Turkey Unrest Deals New Blow as Banks Struggle With Bad Debt

  • Two lenders cancel planned debt sales after political unrest
  • Moody’s says funding for banks could become more expensive

Turkey’s failed coup is dealing yet another blow to the nation’s banks, which are already under pressure from rising bad debts and a slump in tourism.

Istanbul-based lenders Yapi ve Kredi Bankasi AS and Sekerbank TAS canceled about $800 million of debt sales this week after the attempt to unseat President Recep Tayyip Erdogan and the ensuing political unrest spooked investors. Neither bank forecast when it may return to the credit markets, with Sekerbank saying it would contact fixed-income investors in due course.

The renewed tension in Turkey, which imposed a three-month state of emergency last night, is hampering access to the funding banks need to cover their short-term debt, while a slumping lira is increasing the risks of lending in foreign currency. The political instability has made a difficult year worse for banks as they contend with a 33 percent surge in bad loans and soaring bankruptcy filings.

“Funding for Turkish banks could become more expensive, or even more difficult to access, given their large dependence on market funds and their exposure to the foreign-exchange market in a context where the local currency could be under pressure,” Moody’s Investors Service said in a report Tuesday, after placing Turkey under review for a possible downgrade to junk.

Debts Abroad

The nation’s lenders owe $120 billion to institutions abroad, according to the Bank of International Settlements.

Deputy Prime Minister Mehmet Simsek said on NTV television that where was no need to worry about the economy, investments and markets after the state of emergency was imposed. The country won’t have a problem rolling over its external debt, he said.

The currency dropped to a record low on Wednesday as the government widened its post-coup purge of the country’s institutions, the central bank lowered interest rates and Standard & Poor’s cut Turkey to BB from BB+, with a negative outlook. Turkey’s banking index fell as much as 4 percent in Istanbul on Thursday, while the benchmark Borsa Istanbul 100 index lost 3.5 percent by 4:06 p.m. local time. Both gauges were heading for their lowest closing levels since mid-February.

“We may see a rise in the costs of borrowing, but I would not expect difficulty borrowing,” Ates Buldur, an analyst at Credit Suisse Group AG in Istanbul, said Tuesday by phone. “In past crises, Turkish banks have seen only an increase in the cost of funding.”

Asset Quality

Before the coup attempt, Turkish banks were confronting deteriorating asset quality in the tourism and energy industries. Bomb blasts from Ankara to Istanbul have deterred visitors, while power companies are struggling to repay loans amassed during an acquisition spree before energy prices slumped.

Bad debts among retailers also jumped 54 percent in April from a year earlier, while the proportion of soured loans in the construction industry, which accounts for 12 percent of bank assets, increased to 4.2 percent from 3.4 percent.

“Moody’s current assessment already incorporates a high level of political risk, but the impact of the failed coup on Turkey’s policy credibility seems set to be negative, undermining economic activity in the near and in particular medium terms,” Maya Senussi, an analyst at Roubini Global Economics, said in an e-mailed report.

More than 200 people died in the effort to overthrow Erdogan, which the president has blamed on erstwhile ally and exiled cleric Fethullah Gulen. Tanks rolled through the streets of Ankara and Istanbul on Friday, while warplanes and helicopters circled overhead during the uprising.

“Downside risks for Turkish banks’ credit profiles and ratings have increased as a result of the country’s attempted military coup,” Fitch Ratings said in a report Wednesday. “Turkish banks’ credit profiles are sensitive to country risks, access to foreign credit markets and the lira exchange rate.”

Banks accounted for $170 billion of Turkey’s $416 billion external debt in the first quarter, with $100 billion maturing within a year, according to Fitch.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE