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Investors Bet Against Turkey Banks as Debt Wave Gains Force

Investors Bet Against Turkey Banks as Debt Wave Gains Force

Investors are bracing for trouble at Turkey’s banks as some of the nation’s biggest conglomerates struggle to repay their debts.

The Borsa Istanbul Banks Index, which comprises 13 lenders, underperformed the Borsa Istanbul 100 by 20 percent over the past year. Valuations dropped to a nine-year low in November, and have remained there. The banks index trades at 4.9 times estimated earnings, compared with 7.6 times for the broader market. While financial institutions were once the driver of the market, accounting for almost half its value, today they account for less than a third.

“Restructuring demands are already pressuring banks’ valuations and will continue to do so,” said Cagdas Dogan, a banking analyst at BGC Partners Inc. in Istanbul. “More loans will be classified as under ‘close watch’ and the fact that the banks will set aside more provisions under new regulations may have a negative impact on earnings.”

In a latest sign of turbulence, billionaire Ferit Sahenk’s Dogus Holding AS is said to have asked lenders to restructure as much as $2.5 billion in loans. The lenders are already in talks with Godiva Chocolates owner Yildiz Holding AS to refinance as much as $7 billion, and are trying to get payments restarted after Otas failed to pay back the $4.8 billion loan it took to buy phone company Turk Telekom. The joint venture of Italian energy firm Ansaldo Energia SpA and Turkey’s Unit Investment NV is said to have started talks to restructure $700 million.

Investors are left wondering who’s next, and how it ends.

Lira Devaluation

All this comes against the backdrop of a plunge in the national currency, which has lost more than 50 percent of its value against the dollar in the past 5 years. The lira fell to new records against the dollar and euro on Tuesday, at 4.08 and 5.03 respectively. The banks index dropped as much as 3.2 percent.

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Government efforts to keep banks extending loans aggressively probably aren’t helping. A lending spree since 2016 was fueled by a government guarantee and pushed the banks’ loan-to-deposit ratios to record highs at nearly 130 percent. When the ruling Justice and Development Party came to power in 2003, the ratio was about 40 percent.

Credit Boom

“The stories about restructuring in Turkey are a consequence of the credit boom that has been running since around 2003,” said William Jackson, senior emerging-market economist at Capital Economics in London. While the banks appear healthy on the metrics, “given the scale of the credit boom, it’s certainly possible that we might see more serious problems for the banking sector, although as things stand I think the bigger risk is that we get a period of much weaker credit growth.”

While their average NPL ratio is an enviable 2.92 percent, Turkish banks have been extensively restructuring loans amid market turmoil that’s hammered the lira, making it more difficult for companies to repay an accumulated dollar and euro debt pile now equivalent to about 40 percent of gross domestic product.

The nation’s corporate sector sat on a record $336 billion in foreign debt as of the end of January. When netted against their foreign-exchange assets, the shortfall was still at an all-time high of $222 billion.

Profits in the banking industry are so far holding up. They fell slightly to 8.38 billion liras ($2.1 billion) in the first two months of this year from 8.45 billion liras in the same period of last year, according to data from the banking watchdog.

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New Terms

But even if the debts are restructured smoothly and not classified as NPLs, “we may see a hit to banks’ income as the debts are renegotiated on terms that are more favorable to the borrowers,” said Capital Economics’ Jackson. Banks are also likely to be more cautious in extending new credit, “removing one of the most important props to growth in the Turkish economy.”

The trio of a plunging lira, high inflation and rising borrowing costs risks making a bad situation worse for the nation’s firms, according to Tomasz Noetzel, a Bloomberg Intelligence analyst covering eastern European lenders.

“The bigger picture is that it’s more difficult to do business there with a weak lira weighing on inflation and funding costs,” Noetzel said. “The weaker lira eventually will translate into corporate troubles and higher provisioning,” and “unless the central bank takes serious steps to ease lira woes, the industry’s outlook is not too rosy.”

Originally published at: https://www.bloomberg.com/amp/news/articles/2018-04-10/investors-bet-against-turkey-banks-as-debt-wave-gathers-force?__twitter_impression=true

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