Record Bank Bonds Fueling Lending Ease Slump Risk: Turkey Credit

Turkey's Central Bank Governor Erdem Basci
Erdem Basci, governor of Turkey's central bank, advocated increasing local bond sales to help reduce companies’ reliance on syndicated loans in foreign currencies. Source: Central Bank of Turkey via Bloomberg

Turkish banks are increasing bond sales to a record this year, helping to sustain the growth in lending that’s keeping the economy out of recession.

Just two years ago, banks didn’t sell any bonds. So far in 2012, they’ve issued the equivalent of $4 billion, four times the amount a year ago, data compiled by Bloomberg show. Akbank TAS, the biggest by market value, said Feb. 17 it plans to raise the equivalent of as much as $1.5 billion of foreign bonds, triple its single sale in 2011. Turkiye Garanti Bankasi AS, the No. 2 lender, issued 1 billion liras ($600 million) of local bonds last month yielding 11 percent.

Central Bank of the Republic of Turkey Governor Erdem Basci, 45, had sought to limit bank credit as recently as two months ago as a record 40 percent growth in lending fueled the world’s second fastest economic growth after China and fanned inflation and the trade deficit. Concern since January switched to averting a recession. Basci said Jan. 31 he’s now “comfortable” with the pace of lending, which he expects to be about 15 percent for 2012, adjusted for currency variables.

“The central bank wants this market to develop,” Selim Gulkan, a fixed-income trader at Turk Ekonomi Bankasi AS, a unit of BNP Paribas SA, said by telephone from his office in Istanbul yesterday. “If the market situation was very volatile, the private sector wouldn’t be able to do this kind of borrowing.”

Rate Cuts

Yields on benchmark two-year lira bonds fell 14 basis points, or 0.14 percentage point, to 9 percent, the lowest since October, after the central bank unexpectedly cut its highest lending rates by one percentage point to 11.5 percent. The lira weakened 0.3 percent to 1.7482 against the dollar at 6:40 p.m. in Istanbul.

Yapi & Kredi Bankasi AS, a partnership between UniCredit SpA of Italy and Turkey’s Koc Holding AS, was the last Turkish bank to sell debt on the international markets, issuing $500 million of five-year bonds on Feb. 1 to yield 6.86 percent in the first day of trading. The yield fell 2 basis points to 6.63 percent today, the lowest since the sale, data compiled by Bloomberg show.

Akbank’s borrowing plan follows a sale of 650 million liras of 178-day and three-year lira debt on Jan. 19 at an 11.6 percent yield. The yield on the 178-day debt was 60 basis points greater than on Garanti’s 178-day bonds sold a week later, data compiled by Bloomberg show.

Istanbul-based Akbank, which is 20 percent owned by Citigroup Inc., hired UBS AG and Royal Bank of Scotland Group Plc to arrange investor meetings in Switzerland after getting regulatory approval to sell the $1.5 billion of bonds, the bank said in a Feb. 17 statement.

Akbank Offers

Akbank will borrow more from abroad this year in bonds and syndicated loans to help finance lending to small and medium-sized businesses, Chief Executive Officer Sabri Hakan Binbasgil told reporters in Istanbul on Feb. 7. That will help expand Akbank’s loan book “a few percentage points” faster than the average of 15 percent this year, he said.

Garanti has applied to sell 5 billion liras of bonds this year in “different maturities and spreads,” Oben Savas, the bank’s head of corporate investment in Istanbul, said in an e-mailed response to questions yesterday.

Garanti will expand loans by about 20 percent in 2012, helped by “privileged access to alternative funding sources,” the bank said in a report on Jan. 13.

Akbank and Garanti’s bonds are rated Ba1 by Moody’s Investors Service, one step below investment grade, and BBB- by Fitch Ratings, the lowest investment-grade ranking.

Lagging Russia

Turkey’s market for bonds issued by banks in local and foreign currencies totals $10 billion, less than half the $25 billion from Russian lenders and $34.5 billion for South Africa’s while topping the $3.5 billion from Polish banks, data compiled by Bloomberg show.

“The Turkish bond market has a lot of scope for development,” Ercan Uysal, head of research at the Turkish unit of South Africa’s Standard Bank Group Ltd., said in a phone interview from Istanbul on Feb. 17. “It’s very small at the moment and volume will definitely increase.”

Loan growth last year contributed to the current account deficit widening to a record 10 percent of economic output, prompting the central bank to raise interest rates to the upper end of a corridor between the benchmark one-week repurchasing rate of 5.75 percent and the overnight lending rate of 12.5 percent.

Basci reversed that policy last month, lending mostly at the lower rate, after economists from banks including New York-based Bank of America Merrill Lynch and Goldman Sachs Group Inc., pointing to the record deficit, warned that the nation’s growth rate threatened to send the economy off the rails. He reduced the upper lending rate to a maximum of 11.5 percent today.

Growth Target

More bond sales financing loan expansion would support the goal of Prime Minister Recep Tayyip Erdogan, 57, to grow Turkey’s $735 billion economy by 4 percent this year. Economists currently expect the rate of expansion to slow to 2.7 percent in 2012, according to the median of seven estimates compiled by Bloomberg.

Basci has advocated increasing local bond sales to help reduce companies’ reliance on syndicated loans in foreign currencies. Dependence on foreign-currency borrowing means the economy is partly dollarized and the central bank needs to play more of a role in managing the exchange rate, Basci said in an interview with Istanbul-based Bloomberg HT television at the World Economic Forum in Davos, Switzerland on Jan. 29.

First Bonds

The Banking Regulation and Supervision Agency kick started the market for local bonds in 2010 by permitting lenders to have as much as 51 billion liras ($29 billion) of total debt outstanding at any one time. There is no limit for foreign bond sales. The regulator’s decision Feb. 10 to allow banks to add half of the bonds they issue to their liquidity adequacy ratio may encourage more bond sales.

Banks’ local bonds help fund managers provide additional yields over Turkish Treasuries,” Elif Cengiz, a deputy general manager at investment firm Is Portfolio Management, said in a phone interview on Feb. 17. “The only problem is lack of liquidity in the secondary market though this situation will improve as the sales increase.”

Bondholder demand is improving after the lira had the third-best currency rally in Europe, the Middle East and Africa this year. The exchange rate’s 7.8 percent advance trailed only the forint’s 11 percent gain and the zloty’s 8.8 percent appreciation in 2012.

Yields Fall

The lira’s rally helped send yields down from 11.48 percent at the end of last year, according to a Royal Bank of Scotland Group Plc index of the securities.

The extra yield investors demand to hold Turkey’s dollar-denominated bonds rather than U.S. Treasuries declined 44 basis points to 341 since the end of 2011, JPMorgan Chase & Co.’s EMBI Global index shows. Serbia, whose debt carries the same BB rating from Standard & Poor’s as Turkey, had a spread of 568 basis points yesterday, 33 basis lower than the end of last year.

Turkish credit-default swaps traded at 251 basis points today in Istanbul, compared with a spread of 208 for Russia, rated three levels higher by S&P, and 212.5 for Poland, rated five levels higher, according to CMA, which is owned by CME Group Inc. and compiles prices quoted by dealers in the privately-negotiated market.

As of last week, Turkish default swaps cost 29 basis points less than the average for countries in central and eastern Europe, the Middle East and Africa included in the Markit iTraxx SovX CEEMEA Index. 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.

Deposit Growth Slower

Banks are stepping up borrowing after their deposits grew at about half the pace of loans last year, according to 2011 earnings published by lenders including Akbank and Garanti this month. Akbank’s deposits grew 14 percent to 76.8 billion liras, lagging loan growth of 33 percent to 70.2 billion liras. Garanti’s deposits expanded 16 percent compared with the 30 percent pace of its loan growth.

Total lending by banks grew by an average 30 percent last year and an annual 39 percent in the year to August, according to data published by the banking regulator yesterday.

Turkiye Is Bankasi AS, the biggest bank in Turkey by assets, has $500 million of five-year bonds maturing in February 2016 yielding 5.15 percent, declining 4 basis points today, compared with 5.2 percent at issue, data compiled by Bloomberg show. The Istanbul-based lender last sold 1 billion liras of six-month bonds on Jan. 24 at a yield of 11.46 percent.

Turkey’s expanding bond market is helping spur economic growth and its significance will increase in the coming years, said Mine Kumcuoglu, a director at Anadolu Hayat Emeklilik AS, the country’s biggest provider of life insurance and pensions that manages more than $3.3 billion.

“After the negative market conditions of 2011, we actually started 2012 much better -- there’s a decreasing trend in interest rates and everything’s more stable,” she said in a phone interview from Istanbul.

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