Ottoman-Era Bank Taps Foreign Cash After 23 Years: Turkey Credit

TC Ziraat Bankasi AS, the bank founded in 1863 during the Ottoman Empire, plans to sell Eurobonds for the first time in 23 years to finance lending at cheaper rates than the cost of deposits.

Turkey’s biggest state-run lender will sell as much as $3 billion in foreign currency-denominated bonds over the next year, the first time since 1989 it will tap international investors, the company said Nov. 8. Ziraat only has lira- denominated debt. The yield on its notes due in February 2013 fell to 6.5 percent today from 7.75 percent on Sept. 7, according to data compiled by Bloomberg.

“It’s more cost-effective for the bank to fund growth through bonds and move away from expensive deposits,” Ates Buldur, analyst at Credit Suisse Securities Ltd. in Istanbul, said in a telephone interview yesterday. “The bank is clearly moving towards a more profitable structure.”

Turkish banks, faced with paying three-month deposit rates of 10 percent, have sold a record $28 billion in bonds this year, double the amount for all of 2011, data compiled by Bloomberg show. The yield on the July 2017 dollar bonds of Turkiye Halk Bankasi AS (HALKB), Turkey’s second-largest state-run bank, has fallen to 3.9 percent from 4.7 percent at the end of July, below the 4.6 percent average for emerging-market banks, according to data compiled by Bloomberg and JPMorgan Chase & Co. indexes.

Junk Rating

Ziraat Bank, wholly owned by the government, is looking to the international debt market after Fitch Ratings’ Nov. 5 decision to raise Turkey’s credit rating to BBB-, its lowest investment-grade level. Fitch cited a sound banking system, favorable growth prospects and “a relatively wealthy and diverse economy.”

“There will be plenty of demand for these bonds, and Ziraat will probably pay even less than the recent issues because it’s a large state bank,” Recep Demir, an analyst at Garanti Securities in Istanbul, said by phone yesterday. “Costs will come down even more for Turkish banks, as the market now expects other ratings agencies to upgrade Turkey like Fitch.”

The bank is rated Ba2, the second-highest non-investment grade status, at Moody’s Investors Service. The government is rated one step higher at Ba1.

Default Risk

Credit-default swaps on Turkey rose one basis point, or 0.01 percentage point, to 153 today. That compares with 155 for Russia, rated three steps higher at Moody’s. Rising prices show deteriorating perceptions of a borrower’s creditworthiness. The contracts pay the buyer face value in exchange for the underlying securities or the cash equivalent should a government or company fail to adhere to its debt agreements.

Ziraat Bank, set up to support Turkish farmers, said last week it also plans to sell as much as 7 billion liras ($3.9 billion) of bonds in the domestic market. Profits rose 30 percent to 614.5 million liras in the third quarter from a year earlier as total deposits shrank 10 percent to 108 billion liras. Ziraat’s asset size fell 6 percent to 154 billion liras, forcing it to cede the spot as Turkey’s largest bank by that measure to Turkiye Is Bankasi (ISCTR) AS.

“Deposits are costly and we’ve left that to the other players in the market,” Chief Executive Officer Huseyin Aydin, said on Sept. 19. The company’s spokesman didn’t respond to an e-mail and calls seeking comment.

Borrowing Costs

Turkey’s four major banks have borrowed at an average cost of 7 percent in recent lira bond issues. The weighted average interest rate on Turkish banks’ three-month deposits is around 10 percent, according to the central bank.

The lira weakened 0.2 percent to 1.8054 per dollar at 11:20 a.m. in Istanbul today, paring this year’s gain to 4.7 percent. The yield on the government’s benchmark two-year notes rose three basis points to 6.41 percent today, rebounding from the lowest level since at least April 2005.

The extra yield investors demand to hold Turkish debt in dollars rather than U.S. Treasuries rose one basis point to 202 today, according to JPMorgan’s EMBI Global Index. That compares with 385 at the end of last year and 200 for Russia today.

“Funding through local bonds is also cheaper than deposits but banks prefer Eurobonds because of their longer maturity,” Garanti’s Demir said.

Falling Yields

Turkish lenders sold $10 billion of eurobonds this year, compared with $5 billion for all of 2011, according to data compiled by Bloomberg. Turkiye Vakiflar Bankasi TAO (VAKBN), Turkey’s third-largest state lender, and Isbank, the biggest bank by assets, each paid 6 percent to sell 10-year dollar bonds in the past month. The yield on Vakifbank’s $500 million of debt due in November 2022 fell to 5.65 percent yesterday, and Isbank’s $1 billion of October 2022 securities yielded 5.34 percent.

“We like eurobonds because it’s a simple structure for the investor to understand and we’re happy with the maturities,” Erdal Aral, deputy CEO for Isbank, said at a Fitch conference Nov. 8 in Istanbul. “As long as external demand continues, they’re the easy way of funding for us.”

To contact the reporter on this story: Sibel Akbay in Istanbul at;

To contact the editor responsible for this story: Gavin Serkin at

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