Moody’s Turkey Bank Rating Risk Puts Sovereign on Notice

Scrutiny of Turkey’s credit rating is increasing after Moody’s Investors Service put 10 banks on review for a downgrade, amplifying risks for investors as local elections loom amid a government corruption probe.

Turkey’s five-year credit default swaps more than doubled since May 17, the day after Moody’s raised the sovereign to investment grade. The promotion helped push borrowing costs for the country’s banks down, with the yield on the September 2022 dollar security of Turkiye Garanti Bankasi AS (GARAN), the nation’s largest, at 6.1 percent yesterday, compared with 6.3 percent for debt at Russia’s biggest lender OAO Sberbank.

The review adds to pressure on Turkish assets already being wracked by what UBS AG on March 11 called the “triple whammy” of the graft crisis, tapering of U.S. stimulus and political tension before municipal elections on March 30. Standard & Poor’s, which rates Turkey one step below investment grade, cut its outlook on the nation to negative from stable last month, citing heightened political risk and slowing economic growth.

“We think downgrading Turkey would follow the possible banks’ downgrades,” Ayse Colak, head of research at Istanbul-based Tera Brokers, said in an e-mailed report yesterday. “Further downgrades are not priced in and would add to negative sentiment.”

Asset Quality

The Moody’s review includes Garanti and state lender Turkiye Halk Bankasi AS (HALKB), whose chief executive officer was detained for almost two months as part of the investigation that came to light in December. Turkiye Garanti is rated Baa2 at Moody’s, the second-lowest investment grade and one step above the sovereign. Halkbank declined to comment on the decision, and calls to Garanti’s press office during business hours weren’t answered.

Asset quality at the 10 lenders is set to deteriorate as economic growth slows and inflation exceeds official targets, the ratings company said. Sibel Tokgoz, a Finance Ministry spokesman, wouldn’t comment on the review.

Economists at banks from Goldman Sachs Group Inc. to JPMorgan Chase & Co. lowered their 2014 expansion forecasts for Turkey’s $800 billion economy after the central bank unexpectedly raised interest rates in January to stem a slump in the lira and avoid stoking inflation.

‘Downside Risks’

The median growth forecast for 2014 fell to 2.3 percent in a Bloomberg survey of 32 economists, down from 3.7 percent at the end of 2013. Loans to small- and medium-sized enterprises, unsecured consumer lending and credit to companies with open foreign-exchange positions are “most vulnerable” to the slowdown, Moody’s said.

“There is significant downside risk to the growth forecast as the impact of the U.S. Fed tapering and the country’s political developments continue to unfold, potentially triggering further liquidity tightening and weakening of domestic demand,” it said.

The Fed trimmed its monthly bond-purchase program by $10 billion to $55 billion yesterday.

A deceleration in credit growth could help banks identify problem loans sooner rather than later, according to Demetrios Efstathiou, head of central and eastern Europe, Middle East and Africa strategy at Standard Bank Plc in London.

The industry’s regulator introduced measures, including higher bank provision ratios, to tame credit growth in the past six months. Total loans jumped 35 percent in the 12 months to January, more than double the growth rate in the year-earlier period, according to data compiled by Bloomberg.

Sovereign Rating

“Had the crisis occurred in three or four years’ time, with credit growth of 30 percent per annum continuing, the banking sector would have been in serious trouble,” Efstathiou said by e-mail yesterday. The slowdown will allow “loan portfolios to season,” he said.

Concern that lira volatility is too high and that growth is slowing have weighed on the nation’s banking stocks, with the Borsa Istanbul Banks Sector Index losing 32 percent in the past year, exceeding the 20 percent drop in the benchmark gauge.

The lira was the third-most volatile currency in the world in the past three months, after Argentina’s peso and South Africa’s rand, according to data compiled by Bloomberg. The currency lost 0.14 percent to 2.2364 per dollar at 9:26 a.m. in Istanbul. Two-year lira notes yielded 11.28 percent, compared with a record low of 4.79 percent on May 17.

Moody’s is set to make its next comment on the sovereign’s rating on April 11, according to a schedule received by e-mail. The government won investment-grade standing from Fitch Ratings in November 2012, followed by Moody’s six months later.

“The banks’ outlook change won’t necessarily result in a sovereign downgrade, though clearly a weaker banking system will add further pressure on the sovereign rating,” Mariya Gancheva, head of CEEMEA research at Mitsubishi UFJ Securities International Plc in London, said by e-mail yesterday.

To contact the reporters on this story: Isobel Finkel in Istanbul at ifinkel1@bloomberg.net; Benjamin Harvey in Istanbul at bharvey11@bloomberg.net

To contact the editors responsible for this story: Dale Crofts at dcrofts@bloomberg.net Daliah Merzaban, Samuel Potter

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