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Turkish banks should grab their chance to issue

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Turkey has endured a year of turmoil since the Gezi Park protests and a prolonged emerging market sell-off derailed its economic boom. But even as protesters and police mark the anniversary with another splash of teargas, Halkbank’s result last week shows Turkey’s banks have a prime opportunity to return to the bond market and underscore the country’s strong recovery. Banks thinking of waiting for the third quarter might do well to come now.

The temperature is clearly changing for Turkey. Vakifbank is set to roadshow this week. Kuveyt Turk is widely tipped to come to market soon and has applied to the Capital Market Board to issue up to $500m of sukuk.

Peer Islamic banks Albaraka Turk and Bank Asya previously indicated they would wait till the third quarter, but recent trends should speed up those plans, as things do not look like they can get any better.

A confluence of favourable factors – both local and macro – promise to greet any Turkish issuer that chooses to come to market soon. This should be foremost in the minds of treasurers at participation banks like Albaraka Turk, Bank Asya and Kuveyt Turk, as well as conventionals such as Vakifbank.

Bonds and sukuk prices have surged to year-to-date highs, 10 year US Treasury yields have hit one year lows. Gulf credits have become expensive, and investors are looking elsewhere for opportunities. Turkey, playing catch up and undersupplied, is clearly in their sights.

Like Indonesia, the country was hit particularly hard in the EM bond market downturn from late May last year. Like Indonesia, it has seen a massive reverse rally in 2014. But while Indonesian assets have been in the ascendant since January, Turkey’s bonds only really began to pick up after the country’s decisive municipal election result in March.

As such, there has been a dearth of issuance out of the country so far this year, but pent up demand from international investors has greatly increased. Halkbank’s $500m deal last week was only the third bank deal of the year, after April saw Garanti sell $750m and Turkiye Finans follow closely with a $500m sukuk.

Halkbank’s execution, with a $4.25bn book and much tighter pricing from guidance, was very different in temperament to the Turkiye Finans sukuk. That deal struggled to a $1.4bn book only once investors were persuaded the bank would not try to increase its size or go tighter than 5.375%.

The last month has seen this change in temperature confirmed, as the sovereign’s jumbo tranches from earlier this year show. The 6.625% 2045, which slumped below par to 98.5 in March or a 341bp z-spread, has since soared to 116.5, or 236bp, while the 5.75% 2024 has climbed from 99.25 to 109.75 (again more than 100bp of rally in z-spread).

Investors reckon there is at least another month to get deals done, despite the approach of Ramadan and the traditional Middle East summer slowdown. With Treasuries having reached a point of technical resistance, it is hard to see things getting much better.

For some investors, doubts may still remain about the speed at which the Turkish banking sector is growing, relative to the country’s GDP. Non-performing loans, after all, have a habit of revealing themselves only once that growth tops out. They may also be worried by the speed at which the Turkish government influence is compromising the independence of the country’s judiciary and central bank.

But this is not for the banks to worry about now, particularly when numbers sound a much sweeter note. And with many investors having been completely caught offside by the US Treasury tightening, now might be as good a chance as any to lock in some longer funding.

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