Fitch Countered by Turkey Cut Makes Downgrade ‘Non Event’

Investors are looking past credit-rating downgrades for Turkey’s three biggest listed lenders, focusing instead on the benefits of a drop in interest rates.

Fitch Ratings, citing risks from foreign-currency corporate loans, cut the rankings for Turkiye Garanti Bankasi AS, Akbank TAS and Turkiye Is Bankasi AS to the lowest investment-grade level of BBB-, according to a June 24 report. The same day, central bank Governor Erdem Basci reduced the benchmark interest rate by 75 basis points to 8.75 percent to stimulate credit growth as the inflation outlook improves.

Yields on Garanti’s March 2018 lira notes fell 21 basis points in the past three days, to 10.27 percent, and Akbank’s notes due a month earlier dropped 30 basis points to 10.05 percent, according to data compiled by Bloomberg. Emerging-market corporate bond yields relative to U.S. Treasuries rose three basis points on average today, JPMorgan Chase & Co.’s CEMBI Diversified Index shows.

“This Fitch-thing is a non-event unless it signals a full downgrade to a non-investment rating, which I don’t believe is on the cards,” Ercan Uysal, a partner at Integras, a research firm in Istanbul, said yesterday by e-mail. “Rate cuts are generally conducive to Turkish banks’ profitability as they lead to a reduction in funding costs as well as windfall gains on bond portfolios.”

Spokesmen for Isbank, Akbank and Garanti declined to comment.

‘Significant Risks’

Fitch in late 2012 became the first ratings company in two decades to lift Turkey to investment grade, affirming the BBB-ranking with a stable outlook in April.

“There are significant risks in foreign-currency lending to the corporate sector,” Fitch wrote in its report this week. Banks could become “highly dependent on their ability to draw down foreign-currency balances from the central bank to support liquidity positions,” which may “in turn put pressure on the sovereign’s FX reserves and financial flexibility.”

Lending has been growing by about 13 percent a year in the past three months, or 2 percentage points below the central bank’s 2014 guidance.

“I don’t think there is overheating in loan growth,” Fatih Topac, a banking analyst at BNP Paribas SA’s Istanbul-based unit, TEB Investment, said by phone yesterday. “Fitch wanted to align their bank ratings with their sovereign rating, and they had to find a rationale.”

Implied Volatility

Bad loans stayed around 2.8 percent of total lending for the four months through April, compared with 4.7 percent for Russia and 8.4 percent for Poland, according to data compiled by Bloomberg.

“For several months, Fitch has been indicating that its tolerance for rating Turkish banks above the sovereign ratings was diminishing,” said Elaine Bailey, a London-based spokeswoman at Fitch. “Key financial metrics at the banks have weakened over the years.”

Turkey’s currency strengthened 9.6 percent against the dollar in the past five months. Analysts are expecting swings of about 10 percent in the next three months, based on the lira’s so-called implied volatility, which is the fifth highest of 23 emerging-market currencies tracked by Bloomberg.

“Banks have borrowed FX abroad and lent it onshore, so anyone who’s trying to pay dollar loans out of pure Turkish lira cash flow needs the currency to stay at present levels,” Paul McNamara, a fund manager at GAM UK Ltd., said by phone yesterday.

‘Measured’ Cut

Basci said last week he was considering a “measured” rate cut of between 25 and 75 basis points after a 50 basis-point reduction in May. Economy Minister Nihat Zeybekci said at the beginning of this week that the government expects the main rate to fall to below the level last seen before the central bank boosted borrowing costs to 10 percent from 4.5 percent in January

While a rate cut not supported by “solid macroeconomic reasoning” could hurt banks, declining interest rates are “good for banks,” said Ferhat Yukselturk, head of strategy at Istanbul-based Odea Bank.

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