Despite Fed Delay, Morgan Stanley Has Turkey Banks on Notice

  • Costs to rise on external borrowing that tripled since 2009
  • Balance sheets resilient, so funding crunch unlikely

When the Federal Reserve finally gets around to raising interest rates, Morgan Stanley says that Turkey’s private banks are among the most exposed institutions in a country that’s already unusually vulnerable.

Compared to their state-owned counterparts, Turkey’s private lenders are more heavily indebted abroad, leaving them sensitive to rising interest rates that would make it more expensive to roll over their debt. With 83 percent of the banking industry’s external debt taken by private institutions, they’ll feel the brunt of any liquidity drought.

While the Fed declined to raise rates at its September meeting on Thursday, the message from analysts including Samuel Goodacre, Magdalena Stoklosa and Ercan Erguzel remains pertinent. The report, published before the Fed decision, delivered recommendations on the assumption that U.S. policy makers would hold off until December.

“The tide is turning for emerging markets, especially for the ones that increased leverage sharply since 2008,” the report said. For Turkey, “it may not be easy to cope with the adverse affects if Fed liftoff couples with ongoing political uncertainty after the November 1 elections, a ratings cut from Fitch or Moody’s or a complacent Turkish central bank.”

No Crunch

Turkish banks’ external borrowing tripled over the past six years to $175 billion, according to official data. Fitch Ratings Ltd., which has Turkey on its lowest investment grade rating, is scheduled to review that on Friday. Even without a rate hike or a ratings downgrade, Turkey’s markets have had a torrid year, battered by inconclusive June elections that will be followed by another vote on Nov. 1 and a record $6 billion in capital outflows. Two-year bond yields have soared by more than three percentage points, more than any emerging market peer by a wide margin.

While increased rates will force Turkey’s banks to service debt at higher cost, Morgan Stanley doesn’t see the risk of a supply crunch.

“Bank balance sheets are more resilient than an initial glance would suggest,” the analysts said, citing “healthy” appetite for Turkish credit risk and foreign currency reserves and cash that cover three-quarters of maturities in 2015-2016. “Higher U.S. rates are a cost adjustment for Turkish banks, not a supply of funds issue,” they said.

The XBANK Index of Turkish lenders was down 2.3 percent at 2:37 p.m. in Istanbul, extending losses for the year to 42 percent in dollar terms. On Friday, analysts at JPMorgan Cazenove cut Turkish stocks from overweight to neutral and removed lender Akbank from a list of top picks in central and eastern Europe, the Middle East and Africa.

“Running a Turkish portfolio is difficult -- to say the least,” wrote the analysts, who include David Aserkoff. Akbank is still one of JPMorgan’s most preferred Turkish bank stocks, alongside Halkbank, they said. Morgan Stanley analysts’ three favorite banks include both lenders, as well as Garanti.

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