Turkish Banks' Ability to Extend Debt Is Key in Crisis

(Bloomberg) -- Investors are watching closely to see whether Turkish banks will maintain access to the foreign funding they need to keep economic activity humming, as the economy is battered by U.S. sanctions, rating cuts, concern about a looming fine on a state bank and a plunging lira.

Turkish lenders have a good record of foreign borrowing even at the height of a financial crisis and are strong enough to weather a slowdown, according to bank executives. But the nature of the current crisis raises the possibility of a new set of external shocks, most notably from the U.S., which is retaliating with economic attacks against Turkey's imprisonment of American citizens and employees of the U.S. diplomatic mission.

Even if foreign banks continue lending to their Turkish counterparts, “costs will rise and access to markets will be hampered, with many investors not willing to increase their exposure to Turkey," said Trieu Pham, an emerging market credit strategist at ING Bank NV in London. “If sanctions were applied on banks, that would be the worst-case scenario given the high external financing needs, but that's not a likely scenario for now.”

Last week, the U.S. started the pressure by sanctioning two ministers, and on Friday it announced a review of duty free trade for about $1.7 billion in Turkish exports. The Turkish government has been trying to negotiate relief for a two-track investigation into state-run bank Turkiye Halk Bankasi, but Secretary of State Mike Pompeo has already warned Turkey that “the clock had run out" on its its deadline to set the prisoners free.

Banks have already been struggling with a weakening lira and a wave of debt-restructuring demands from companies that now sit on $337 billion of liabilities, with a shortfall of $217.3 billion net against assets. Borrowing costs are also rising ahead of more than $100 billion in debt payments coming due over the course of a year.

Severe concerns about the future for banks have already been priced in; the banking index has lost more than a third of its value this year, while the benchmark Borsa Istanbul 100 Index lost 18 percent. Turkish banks' dollar bonds also reflect nervousness, with yields more than 300 basis points above the sovereign, while some big non-financial companies such as oil refiner Tupras Turkiye Petrol Rafinerileri AS and the nation's biggest mobile-phone operator, Turkcell Iletisim Hizmetleri AS, have lower costs.

Meanwhile, the lira slumped as much as 6.3 percent Monday on concerns over tensions with the U.S. before rising 1.9 percent Tuesday on a report that Turkish officials will head to the U.S. The currency lost 28 percent against the dollar this year, making it the second-biggest loser in emerging markets tracked by Bloomberg after Argentina. Inflation hit 15.9 percent in July, and 10-year Turkish bond yields have reached record levels near 20 percent.

Still Borrowing

The heads of Turkey's two largest banks say they're still able to borrow.

“There is no issue at all regarding the syndication,” Akbank TAS Chief Executive Officer Hakan Binbasgil said on July 25 during a teleconference after the bank's first-half earnings. Akbank borrowed a total of $1.15 billion in syndicated loans in August 2017, $945 million of which will mature in September, according to a public filing.

Turkiye Garanti Bankasi AS CEO Ali Fuat Erbil said strong relationships allow banks to roll over loans even against a turbulent economic backdrop. “In the toughest days I remember during 2008 and 2009, our rollover ratio was around 88 percent, not below 80 percent,” Erbil said in an earnings teleconference on July 26.

Fitch downgraded Turkey and then 24 Turkish banks further into junk in July, saying tougher financing conditions and a weaker economy will likely hit the performance of the banking sector by heightening pressure on asset quality, capitalization, and liquidity and funding profiles.

“External debt rollover rates for banks have held up, and banks generally have sufficient foreign currency liquidity to meet foreign currency wholesale liabilities maturing within a year," Fitch said. “However, the cost of financing has gone up and market demand for some instruments has tailed off.”

Even a 100-percent rollover ratio doesn't meet Turkey's needs at a time of weak capital inflows, according to Inan Demir, an economist at Nomura International Plc.

“Investors are watching restructuring demands and their impacts on banks' balance sheets and creditworthiness very closely," he said. “I don't know when these will have a negative impact on foreign borrowings, but we can't say that they will have no impact on foreign lenders' appetite.”

To contact the reporter on this story: Asli Kandemir in Istanbul at akandemir@bloomberg.net

To contact the editors responsible for this story: Stefania Bianchi at sbianchi10@bloomberg.net, Benjamin Harvey, Keith Campbell

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