the Istanbul election result leads to the transfer plans being shelved/cancelled. We would stress that we do not believe such a transfer would have resulted in a significant change in Isbank’s strategy.
  • For the banks’ exposure to companies such as Anadolu Efes, the result may be seen as positive. The CHP is considered to be a more secular party, may be less likely to impose restrictions on such issuers.
  • There are still concerns that President Erdogan may place incremental limits on the Mayor of Istanbul’s powers. Initial statements from Erdogan suggest otherwise, but we’ll have to see how things develop over the next few days and weeks. Any such restrictions may undo the effect of Erdogan's most recent actions and could be seen as negative for Turkish assets. 
  • Some reports have suggested that this weekend’s events may lead to the formation of rival alliances within the AKP. This is also a risk, though Turkish banks are clearly accustomed to managing through political and other uncertainties.
  • Attention has now shifted to Erdogan’s planned meeting with US President Donald Trump during the G20 summit. We acknowledge that other issues (Iran tensions, China trade) may be seen as more pressing by the US authorities. Assuming the US-Turkey meeting goes ahead, the worst case for Turkish assets may be as follows: no agreement between the two countries, delivery of military equipment from Russia in July and US sanctions on Turkey. We think it is important to consider this scenario as comments from various Turkish authorities, including the Minister of Foreign Affairs, Mevlut Cavusoglu, suggest that the S-400 air and missile defence equipment order from Russia cannot be cancelled, thus sanctions limitation rather than sanctions avoidance may be the more likely outcome. Such sanctions may be restricted to defence-related companies and may not directly target banks with bonds outstanding. However, there is a risk that the market reaction may not be as limited, as we saw in the Brunson case. Having said all this, recent events (we are thinking of last year’s interest rate hike and the decision to release Pastor Brunson, as well as reactions to Istanbul’s election results), show that we should not rule out the possibility of a rapid turnaround in Turkey.