While few emerging market sectors failed to benefit from the wave of liquidity unleashed last September by central banks in the US and the eurozone, few have had as good a year as Turkey’s banks. Indeed, market participants predict that the period will be remembered as the start of a new era in funding for the country’s financial sector.
“Turkish banks have really come of age in terms of their capital markets usage over the past year,” says Alex von Sponeck, head of CEEMEA DCM at Bank of America Merrill Lynch. “They’ve always been market savvy but since September they’ve started to access the markets in the regular, opportunistic way that’s more usually associated with developed jurisdictions.”
Traditionally, Turkey’s financial institutions have financed themselves primarily via deposits, domestic issuance and syndicated loans. None of these sources, however, could provide longer term funding in the size needed to serve rapidly growing demand from Turkey’s retail market for credit products such as car loans and mortgages.
Thus, when spreads on global Turkish bank bonds started falling to levels on a par with those on offer in the loan market last autumn, the sector’s leading institutions leapt at the chance to access the deep pools of longer dated dollar funding available from US real money investors.
Their enthusiasm was reciprocated. Akbank, coming to market in mid-October with a proposed $500m five year deal, met with such strong demand that the issuer broke new ground by adding a 10 year tranche, the first ever in senior unsecured format from a Turkish financial institution.
In the ensuing six months, most of Turkey’s top lenders — including Finansbank, Isbank and Yapi Kredi — also took advantage of US investors’ relentless appetite for emerging market paper to issue senior dollar deals at record low all-in yields.
More significant for the long term funding prospects of the Turkish banking sector, however, has been the success of its members in issuing across a hugely expanded range of innovative and diverse products.
Boosted by Turkey’s implementation of Basel II, a steady stream of subordinated deals found a ready market among yield-hungry investors. Just three days after Akbank’s inaugural 10 year senior, Isbank set the ball rolling with a $1bn 10 year deal that added lower tier two supply to the Turkish market.
Within a week Vakifbank had followed with a $500m issue, and Yapi Kredi subsequently met with such a warm reception for a $1bn tier two that it was able to take a $400m tap less than two months later.
The pace of subordinated issuance slowed at the start of 2013 but bankers say several mandates are in the market and further activity is likely before the end of the year, despite high levels of capitalisation across the sector.
“When an economy is expanding as fast as Turkey is and credit growth is strong, banks will need to replenish their capital and many of them still have space in their capital structures to add tier two and even tier one deals,” says von Sponeck. “So I would expect to see the recent mix of senior and subordinated issuance continue.”
Meanwhile, the pace of innovation was maintained in the senior sector as Turkish banks began raising funds across a range of new currencies.
Eurolira was a natural first step, given the substantial flows seen from the autumn onwards into local currency funds, and in late January Akbank again led the way with a TL1bn ($566m) five year that was more than five times subscribed.
Garanti Bank and Russia’s Sberbank — the new owner of Turkish lender Denizbank — followed a month later with TL750m and TL550m issues, also in the five year sector, attracted by the opportunity to raise lira at longer maturities than those available in the domestic bond market while saving as much as 75bp on dollar funding costs.
By early June, however, the development of the Eurolira market looked to have been at least temporarily halted as the sell-off across emerging market currencies sent funding costs in the Turkish currency soaring and took the shine off local currency assets for nervous investors.
“Eurolira is an opportunistic, technical trade that is obviously dependent on how the currency basis moves and is linked to investor fund flows in the local currency, so given the recent volatility it’s difficult to envisage such issuance in the near short term,” says Gaurav Arora, director of CEEMEA debt origination at RBS. “Once volatility subsides, however, there could definitely be an opportunity there.”
If late May’s emerging market sell-off was an unhappy reminder for investors of the risks surrounding local currency debt, it provided Turkey’s bank issuers with impressive proof of the value of niche currency market access.
On June 4, with dollar markets shut to EM issuers and growing political unrest in Turkey, both Garanti Bank and Vakifbank were able to raise funding at favourable terms from investors in Switzerland via a pair of Swiss franc MTNs.
Garanti’s Sfr85m two year floating rate note was the fourth deal in a month from the borrower’s newly launched $2.5bn global MTN programme, following a private placement debut in dollars in early May, a private deal in Swiss francs and the first ever public Australian dollar bond from a Turkish issuer.
The success of Garanti and Vakifbank is likely to inspire more Turkish lenders to explore the niche currency option, according to von Sponeck. “These markets offer investor base diversification and flexibility, as well as attractive funding arbitrage opportunities,” he says.
“The top tier of Turkish banks have always been very proactive and innovative in their approach to funding, and I’m sure they will all be looking carefully at these markets in future.”
Von Sponeck is sceptical, however, of suggestions that the coming year might finally see the long-heralded development of a covered bond market in Turkey on the back of Denizbank’s placement of the country’s first ever SME-backed covered bond on June 6.
“In regard to the Turkish market, I don’t think covered bonds are going to appeal to specialised covered bond investors and other accounts will always prefer senior unsecured paper because the issue size is larger, it’s more liquid, and it offers a better yield,” he says.
Arora agrees that covered bonds will struggle to gain traction in Turkey in the absence of a strong domestic institutional investor base but is more reluctant to rule out the possibility of a pick-up in international interest.
“There’s certainly an asset and price discovery process that needs to take place, but that was the same with the sub debt and Eurolira markets until recently,” he says. “Investors like Turkish bank assets so if markets stabilise I wouldn’t be surprised to see banks exploring the covered bond option.”
Arora admits, however, that the prospects for growth look much brighter in the Islamic financing market.In late March, Bank Asya became the second Turkish lender to access the market — and the first since the sovereign’s highly successful $1.5bn sukuk debut in September — with a well received $250m 10 year tier two.
That was followed a month later by Albaraka Turk, the Turkish banking unit of Bahrain-based Albaraka, which attracted a healthy order book from Middle Eastern investors for a $200m murabaha transaction.
Arora says the strength and depth of demand out of the region is likely to prompt other Turkish borrowers to tap this market, either directly for participation banks — the name given to the small number of Islamic finance houses in Turkey — or through Shariah-compliant leasing arms.
“This is a nascent asset class in Turkey so there’s definitely room for growth,” he says. “There is a deep Middle Eastern and Asian investor base for Turkish assets, and the increasing geo-political proximity between Turkey and the Middle East means sukuk as an asset class will likely be a force to be reckoned with in future.”
He stresses, however, that there seems little danger of the more traditional US real money investor based losing interest in Turkish financials any time soon, given the sector’s impressively strong fundamentals.
“Turkey’s banks are well capitalised and well regulated, and they’ve performed extremely well over the past decade against their EM peers,” he says.
Bankers note, however, that investors are not undiscriminating, as was demonstrated by the failure of double-B lender Sekerbank to get a debut five year deal away in April despite widening price guidance.
Von Sponeck says that investors are prepared to look further down the credit spectrum but that second tier lenders need to work harder than their larger counterparts to get deals away.
“There is a must-buy category out of Turkey, which are the top five or six banks, and then there’s an optional category,” he says. “The successful lenders in the latter category will be those that are proactive in getting their name in front of investors and keeping them updated.”
That, of course, will be all the more important following the recent wobble in Turkish markets, which participants agree has also likely dimmed the prospects of further sizeable dollar issues from the country’s price-sensitive larger lenders, at least in the short term.
Nevertheless, bankers report a healthy pipeline of Turkish FIG deals across a range of markets and stress that international deals are now well established as part of the funding mix for Turkey’s bank treasurers.
“Turkish banks are very price-sensitive so they will likely be more careful and opportunistic while this repricing of emerging markets lasts, which may mean they issue less frequently and in larger size when they see the right market windows as opposed to opting for a more continuous and spread-out funding strategy,” says von Sponeck.
“I don’t think any of them envisage a return to pure syndicated loan funding, though — they will definitely use these markets.”
For investors eager to buy into Turkey’s growth story, that will be welcome news.