Banks Piggybacking Upgrade Bets to Sell More Debt: Turkey Credit
Turkish banks will sell a record amount of dollar bonds again in 2013 as investor bets for an investment-grade ranking from a second ratings company push yields lower, according to the country’s biggest brokerage.
“Turkish banks’ bond sales may increase by around 40 percent next year,” Ugursel Onder, a fixed-income analyst at Is Investment, said in a Dec. 21 phone interview from Istanbul. “I expect borrowing costs to come down even more, especially with expectations of an upgrade.”
Lenders sold $15.8 billion of bonds in the U.S. currency this year, triple the amount in 2011, while trailing behind the $22.4 billion from Russian lenders, according to data compiled by Bloomberg. Yields on five-year dollar bonds of Akbank TAS (AKBNK), partly owned by Citigroup Inc., have dropped 339 basis points this year, compared with a 198 basis-point decline for equivalent debt from OAO Sberbank (SBER), Russia’s largest bank.
Fitch Ratings handed Turkey its first investment-grade ranking since 1994 in November, citing a “sound banking system“ and favorable growth prospects. Moody’s Investors Service rates Turkey one step lower than Fitch at Ba1, while Standard & Poor’s is a further notch down at BB. Moody’s, which has a positive outlook, said in a Nov. 20 report that Turkey’s prospects for an investment-grade rating will be driven by its “vulnerability to balance-of-payment shocks.”
Turkey’s current-account deficit, which surged to about 10 percent of gross domestic product at the end of 2011, the second highest level worldwide, after the U.S., narrowed for an 12th month in October as imports shrank. The inflation rate fell to 6.4 percent in November, the slowest in 14 months, according to the statistics office’s website.
Banks may need additional financing to expand lending as economic growth picks up, based on analyst forecasts. Turkey’s economy will expand by 4.1 percent next year, up from an estimated 3 percent in 2012, according to the average of 24 economist estimates on Bloomberg.
Deposit growth has lagged behind the increase in lending to date. Loans have increased by 14 percent this year to 787.2 billion liras ($438.4 billion), while deposits rose by 8.7 percent, according to the banking regulator’s website. Bond sales in dollars and liras rose to a total $36.8 billion from $14 billion in 2011, data compiled by Bloomberg show.
The increase in dollar debt is a concern for S&P. The ratings company said the reliance on external funding could cause a “liquidity crunch,” according to a Dec. 5 report.
“It is understandable Turkish banks would find borrowing abroad at these attractive rates,” Kaan Nazli, a senior economist at ING Investment Management Europe in The Hague, said in a telephone interview on Dec. 21.
Turkiye Vakiflar Bankasi TAO (VAKBN), Turkey’s third-largest state lender, sold $500 million of five-year bonds on April 24. The yield has since dropped 65 basis points. In the domestic market, Vakifbank’s six-month lira-denominated bonds are yielding 6.17 percent, data compiled by Bloomberg show.
Yields on Turkey’s two-year benchmark debt rose one basis point, or 0.01 percentage point, to 6.02 percent on Dec. 21, the fourth day of increases, taking this year’s decline to 499 basis points, the biggest drop among 20 major countries worldwide tracked by Bloomberg.
The lira lost 0.5 percent against the dollar to 1.7964 at 6:08 p.m. in Istanbul on Dec. 21, the biggest depreciation since Nov. 12, paring this year’s gain to 5.3 percent.
Five-year credit-default swaps on Turkey rose three basis points to 126 on Dec. 21. That compared with 131 for Russia, 85 for Poland and 142 for South Africa. Lower prices signal improving perceptions of a borrower’s creditworthiness, while the reverse shows deterioration. The contracts pay the buyer face value in exchange for the underlying securities or cash if a borrower fails to adhere to its debt agreements.
The extra yield investors demand to hold Turkish debt denominated in dollars rather than U.S. Treasuries fell three basis points to 173, according to JPMorgan Chase & Co.’s EMBI Global Index. The premium compares with 385 at the end of last year, and 160 for Russia.
Funding through dollar bonds helps Turkish banks overcome the maturity mismatch between short-term deposits and longer- term loans. Dollar bonds have an average maturity of five years, which is 10 times longer than lira debt and 20 times the maturity of deposits, which average about three months, according to data from central bank and Bloomberg.
Lenders will take advantage of falling yields to extend the maturity of dollar bonds to 10 years or more, while also increasing lira notes to three years, Is Investment’s Onder said.
“Turkish bank debt is getting more attractive as the risk appetite for emerging-market debt improves,” ING’s Nazli said. “Expectations of a second upgrade will further boost the Turkish market at least for the next six months.”
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