{"id":110538,"date":"2021-03-25T14:15:20","date_gmt":"2021-03-25T14:15:20","guid":{"rendered":"https:\/\/fin2me.com\/?p=110538"},"modified":"2021-03-25T14:15:20","modified_gmt":"2021-03-25T14:15:20","slug":"analysis-rollover-risks-loom-for-turkeys-banks","status":"publish","type":"post","link":"https:\/\/fin2me.com\/markets\/analysis-rollover-risks-loom-for-turkeys-banks\/","title":{"rendered":"Analysis: Rollover risks loom for Turkey's banks"},"content":{"rendered":"

ISTANBUL (Reuters) – A sharp spike in borrowing costs following the sacking of Turkey\u2019s central bank chief has raised risks for local banks which face a wall of maturing foreign currency debt in the coming months.<\/p>

FILE PHOTO: A board shows the currency exchange rates outside an exchange office in Istanbul, Turkey March 22, 2021. REUTERS\/Murad Sezer<\/figcaption>

Governor Naci Agbal, who had sought to combat double-digit inflation with aggressive interest rate hikes, was replaced with Sahap Kavcioglu, like President Tayyip Erdogan a critic of tight monetary policy.<\/p>\n

The switch has jolted markets, with the lira and Turkey\u2019s bonds tumbling in value and interest rates soaring on overnight lira swaps, used for hedging and shorting by overseas investors.<\/p>\n

Foreign currency bonds of Turkish banks have fallen in price, pushing up yields, which indicate likely borrowing costs. Dollar bonds maturing in 2026 issued by state-run VakifBank and Ziraat Bank now yield nearly 8%, up from about 5% in February, while commercial lender Isbank\u2019s 2028 bond yield has soared to over 11% from 6%.<\/p>\n

Capital Economics estimates Turkish banks must repay $89 billion of external debt in the next 12 months — equivalent to 12.5% of Turkey\u2019s GDP — including more than $7 billion in April and May.<\/p>\n

Turkish Banks Association chief and Ziraat CEO Huseyin Aydin said on Thursday the sector is managing market volatility and does not face problems securing foreign financing.<\/p>\n

VakifBank declined to comment. Isbank and other big banks Garanti, AKbank and Yapi Kredi did not immediately respond to requests for comment on refinancing risk, and nor did the national regulator.<\/p>\n

Erdogan has pledged reforms to improve lenders\u2019 asset quality. The central bank, which declined to comment, said in January its tight policy had cooled credit growth.<\/p>\n

Analysts are nevertheless worried about lenders\u2019 ability to service debts if the fallout from the crisis prompts another spike in borrowing costs and more lira weakness.<\/p>\n

Graphic: Turkish banks’ FX debt repayments in 2021 –<\/p>\n

\u201cRefinancing risks for Turkish banks are high given exposure to changes in investor sentiment amid volatile market conditions,\u201d said Huseyin Sevinc, EMEA director of banks at Fitch Ratings. \u201cThe risks have also increased further following the replacement of the central bank governor, given renewed pressure on the lira and an increase in Turkey\u2019s risk premium.\u201d<\/p>\n

Bank shares have plunged 15% this week.<\/p>\n

Turkish banks have become more reliant on the central bank for foreign currency liquidity since offshore swap transactions were restricted in early 2020.<\/p>\n

About half of banks\u2019 $94 billion available FX liquidity is placed with the central bank, mainly through foreign currency swaps, said Sevinc. If banks had to pay down significant amounts of foreign currency debt or deposits, they would need to access that liquidity.<\/p>\n

Sevinc estimated banks would need up to $50 billion to service short-term debt if they were unable to borrow internationally.<\/p>\n

Turkey\u2019s reserves are severely depleted after state banks sold $130 billion in dollars in 2019 and last year to stabilise the lira, in market operations backed by central bank swaps.<\/p>\n

Moody\u2019s, another ratings agency, said the central bank overhaul was credit-negative for Turkish banks and likely to raise funding costs and limit them to short-term borrowing.<\/p>\n

Rapid growth and an expanding middle class have prompted European and Gulf banks to raise exposure to Turkey in recent years. Spain\u2019s BBVA, Italy\u2019s UniCredit and Qatar National Bank are among those owning stakes in local lenders.<\/p>\n

Qatar National Bank declined to comment. UniCredit did not immediately respond to requests for comment.<\/p>\n

BBVA is prepared to handle the main risk in Turkey, which is forex, chief executive Onur Genc said on Tuesday, adding the bank was hedged and that Agbal\u2019s dismissal would not affect operations.<\/p>\n

LOAN WORRIES<\/h2>\n

Investors take comfort from the track record of the banks, which managed to roll over around 90% of syndicated loans at the height of a lira crisis in 2018, said Marcelo Assalin, head of emerging market debt at William Blair Investment Management.<\/p>\n

\u201cWe would be more concerned regarding the medium-term impacts of this confidence shock on growth and the currency, which could exacerbate asset quality concerns and put pressure on capital ratios,\u201d he added.<\/p>\n

The informal adoption of the U.S. dollar by Turkish businesses and households as a protection against further lira instability is another metric analysts are watching.<\/p>\n

Graphic: Forex held by Turkish local individuals and institutions –<\/p>\n

With four governors in two years, concerns over central bank independence have exacerbated Turkey\u2019s boom-and-bust cycles and fanned such dollarisation.<\/p>\n

But after FX deposits suffered a roughly $20 billion drawdown in the wake of the 2018 currency crisis, they quickly rebounded, noted Denise Simon, portfolio manager in Lazard Asset Management\u2019s emerging markets debt team, who believes a full-blown banking crisis will not occur.<\/p>\n

\u201cResidents generally believe in the banking system. During times of strife, they tend not to make massive withdrawals,\u201d she said.<\/p>\n

Another worry is foreign currency loans made by local banks, which could sour following the lira\u2019s slump, warned Jason Tuvey, senior emerging markets economist at Capital Economics. FX loans are 44.6% of Turkey\u2019s total 2.8 trillion lira ($353.65 billion) in corporate loans.<\/p>\n

Kavcioglu sought to calm nerves in meetings with bank executives on Sunday and Wednesday, saying he would not change policy any time soon.<\/p>\n

But one banker said executives were unconvinced early in the week, while lenders have been hesitant to price loans and sought to gauge liabilities on assets in a raft of emergency meetings.<\/p>\n

\u201cWe waited for the message from headquarters\u201d before granting new lira loans, another banker said.<\/p>\n

Commercial loan rates have risen up to 200 basis points in the last two days, to around 19%-22%.<\/p>\n

($1 = 7.9174 liras)<\/p>\n

Source: Read Full Article<\/a><\/p>\n","protected":false},"excerpt":{"rendered":"

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