Fitch Ratings-London: Turkish bank Garanti BBVA’s decision not to call its USD750 million Tier 2 debt in May 2022 is a sign of building market pressure affecting banks in Turkey, Fitch Ratings says. The decision is likely to have been driven primarily by economic considerations given higher refinancing costs amid market volatility. The operating environment for banks in Turkey has deteriorated due to pressure on the lira, spiralling inflation and the negative implications of rising US interest rates on emerging markets. Sekerbank, a smaller bank, has also decided not to call its Tier 2 debt, instead extending the tenor.
Garanti’s decision is likely to have taken investors by surprise as the market norm for Turkish banks in recent years has been to call Tier 2 instruments. However, as well as saving Garanti the increased refinancing costs, the non-call will underpin the bank’s capital position by continuing to provide a hedge against lira depreciation (currently the greatest risk to Turkish banks’ capitalisation), and supporting its total capital ratio. The non-call will also preserve Garanti’s foreign-currency (FC) liquidity buffer amid ongoing lira depreciation. Lira weakness has been exacerbated by the additional market volatility triggered by the war in Ukraine, and creates heightened FC liquidity risks for Turkish banks given their exposure to international investor sentiment and their high deposit dollarisation.
Garanti’s non-call does not affect the bank’s ratings, which we affirmed in March (see Fitch Affirms Garanti BBVA at 'B'; Outlook Negative). However, it could deter investors if Garanti wants to issue Tier 2 debt in future, and it reflects the heightened operating environment pressures that already weigh on Turkish bank ratings.
The operating environment is a key rating sensitivity for Turkish banks’ Viability Ratings. Key downside risks include potential funding market closure and deposit outflows amid heightened market volatility, which could lead to material erosion of capital and FC liquidity buffers given the sector’s large amount of FC debt that matures in the near term and high deposit dollarisation. Fitch’s operating environment score for Turkish banks is ‘b’/‘negative’, and risks to financial and macro stability remain high given lira weakness, Turkey’s unorthodox monetary policy in the face of soaring inflation, and lack of policy credibility amid tighter external financing conditions.
The market norm for Turkish banks has generally been to call Tier 2 debt after five years, even when markets have been volatile. Garanti’s non-call could damage investor confidence in the Turkish banking sector, with investors no longer clear how banks will act at call dates. This could weaken banks’ ability to access Tier 2 debt markets and push up their financing costs, potentially leading more banks not to call their debt. Several Turkish banks have Tier 2 call dates in 2H22, including Odea, Vakifbank and Fiba. Each bank’s approach is likely to depend on how volatile the market conditions are at the time, and on its own view of the reputational risk associated with a non-call.
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Link to Infogram: Tier 2 Call Dates in 2H22
Media Relations: Louisa Williams, London, Tel: +44 20 3530 2452, Email: louisa.williams@thefitchgroup.com
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
