MENA & Turkey Financials

Ercan Uysal

Thematic (Sector/Industry)

The answer largely depends on what the metaphor implies. While the recent sharp devaluation in TL has surely exacerbated the structural problems in the Turkish economy, if the political tensions with the US do not further escalate leading to economic sanctions, a painful but manageable hard landing is still within the realm of possibility, in our view. As we have discussed in detail in our previous note ("Turkish Banks: A Painful Deleveraging Ahead"), having registered the second largest private sector debt-to-GDP build-up in 2009-2017 in the EM universe after China, a multi-year deleveraging in the Turkish economy seemed inevitable to us. In this respect, the recent political developments have merely triggered this inevitable process, which could have devastating consequences (social and economic) if not handled carefully and swiftly. In this note, we further delve into the potential impact of recent macro developments on the Turkish banking sector and attempt to quantify our somewhat “orderly deleveraging” scenario.

The answer largely depends on what the metaphor implies. While the recent sharp devaluation in TL has surely exacerbated the structural problems in the Turkish economy, if the political tensions with the US do not further escalate leading to economic sanctions, a painful but manageable hard landing is still within the realm of possibility, in our view. As we have discussed in detail in our previous note ("Turkish Banks: A Painful Deleveraging Ahead"), having registered the second largest private sector debt-to-GDP build-up in 2009-2017 in the EM universe after China, a multi-year deleveraging in the Turkish economy seemed inevitable to us. In this respect, the recent political developments have merely triggered this inevitable process, which could have devastating consequences (social and economic) if not handled carefully and swiftly. In this note, we further delve into the potential impact of recent macro developments on the Turkish banking sector and attempt to quantify our somewhat “orderly deleveraging” scenario.

Turkish Banks: Has the Rubicon Been Crossed?

Silver Point

Thomas J. Monaco

Silver Point is a boutique research firm that focuses on the broader financial services sector, with a particular focus on troubled institutions globally. 

Asia Ex Japan

* Following up on his sweeping cabinet changes on Tuesday, July 10, 2018, President Erdogan has also accelerated his push to engineer a full blown economic and banking crisis; *  Banks are highly likely to be under pressure to relax lending controls with the threat of banking sector zombification now on the visible horizon;  and  * With Turkish contagion risks flashing red, the current lunacy in Turkey is likely to further reduce emerging market appetite.<h2>Investment Summary </h2>President Erdogan has…

* Following up on his sweeping cabinet changes on Tuesday, July 10, 2018, President Erdogan has also accelerated his push to engineer a full blown economic and banking crisis; *  Banks are highly likely to be under pressure to relax lending controls with the threat of banking sector zombification now on the visible horizon;  and  * With Turkish contagion risks flashing red, the current lunacy in Turkey is likely to further reduce emerging market appetite.Investment Summary President Erdogan has…

<h2>Orderly or disorderly deleveraging?  </h2>
If history is any guide, the aftermath of a private debt boom often results in slower consumption and GDP growth, or outright financial crisis. As the window is rapidly closing to avoid the latter, a multi-year deleveraging in the Turkish economy seems inevitable to us, after having registered the second largest non-financial private sector debt-to-GDP build-up in 2009-2017 in the EM universe after China. The recent sharp deceleration in credit growth against peak corporate leverage and an increasingly volatile macro backdrop portend that the Turkish banks will have to grapple with mounting asset quality problems in the next few years. At 0.48x 12MF P/BV, the BIST Banks are currently trading at a hefty 50% discount to MSCI EM Banks, largely reflecting the underlying investor concerns about worsening macroeconomic outlook and its potential adverse impact on the banking sector, in our view. Despite seemingly attractive valuations, we believe if a comprehensive bank resolution framework is not put in place in the coming months, more pain might be on the cards for investors.

Orderly or disorderly deleveraging?  
If history is any guide, the aftermath of a private debt boom often results in slower consumption and GDP growth, or outright financial crisis. As the window is rapidly closing to avoid the latter, a multi-year deleveraging in the Turkish economy seems inevitable to us, after having registered the second largest non-financial private sector debt-to-GDP build-up in 2009-2017 in the EM universe after China. The recent sharp deceleration in credit growth against peak corporate leverage and an increasingly volatile macro backdrop portend that the Turkish banks will have to grapple with mounting asset quality problems in the next few years. At 0.48x 12MF P/BV, the BIST Banks are currently trading at a hefty 50% discount to MSCI EM Banks, largely reflecting the underlying investor concerns about worsening macroeconomic outlook and its potential adverse impact on the banking sector, in our view. Despite seemingly attractive valuations, we believe if a comprehensive bank resolution framework is not put in place in the coming months, more pain might be on the cards for investors.

Turkish Banks: A Painful Deleveraging Ahead

Financials Credit Analyst

Hank Calenti, CFA

CreditContinuum

Credit

Executive Summary: A liquidity driven melt-up combined with month-end rebalancing to drive bank credit spread performance over the last week. Remove the month-end rebalancing and short duration positioning may remain the best strategy over the next few weeks, absent a material inflection point in the upcoming non-farm payroll numbers. The short end of the rates market continued to push investors up the curve to generate returns. Awash with still rising liquidity, this melt-up was the key driver of credit spread outperformance.Risk asset volatility and talking about, talking about, talking about tapering had little lasting impact on US interest rates over the last few weeks. In fact, rate curve flattening, and falling forward breakeven rates, suggest that the interest rate market may buy the Fed’s assessment of inflation as being transitory.While the transitory mantra is believed, whispers of supply driven growth constraints are being mentioned. This would be interest rate and credit spread positive as it would extend the duration of the recovery and thereby delay late-stage economic cycle repositioning. Although not consensus, this thought is disconcerting, as it suggests the rising rates consensus is very wrong.Therefore, the risk is clearly that the rates market is underpricing the potential for an extended period of higher than anticipated inflation. However, holding cash is expensive. Moving too early to position for higher or longer than anticipated inflation may be career ending. Extending duration to take advantage of declining rates is considered insane. Carry trades remain unloved. Ergo, the silent self-doubtful suffering of the rate and credit markets. Security selection based on fundamental analysis, in so much as one avoids unexpected spread widening, may be the differentiator for outsized total returns over the next few weeks.  We elaborate on these themes within.Market Outlook: The question is whether the over-heating narrative will make a comeback and bring rate and tapering expectations closer. Financial stability risks appear binary from here. Either the Fed is over-accommodative, and it sits on its hands too long while asset bubbles over-inflate so that it gets nasty when it moves, or the Fed gets impatient, and it lowers accommodation unexpectedly which creates a risk off reaction. In both cases, curves flatten in a risk-off environment. We suspect the former is more likely, and for now, the Fed remains the bartender rather than the bouncer.

Executive Summary: A liquidity driven melt-up combined with month-end rebalancing to drive bank credit spread performance over the last week. Remove the month-end rebalancing and short duration positioning may remain the best strategy over the next few weeks, absent a material inflection point in the upcoming non-farm payroll numbers. The short end of the rates market continued to push investors up the curve to generate returns. Awash with still rising liquidity, this melt-up was the key driver of credit spread outperformance.Risk asset volatility and talking about, talking about, talking about tapering had little lasting impact on US interest rates over the last few weeks. In fact, rate curve flattening, and falling forward breakeven rates, suggest that the interest rate market may buy the Fed’s assessment of inflation as being transitory.While the transitory mantra is believed, whispers of supply driven growth constraints are being mentioned. This would be interest rate and credit spread positive as it would extend the duration of the recovery and thereby delay late-stage economic cycle repositioning. Although not consensus, this thought is disconcerting, as it suggests the rising rates consensus is very wrong.Therefore, the risk is clearly that the rates market is underpricing the potential for an extended period of higher than anticipated inflation. However, holding cash is expensive. Moving too early to position for higher or longer than anticipated inflation may be career ending. Extending duration to take advantage of declining rates is considered insane. Carry trades remain unloved. Ergo, the silent self-doubtful suffering of the rate and credit markets. Security selection based on fundamental analysis, in so much as one avoids unexpected spread widening, may be the differentiator for outsized total returns over the next few weeks.  We elaborate on these themes within.Market Outlook: The question is whether the over-heating narrative will make a comeback and bring rate and tapering expectations closer. Financial stability risks appear binary from here. Either the Fed is over-accommodative, and it sits on its hands too long while asset bubbles over-inflate so that it gets nasty when it moves, or the Fed gets impatient, and it lowers accommodation unexpectedly which creates a risk off reaction. In both cases, curves flatten in a risk-off environment. We suspect the former is more likely, and for now, the Fed remains the bartender rather than the bouncer.

Bank Credit Weekly: Month-End Rebalancing Takes Risk-Off Before Take-Off

Executive Summary: Momentum behind the recent Treasury market rally may be starting to slow. Greater conviction is likely to build over the weeks which follow as economic data is published, rather than result from this week’s FOMC meeting.It is unlikely that the Fed will signal that it is ready to start tapering its asset purchase program this week. We are yet to see the whites of wage-growth eyes. Meanwhile, Canada became the first major economy to signal an exit from asset purchases. Canada’s central bank also indicated that a rate rise is now expected in the second half of 2022. Global interest rates did not react.  However, we may be tricked into seeing things which not there as upcoming wage data may point to rapidly falling wages.As such, the narrative remains left to be taken in the fixed income markets.  We may have reached a peak in short positioning unwinding and the re-entry of Japanese investors in the market is also taken as a given. Unexpectedly good economic data over the next few weeks could be bad for Treasury yields.  This could re-ignite the reflation and carry-trade rallies.While Treasuries continue to tread water, spreads on US CCC rated notes continued to trade at levels not seen since prior to the Global Financial Crisis in 2007. Investors are becoming concerned that the stretch for yield may be overdone. Excess US spread compression could benefit Asia HY as investors move offshore to grab better yields and excess spreads.In the bank credit markets, Asia-headquartered institution performed across the credit continuum while European bank bond remained stuck with carry-trade unwind performance. The combination of spread tightening and Treasury bond curve flattening generated positive total returns amongst Asia banks.We will hit the peak in bank earnings reports in the upcoming week. US banks set a high bar for performance by generating stellar investment banking and progressively improving core banking results over the last two weeks. They then signaled that they anticipate significantly higher interest rates later this year by raising record breaking amounts in the debt capital markets. Other banks may follow with material debt issuance over the next few weeks after reporting earnings this week.  We explore these market themes within.Market Outlook: Already looking past upcoming spikes in inflation and job creation, the Treasury market is repricing for lower growth and lower rates over a longer time-period. This should be risk asset supportive as the US dollar finally weakens. The risk is that of impotent monetary policy and a constrained fiscal response in a shorter than expected business cycle.

Executive Summary: Momentum behind the recent Treasury market rally may be starting to slow. Greater conviction is likely to build over the weeks which follow as economic data is published, rather than result from this week’s FOMC meeting.It is unlikely that the Fed will signal that it is ready to start tapering its asset purchase program this week. We are yet to see the whites of wage-growth eyes. Meanwhile, Canada became the first major economy to signal an exit from asset purchases. Canada’s central bank also indicated that a rate rise is now expected in the second half of 2022. Global interest rates did not react.  However, we may be tricked into seeing things which not there as upcoming wage data may point to rapidly falling wages.As such, the narrative remains left to be taken in the fixed income markets.  We may have reached a peak in short positioning unwinding and the re-entry of Japanese investors in the market is also taken as a given. Unexpectedly good economic data over the next few weeks could be bad for Treasury yields.  This could re-ignite the reflation and carry-trade rallies.While Treasuries continue to tread water, spreads on US CCC rated notes continued to trade at levels not seen since prior to the Global Financial Crisis in 2007. Investors are becoming concerned that the stretch for yield may be overdone. Excess US spread compression could benefit Asia HY as investors move offshore to grab better yields and excess spreads.In the bank credit markets, Asia-headquartered institution performed across the credit continuum while European bank bond remained stuck with carry-trade unwind performance. The combination of spread tightening and Treasury bond curve flattening generated positive total returns amongst Asia banks.We will hit the peak in bank earnings reports in the upcoming week. US banks set a high bar for performance by generating stellar investment banking and progressively improving core banking results over the last two weeks. They then signaled that they anticipate significantly higher interest rates later this year by raising record breaking amounts in the debt capital markets. Other banks may follow with material debt issuance over the next few weeks after reporting earnings this week.  We explore these market themes within.Market Outlook: Already looking past upcoming spikes in inflation and job creation, the Treasury market is repricing for lower growth and lower rates over a longer time-period. This should be risk asset supportive as the US dollar finally weakens. The risk is that of impotent monetary policy and a constrained fiscal response in a shorter than expected business cycle.  

Bank Credit Weekly: Momentum Slows as Conviction Is Lacking

Turkey

Turkiye Vakiflar Bankasi T.A.O. attracts deposits and offers corporate, retail, and investment banking services.  The Bank offers consumer and agricultural loans, sponsors credit cards, offers asset management services, manages mutual funds, and offers securities brokerage services.  Vakiflar Bankasi also takes equity stakes in Turkish companies.

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Turkiye Vakiflar Bankasi Tao (VAKBN TI)

Turkish Banks: Has the Rubicon Been Crossed?

The answer largely depends on what the metaphor implies. While the recent sharp devaluation in TL has surely exacerbated the structural problems in...

Ercan Uysal

Turkey - Legging Down

* Following up on his sweeping cabinet changes on Tuesday, July 10, 2018, President Erdogan has also accelerated his push to engineer a full blown...

Thomas J. Monaco

Turkish Banks: A Painful Deleveraging Ahead

Orderly or disorderly deleveraging? If history is any guide, the aftermath of a private debt boom often results in slower consumption and GDP...

Ercan Uysal

Bank Credit Weekly: Month-End Rebalancing Takes Risk-Off Before Take-Off

Short duration positioning may remain the best strategy over the next few weeks, absent a material inflection point in the upcoming non-farm...

Hank Calenti, CFA

Bank Credit Weekly: Momentum Slows as Conviction Is Lacking

Momentum behind the Treasury market started to slow. Greater conviction is likely to build over the weeks which follow as economic data is...

Hank Calenti, CFA

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