Fixed Income Analysis /

Turkish banks: History doesn't repeat itself, but it often rhymes

    Tolu Alamutu
    Tolu Alamutu

    Credit Research Analyst, Banks

    Tellimer Research
    21 June 2019
    Published by

    Istanbul elections now just days away: Near-term headline risk in Turkey remains elevated. The re-run of Istanbul’s mayoral elections is scheduled to take place on 23 June. In addition, US authorities have stated that sanctions will be imposed on Turkey if the NATO country takes delivery of the S-400 air and missile defence equipment from Russia, possibly in July. As we stated in a previous note, it is not clear how far-reaching such sanctions might be. However, even if these sanctions are limited, the market reaction may not be, as we saw in the case of Andrew Brunson. In addition, concerns about reserves, corporate indebtedness and banks’ asset quality have not gone away. This may continue to weigh on bank bond valuations.

    Moody’s downgrades are just the latest in a series of ratings adjustments: Turkey is now rated B1 at Moody’s. The sovereign was downgraded from Ba3 on 14 June. The outlook on the new rating is negative. Moody’s has also downgraded 18 Turkish banks’ ratings and hasn’t ruled out further cuts. Looking at senior bond ratings, Turkey’s major banks have been downgraded six times at Moody’s in the last five years. There have also been multiple downgrades at Fitch in that time. Importantly, Turkish sovereign and bank bonds already trade wider than some issuers with lower ratings.

    We have been here before: Turkish bank bondholders are no strangers to volatility. Since Akbank issued a US$1bn 5-year bond in July 2010, marking a resurgence in eurobond market activity, we have had several rounds of elections, concerns about Greece exiting the Eurozone, a US taper tantrum, an attempted coup, withdrawal of an issuer’s banking licence, sanctions fears, arrest and imprisonment of a major bank’s deputy general manager and much more impacting the valuations of Turkish bank bonds. The decision to re-run elections in Istanbul and to proceed with taking delivery of military equipment from Russia should be seen in this context.

    Brace for impact? More on sanctions: Bloomberg suggests that US authorities are considering three sanctions packages, one of which would ‘all but cripple’ Turkey’s economy. For the eurobond market, we think what matters most is the ability of issuers to make payments on outstanding securities within any sanctions framework. Events involving UC Rusal suggest that sanctions which prevent issuers from making payments on existing securities seem less likely. Supporting this, the article suggests sanctions may target Turkey’s defense sector. However, as stated earlier, the risk is that the market reaction may not be limited, even if sanctions imposed by the US authorities are.

    Assessing 2018 price changes: In the valuation nadir that was August 2018, some bank bond prices fell below 50. Sovereign and corporate bonds were generally less volatile. Unsurprisingly, short-dated senior bank bonds were the most resilient in price terms – in our ranking of price changes, 2019 bonds occupy all but three of the top 10 places. In contrast, subordinated bonds – particularly Isbank securities – recorded the most significant price changes.

    Past performance is not always indicative of future results: In this report, we show how current yields compare with 2018 levels. For all but a handful of bonds, we are still some way off the August 2018 yield highs. In relative terms, securities including the Vakifbank (VAKBN) covered bond and Kuveyt Turk (KFINKK) bonds were more resilient in 2018. However, we are all too aware that, as many investment disclaimers state, future performance may differ from what was obtained in the past. In addition, the much-anticipated meeting between President Trump and President Erdogan at the G20 summit on June 28 and 29 may well address sanctions-related risks.