Banks break ground
The last 12 months will be remembered as the time when Turkey’s banks broke out of their deposit only funding base. A wave of innovation has swept over the sector with new structures, terms and products allowing the banks to diversify and extend their funding base. Nick Lord reports.
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Turkey’s banking sector has a reputation as a fortress: sector wide capital adequacy rates of 17%, record profits and negligible NPLs all point to the strength of the business. But on one metric they are still very risky. The majority of bank funding still comes from deposits with a term life on three or four months. With demand for longer dated loans increasing rapidly, the banks have been running cavernous asset liability mismatches.
In the last twelve months however, strides have been made in addressing this issue. New funding structures have become more prevalent that lengthen out bank’s liabilities and diversify their sources of funding.
Most noticeable to international investors has been the activity in the Eurobond market. Before 2010 only one bank had tapped this market when in 2007 Garanti Bank sold a US$600m 10 year non-call five lower tier 2 with a 6.95% coupon through Deutsche Bank and Merrill Lynch. After that the market went quiet until the July 2010 when Akbank, Turkey’s biggest lender, sold the first senior unsecured offshore bonds. Its US$1bn five-year Reg S/144a transaction was priced at US Treasuries plus 350bp through Bank of America Merrill Lynch, Citigroup, JP Morgan and Standard Chartered.
“Our Eurobond issue attracted broad interest abroad,” said Ziya Akkurt, CEO of Akbank. “With our new bond issue, we are pioneering the domestic borrowing as well as leading foreign borrowing.”
With the market well and truly open, two of Turkey’s other big four banks went on the road. Yapi Kredi was next out of the gate, pricing a US$750m five year deal at 396.4bps over Treasuries to yield 5.1875%. The deal was sold through Citigroup, Deutsche Bank and Unicredit. Isbank then followed in late January with its own US$500m five year deal, priced at 329.1bps over Treasuries, through JPMorgan, RBS, Standard Chartered and Standard Bank.
Both Yapi Kredi and Isbank waited between two and three months after their road shows before doing the deals. The confidence shown by this deliberate delay was rewarded in both cases by the banks being able to save between 20bps and 25bps on their pricing.
Akbank in early March then returned to the market it had reopened, extending its Eurobond curve through a seven year US$500m deal priced at 360bps over Treasuries. The deal was sold though Citigroup, CA CIB, HSBC and Standard Chartered.
It is a strategy that Garanti is following. It undertook a non-deal road show in early February 2011. On April 4 the bank registered a US$1.5bn shelf application with the Turkish Capital Markets Board which will allow it to issue up to that amount in the next 12 months in one or more issues. The bonds will be sold to non-Turkish investors.
“The long awaited issuance of bank Eurobonds shows that Turkey’s banks will issue on their own terms,” said Muge Eksi, head of capital markets for Turkey at UniCredit Menkul Degerler in Istanbul. “The way they approached the market has been very selective.”
But it is not just Turkey’s big banks that have been innovating. In late summer 2010 Kuveyt Turk, a Turkish Islamic bank (which are known locally as participation banks), broke new ground financially and politically when it issued the country’s first sukuk. The three year US$100m issue was lead arranged by Citigroup and Liquidity House of Kuwait. The deal was given the personal blessing of the government through the presence of finance Minister Simsek at the signing ceremony. It was a demonstration of the importance the government attaches to diversifying Turkish bank’s funding base, even if it is in the politically sensitive area - for Turkey - of Islamic finance.
“We hope that this new bond serves as a model to encourage other financial institutions and corporations in their efforts to launch new Sukuk bonds” said Mohammed Al-Omar, chairman of Kuveyt Turk. “In this respect, a new financial product … will be added to the Turkish economy. Consequently, if this product attracts wider foreign investments, more funds from global markets will flow into Turkey, as the Gulf region takes the lead.”
Bank Asya, Turkey’s largest participation bank followed Kuveyt Turk’s sukuk with its own innovation in the Islamic financial market. On March 31 the bank raised a one year US$171m and €94.5m Murabaha syndicated loan from a consortium of 26 international banks, led by Standard Chartered Bank, ABC Islamic Bank, Noor Islamic Bank, and National Bank of Abu Dhabi.
Reaching for Cover
Perhaps the most innovative deal is currently being finalised. Sekerbank – a mid-sized lender that focuses on SME business – has been working for a year to undertake Turkey’s first covered bond. The deal will comprise a pool of the bank’s best SME loans which are ring fenced from the rest of the bank. It is being issued under the terms of Turkey’s covered bond law that was passed in 2007. The fact that it has taken until now for this law to be used by an actual deal speaks of how the current burst of financial creativity was preceded by two years of caution as Turkey navigated through the global financial crisis.
That caution has now passed and it is the banks that are opening up to the international markets. The Sekerbank deal is being lead arranged by UniCredit and has extremely strong support from IFC, which, having a 3% stake in Sekerbank, has been working closely with it on the transaction since its inception.
“Financial market innovation is the next step given Turkey’s current stage of development,” said Ed Strawderman, senior manager of financial markets for EMEA at IFC in Istanbul. “We’re looking to build our track record of innovation and our focus remains on diversifying products in the market and helping create new markets or revive dormant ones.”
The details are still being finalised at the time of going to press, but sources close to the deal said it is likely to come in four tranches and be at least €200m in size. One of the tranches will carry a guarantee from the European Investment Fund giving it a Triple A rating. Two tranches will be bought directly by IFC and FMO, the Dutch development agency. IFC confirms that this tranche will be at least US$25m equivalent in size. The final tranche will be sold to private investors and they will determine the price that the other two tranches will pay as well.
“This deal will open up a whole new world for Turkey’s banks,” said Zeki Onder, executive vice president of Sekerbank in Istanbul. The biggest impact will be felt through the extended maturity profile of the bank’s liabilities, he predicted.
The banks are not just focusing on external funding sources but on domestic ones as well. In early January the first of many bank domestic bonds were issued. So far most of the biggest banks have issued bonds with tenors varying from half a year to 18 months. While these deals can hardly be called innovative they do extend the funding curves, not least because the majority of the bonds are actually sold to retail bank depositors.
Akbank was the first bank to issue local corporate bonds when it sold a TL1bn six month issue in December, pricing it at 60 bps above the relevant Turkish government security.
“We have always emphasised at every opportunity that our banking industry needs different products and services,” said Akkurt. “Our step will create a new market as it will enable the credit risk of the institutions to be traded in the securities market. Our new borrowing instrument will help deepen the capital markets. The consequent development of the private bond market will play a significant role in better managing the maturity mismatch by banks.”
At the beginning of 2011, this local bank bond market fully came to life. On January 21, the three biggest banks all notified the Istanbul Stock Exchange that they would be issuing lira denominated bonds. Akbank again led, announcing that it would be selling TL500m (US$312m) of six month paper at 7.56%. Garanti announced that it would be selling TL1bn of one year paper at a yield of 7.68%. The largest Turkish bank, Isbank announced that it had authorisation to sell up to TL5bn of domestic bonds, before eventually selling TL500m of six month notes to yield 7.5% and TL600m of one year notes to yield 8.43%.
Smaller banks have also got into the local bond market. Sekerbank undertook its first local bond deals in March, selling a combined TL350m in two deals, one with a one year tenor and one with an 18 month tenor. The deal was twice subscribed and was mainly sold to small retail investors, although according to Onder at Sekerbank, this was mostly new money, as opposed to depositors transferring money from deposit accounts into the bonds.
What underpins this new wave of innovation in Turkish bank finance is international confidence in the banks in particular and the sector as a whole. Investors are clamouring for exposure to the banks, which are seen as a good proxy for Turkey’s growth. “As an investor we are very interested in buying corporate bonds,” said Johan Hattingh, CEO of international asset management firm Ashmore Turkey. “There are not enough bonds available to satisfy the demand. As a result the market is not focusing on the credit quality of the issuers and there is little pricing difference between the issuers.”
In the international markets that is also the case although with a slightly different dynamic. Investors are keen to get exposure to international banks, and the banks are all competing to see who can get the best pricing on their deals.
But more fundamentally, investors are willing to take the risks of the banks on an individual basis, not as a substitute for Turkish risk. In August last year, for instance, Standard Bank and UniCredit undertook an exchange offer for Yapi Kredi. The deal saw 20 holders of a privately placed monoline wrapped securitised bond that Yapi Kredi had outstanding for a new bond with no wrap. The fact that the markets were able to move away from the comfort of a monoline and take the underlying credit risks shows how Turkish banks are now able to finance themselves on the basis of their own credit.
“There have been significant developments in wholesale funding instruments in the last six to twelve months,” said Eksi at Unicredit Menkul Degerler. “And these new funding tools will be very important in the future of Turkish bank and corporate funding.”