Turkish bank funding in focus after Atilla sanctions verdict


Lucy Fitzgeorge-Parker
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US penalties against institutions likely, say analysts; lenders remain loyal despite rising macro risk.


Turkish banks’ dependence on external funding was back in focus in January after one of the country’s leading bankers was found guilty of involvement in a multi-billion dollar scheme to evade sanctions on Iran.

Mehmet Hakan Atilla, the former deputy chief executive of state-controlled lender Halkbank, was arrested last March at JFK airport in New York at the end of a bond roadshow. He was convicted on January 3 of conspiracy to violate US sanctions law and commit money laundering by a federal court in New York after a three-week trial.

The verdict prompted furious denunciations from Turkish politicians, with president Recep Tayyip Erdogan condemning it as “scandalous” and “a political coup attempt”.

US authorities were slower to react, but analysts say penalties against Halkbank – and potentially other entities implicated in the case – are likely.

“It’s hard to see the US Treasury leaving this with no action against specific institutions,” says Tim Ash, an emerging market strategist at BlueBay Asset Management. “It’s important for them that warnings are sent to others and that where institutional vulnerabilities are revealed, the fault is accepted and systems changed.”

The issue has once again highlighted the dependence of Turkish banks on short-term external financing. Last year, the sector raised $7.9 billion from the Eurobond market and $15 billion in short-dated syndicated loans, according to Dealogic.

For the first time since 2009, however, Halkbank was not among the lenders raising foreign cash. Since Atilla’s arrest, the bank has been shut out of international markets and has had to rely on central bank liquidity and pricey local-currency deposits.

As a result, Halkbank’s net interest margin declined sharply in the second half of 2017, earning the lender a ratings downgrade from Moody’s in December.


Some market participants have questioned whether or not other Turkish banks will also see a pullback by international banks and bond buyers this year. As well as the threat of potentially wide-ranging US penalties, pessimists note that the sector is facing other headwinds in the form of declining profitability, asset quality deterioration and a challenging macroeconomic environment.

Returns on equity are expected to moderate on the back of reduced lending growth, as the Turkish government’s Credit Guarantee Fund programme for small and medium-sized enterprise lending – introduced to stimulate the economy after the 2016 coup attempt – starts to wind down.

Non-performing loan ratios are also forecast to pick up, albeit from very low levels. Sector-wide NPLs stood at just 3% of the total at end-September, according to Fitch Ratings, but some fear recent rapid loan growth – which topped 20% last year at state-controlled lenders such as Halkbank – could lead to sharp increases in bad debt formation.

“There’s been a lot of indiscriminate lending in the past two years because the government was so keen to prop up the economy,” says Julian Rimmer, an emerging market trader at Investec Bank.

Analysts also note that the Turkish macroeconomic outlook remains vulnerable. The central bank has proved reluctant to tighten monetary policy to counter rising inflation, possibly due to intense political pressure to keep interest rates low.

As a result, inflation hit a multiyear high of 13% in November. Policymakers claim this will moderate this year, but others say such forecasts fail to take account of the impact of rising oil prices on Turkey’s commodity-importing economy.

“In lira terms, the oil price has risen two-thirds since last summer,” says Rimmer. “Oil accounts for around 80% of Turkey’s current account deficit, so inflation will likely remain fairly sticky.”

Combined with rising interest rates in developed markets, this could cause a spike in borrowing costs for Turkish entities, he adds. Turkey has an annual external financing requirement of more than $200 billion.

“Turkish borrowers have been given a free pass for the past five years because rates globally have been artificially repressed, but that’s coming to an end,” says Rimmer. “Once rates go up, Turkey’s problems could mount very quickly.”

Whether or not this will affect Turkish banks’ ability to access international markets, however, is open to question.

“We hear every year that funding for Turkish banks is going to dry up and it never really seems to happen,” says Tolu Alamutu, a financial institutions analyst at Exotix Capital.

She notes that the fundamentals of Turkish banks are still among the strongest in emerging markets and that European lenders, who provide “significant funding” to the sector, have proved remarkably loyal.

“Even in 2012, at the height of the Greek crisis, they didn’t pull back by as much as feared,” she says.

Bulent Sengonul, head of research at Is Yatirim, also notes that Turkish banks’ dependence on western lenders is waning as lenders from new regions enter the market.


Two Japanese banks – Sumitomo Mitsui and Mitsubishi UFG – were among the top 10 providers of syndicated loans to Turkey last year, most of which went to the financial sector. Middle Eastern and Chinese banks are also showing an increasing appetite for Turkish exposure.

Warnings of rising risks to the Turkish economy and banking sector have also failed to deter international bond buyers so far. On January 9, a $350 million Eurobond from Turkish private-sector development bank TSKB met with a warm response from investors, despite coming to market on the same day as a $2 billion Turkish sovereign issue.

Just over a week later, second-tier lender Fibabanka also managed to sell a $300 million senior bond at the second time of asking. The bank initially approached investors in October but postponed the deal due to difficult market conditions.

Nevertheless, developments relating to Halkbank and the Atilla case will be closely watched over the coming months. No action is expected from the US side until after sentencing in April or a possible appeal, but Turkish policymakers already appear to be setting out their stall.

A statement by Turkish deputy prime minister Mehmet Simsek that any fine by US authorities would be paid by Halkbank rather than the government was seen as particularly important.

“I sense the Turkish starting position is, if you want us to comply then the fine has to be limited to Halkbank and in terms of size,” says Ash.