20160906-法国巴黎银行-Turkish_banks__In_the_shadow_of_the_sovereign_22页_595kb

Summary of EM Credit Strategy: Turkish Banks

Core Content

This report analyzes the current performance and outlook for Turkish banks, highlighting their resilience amid political and economic uncertainties. The key focus is on the impact of Moody's sovereign rating review, the sector's capital adequacy, asset quality, and liquidity position.

Main Points

• Financial Performance: Turkish banks showed strong financial results in the first half of 2016, with improved profitability and resilient capital and asset quality.
• Rating Uncertainty: The outcome of Moody's rating review is a major concern. A potential downgrade could significantly affect bank spreads and capital ratios.
• Relative Value Switches: Given the uncertainty, the report recommends relative value switches within the sector as a safer investment approach.
• Capital Adequacy: Turkish banks are well-capitalized, with Tier 1 capital ratios ranging from 10.9% to 15.2%. The sector's average Tier 1 capital ratio is 13.5%, which is among the best globally.
• Asset Quality: The NPL ratio stands at 3.3%, which is relatively stable compared to global peers. However, there are signs of increasing pressure from rising watch loans and the potential for future defaults.
• Liquidity and Funding: Banks have a high proportion of non-deposit funding, with 40% of total funding coming from short-term sources. Despite this, they maintain strong liquidity positions, supported by regulatory requirements and central bank policies.
• FX Exposure: Turkish banks face profitability risks due to FX liabilities, especially as the lira has depreciated significantly. However, their high liquidity cushions and regulatory buffers help mitigate these risks.
• Rating Agency Impact: While Moody's is under review, most banks reference Fitch for sovereign ratings, which could reduce the risk-weighting impact. A downgrade by Moody's could lead to increased risk-weightings, but this is not expected to be the base case.

Key Information

1. Rating Review Impact

• Uncertainty: Moody's rating review is expected by mid-October, and its outcome will determine the performance of Turkish banks.
• No Downgrade Scenario: If no downgrade occurs, Turkish banks are likely to outperform other EM banks and the sovereign. Spreads may narrow.
• Downgrade Scenario: If the rating is downgraded, banks may see a more significant spread widening than the sovereign. This could present an attractive entry point for long positions, given their current alignment with double B EM peers.

2. Relative Value Switches

• HALKBK to TCZIRA: TCZIRA's $4.75% '21s are seen as more attractive due to better asset quality and lower NPLs.
• ISCTR to GARAN: Garanti's strong performance and potential rating support from BBVA make it a preferred choice over ISCTR.
• GARAN USD to GARAN EUR: EUR-denominated bonds offer a better spread, adjusted for cross-currency basis, making them more attractive for investors.

3. Capital Adequacy and Regulatory Environment

• Tier 1 Capital: The sector's Tier 1 capital ratio is 13.5%, with some banks (e.g., Garanti) exceeding 15%.
• Basel III Implementation: Turkey has been aligning its capital standards with Basel III, with the minimum CET1 ratio increasing to 9% by 2019.
• Capital Buffers: Banks have high capital buffers to absorb potential losses, especially in a stressed scenario. Some banks, like Akbank, have additional provisions that can be used to bolster capital ratios.

4. Asset Quality and NPLs

• NPL Ratio: At 3.3%, NPLs are relatively stable compared to global peers, though they have increased significantly in recent years.
• Segment Analysis: Corporate and SME loans contribute the most to NPLs, while FX loans and tourism-related loans show lower delinquency rates.
• Watch Loans: An increase in watch loans (Group 2 loans) indicates potential future NPL inflows. Garanti and Isbank have seen the highest increases.

5. Liquidity and Funding Risk

• Non-Deposit Funding: Turkish banks rely heavily on non-deposit funding, with 40% of total funding coming from short-term sources.
• Liquidity Coverage Ratio (LCR): Banks maintain high LCRs, with Akbank leading in both total and FX liquidity coverage.
• Regulatory Shifts: Banks have shifted from short-term to long-term borrowing, partly due to regulatory arbitrage. Short-term repos have also decreased, which is a positive sign.

6. FX Liabilities and Profitability

• Depreciation Impact: The lira's depreciation has increased the share of FX liabilities in banks' balance sheets, exposing profitability to downside risk.
• Mitigation: Banks have high liquidity and regulatory buffers to manage FX-related risks, especially in the event of a rating downgrade.

Conclusion

The Turkish banking sector is currently in a strong financial position, with solid capital ratios and resilient asset quality. However, the outcome of Moody's sovereign rating review remains a critical uncertainty. The report recommends relative value switches as a strategic approach given the high risk of an outright long or short trade. Investors should also monitor the impact of FX exposure and the potential for NPL increases, while considering the regulatory environment and capital buffers in their decision-making.