Well prepared

IFR Turkey 2009
11 min read
Emerging Markets

Amid a crisis that is global in nature, there is only so much that can be done to insulate your own national market. But Turkey’s banks could barely have done more to ensure the loan market remains open to its corporates. And the banks also look well placed to secure at least a proportion of their own needs from their foreign counterparts. Solomon Teague reports.

Turkish banks are in bullish mood. There is no denying the grim reality in which they find themselves, and yet there is a feeling they could not be in better shape to deal with the challenges they face. With little or no exposure to CDOs or other complex or toxic instruments and high deposit levels, Turkish banks are well funded in lira terms.

While the average capital adequacy ratio in the developed markets is around 6%–8%, regulatory requirements in Turkey demand its institutions maintain levels above 12%. The average level in Turkey is comfortably above that at around 16%.

The loans to deposit ratio is around 80% in Turkey, significantly lower than the around 100% level seen across the developed markets. There is plenty of room for growth too: the loan portfolios of Turkish institutions total around 33% GDP, signifying an underpenetrated market.

And although non performing loans have become a hot topic for debate in Turkey as the figure rises, in international terms the problem is modest, at around 3.5%. That figure is of course expected to grow, putting more pressure on banks’ balance sheets, but starting at the level they are at, most Turkish banks have the capacity to absorb rising losses and remain profitable.

According to Cem Mengi, executive vice president at Akbank, Turkish banks have the advantage of serving a corporate community dominated by family-owned businesses. This makes Turkish businesses less risky to lend to since owners tend to be more aligned to the long-term sustainability of their business compared to professional management, and are often willing to make personal sacrifices for the good of the company.

FI funding challenge

Perhaps the biggest challenge facing Turkey’s banks is securing the external funding required to eliminate their asset maturity mismatch problem. Deposits have a maturity of 45 days, so securitisations and syndications are crucial to the banks to allow them to make longer term loans.

In 2009 alone there are approximately US$11bn of Turkish FI loans coming up for maturity, which will either need to be repaid or refinanced. This is occurring against a backdrop of declining lending appetite at foreign banks, which are under pressure to scale back their foreign activities and service their home markets.

Yet from a purely economic perspective, Mengi believes foreign banks remain attracted to Turkey and are keen to keep as much exposure as is politically feasible.

Turkish banks are also mindful of the M&A occurring between Western financial institutions and how this might affect their ability to lend in Turkey. If two institutions with a relatively high exposure to one market merge, it is likely that the aggregate exposure will have to be reduced. The foreign banks’ retreat from Turkey is already evident, with syndications that once averaged 50-60 banks now typically seeing participation from only 20-25.

Mengi predicted around 60% of the rollover will be refinanced, with the rest repaid not solely at the behest of the foreign banks, but also because Turkish FIs will not anticipate such domestic demand, and will therefore look to scale back their own debts.

The deals that have already occurred this year and towards the end of 2008 substantiate this view: although prices are steadily rising, Turkish FIs have so far mostly managed to service their debt requirements from their foreign counterparts. “We have a good relationship with the foreign banks,” said Mengi. “Today’s picture might not be bright, but there is always a tomorrow.”

In March, Isbank and Garanti sent out RFPs for their spring refinancings. Pricing discussions for Yapi Kredi Bank's rollover were also being conducted in March. Isbank is looking to replace its US$900m loan due in April. Garanti is looking to replace its €600m line due May 15. Given liquidity constraints, the expectation has been that Garanti's smaller requirements would be the easier to complete successfully.

The pricing of these FI loans and the others that will follow later in the year is likely to be heavily influenced by the outcome of Yapi Kredi's negotiations for its US$300m loan. It was initially looking to follow the 200bp all-in price that other top-tier FIs secured at the end of last year, when Garanti, Akbank and Vakifbank all signed loans at 200bp all-in. However, it soon realised how unrealistic this hope was, given the continued deterioration in the market. Even an improved offer of 250bp did not meet the expectations of lenders who were looking for 275bp–300bp.

The situation is obviously a little harder for the smaller banks, although at least the market does remain open: Alternatifbank managed to complete a US$70m multicurrency loan in March, priced at 325bp all-in.

Even the 200bp level had constituted a sharp increase from the 75bp all-in that FIs such as Isbank and Akbank had secured earlier in 2008. But despite the steadily increasing price of borrowing in Turkey, it was especially impressive that the market remained open, in contrast to emerging market FI peers in countries such as Russia.

Turk Eximbank had agreed an all-in of 315bp with a domestic-heavy bank group for its rollover. International lender interest for this facility was said to be muted due to the state-owned borrower's limited ancillary wallet.

Even though Turkish pricing has increased sharply over the past year, bankers say they are only willing to lend when there is a strong relationship rationale. If top-tier Turkish pricing does settle at the higher level this will bring it closer into line with secondary spreads, which are now trading in the 350bp to 370bp range.

Corporate market quiet

The credit crunch came late to Turkey. Deal-flow was greater in 2008 than in 2007, reaching around US$15bn in transactions, of which around US$7bn constituted debt. Unlike in previous years, most of this business was done by Turkish banks.

Turkish banks have been the beneficiaries of retreating foreign bank participation in the Turkish corporate loan market as they have stepped in to fill the void. As 2008 progressed and into 2009, domestic banks became the dominant players in the market, said Mengi – a very different picture to 2006 and 2007, when they played second fiddle to their larger international peers.

The change in players involved, coupled with a transformation in economic conditions over the last two years, have seen radical changes in the terms of loans: maturities have shortened and prices have increased, while debt to equity ratios have tilted towards a higher average equity contribution, reflecting a more risk-averse landscape. This has killed the appetite of private equity companies, which in 2007 were rife in Turkey, but who now have mostly taken flight.

By the end of 2008, the downturn had taken full hold and in 2009 the corporate market has been quiet. In March Firat Plastics came with a best-efforts loan, its debut in the market, targeting US$40–$50m, with RBS leading. The deal provided the litmus test for the corporate market, with a margin set at 550bp over Libor.

The Turkish market is clearly in better shape than those of many of its peers, notably Russia, and corporates have always enjoyed strong support from domestic banks. As local banks remain in a comparatively strong position they can still be relied upon to support key clients. And although local banks were often willing to lend at long maturities, corporate pricing in Turkey never reached the tight levels seen in Russia and elsewhere. Though pricing is at least 50% higher than average levels seen at the height of the credit bubble, it has not seen the multiple increases that are now the norm in Russia and much of Europe.

That said, clearly these new levels are likely to be challenging for Turkish corporates. In February, Turkcell abandoned provisional plans to raise financing in the syndications market, opting instead to implement a series of bilateral loans, with the associated relationship benefits they were expected to bring. The corporate is cash-hungry after making a bid for Macedonian corporate Cosmofon, and also has plans to invest about US$600m in its own network in 2009.

In January Koc Holding completed its US$320m one-year and €339m three-year club loans, which replaced a US$1bn loan signed in 2006 funding the acquisition of refiner Tupras, a refiner. Again, the deal gave heart to observers of the Turkish loan markets by raising more than expected and at a better price. Pricing was believed to be 250bp over Libor on the one-year, rising to 450bp on the three-year.

There are a few big deals on the horizon, particularly the privatisation of the National Lottery. The ongoing liberalisation of the energy markets, especially in energy distribution, is another source of optimism: “We will definitely see activity there,” predicted Mengi. With some Turkish institutions being very cash-rich, and others being significantly undervalued due to the downturn, there is also a good chance of some acquisitions happening later in the year, he said.

When the eventual global upturn comes, Turkish banks are likely to retain their dominant position in the corporate market. Their balance sheets are stronger than before, which, combined with their local relationships gives them a strong foothold that foreign banks will find it hard to regain.

“We will transform our temporary market share advantage into a permanent one,” said Mengi. In that sense, at least, the financial crisis may prove to have been the making of Turkish financial institutions.