Banks on the run: odds shorten on Turkey losing both Unicredit and HSBC

Banks on the run: odds shorten on Turkey losing both Unicredit and HSBC
A Yapi Kredi branch in the Sirkeci quarter of Istanbul. Unicredit is increasingly treating its investment in the lender as a bet that didn't come off.
By bne IntelliNews February 5, 2020

Italy’s biggest bank by assets UniCredit on February 5 moved one step closer to possibly exiting Turkey by announcing the placement of a 12% stake in Turkish bank Yapi Kredi. The move followed its November decision to dissolve a joint venture with Turkish conglomerate Koc Holding that controlled the lender.

Foreign banks have had their fingers burnt by Turkey’s economic turmoil of the past two years, and UniCredit is not the only big global banking and finance services group eyeing the exit. Reportedly concerned by the country’s volatile currency and economic outlook, HSBC is considering disposing of or downsizing its Turkey business. February 5, meanwhile, brought a report from Reuters quoting a source with knowledge of the matter as saying that Citigroup, one of the top foreign banks in Turkey, transferred at least two foreign exchange and rates traders to London from Istanbul last year due to the uncertainty. Finally, Spanish banking group BBVA in mid-January put up for sale Garanti Bank Romania, a bank that it holds via its near-50% stake in Garanti Bank Turkey.

Unicredit’s unwinding of the 50:50 Koc Financial Services JV, which controlled 82% of third largest Turkish bank Yapi Kredi, gave it a direct 31.9% stake in the bank. That will fall to 20% after the $500mn share placement, expected to be completed on February 6.

The economic recession in Turkey last year which followed 2018’s summer run on the lira forced UniCredit to write down its Yapi Kredi asset by €846mn. UniCredit said in December it planned to book a €400mn ($440mn) charge in the fourth quarter of 2019 in relation to the unwinding of the Koc accord. To get out of the JV, Unicredit not only sold at a 12% discount to the previous closing price, it agreed to pay €260mn euros in break fees and local taxes. Also under the terms of the deal with Koc, Unicredit is limited to just one public sale over two years. The bank will hope investors will reward Unicredit with a richer valuation now that it is less exposed to the fragile Turkish economy.

HSBC has operated in Turkey since 1990. It has already downscaled its presence in Turkey from some 315 branches and around 6,000 staff in 2013 to around 80 branches and 2,000 staff as of September last year, according to data from the Banks Association of Turkey.

Volatility in the lira—which lost 36% of its value against the dollar across 2018 and 2019—and Turkey’s wider economic problems have hit HSBC’s returns. It flagged rising expected loan losses in the country in its 2018 annual report. The lender previously attempted to sell its business in Turkey in 2015. Dutch lender ING was among the interested parties, but the sale never occurred. HSBC instead pursued branch closures and job cuts. That path saw it swing from losses in 2014 and 2015 to a profit of Turkish lira (TRY) 456mn ($77.02mn) in the first nine months of 2019.

Foreign investors steering clear

Foreign investors, often unnerved by the unpredictable and tight controls placed on the financial markets by the Erdogan regime, have increasingly steered clear of Turkey. They have, for instance, largely avoided Turkey’s sovereign bonds, despite a once-in-a-decade rally that has occurred since May. Given how outsiders have been abandoning the Turkish government debt market in droves, the Central Bank of the Republic of Turkey (CBRT) has launched its biggest government debt buybacks in over a decade, helping to fill the void left by foreigners, Bloomberg wrote on February 4.

Goldman Sachs has declined to comment to media that have approached it for comment about losses apparently suffered by it and other foreign firms hit in early 2019 when Turkey, set for local elections, directed its banks to withhold liquidity from the key London lira offshore swap market in order to defend the currency. The lira swap market, a source of funding for Turkish mortgages, has since collapsed. Several foreign investors spoken to by Reuters say they no longer trust it.

Since the offshore swaps shutdown, which left investment banks scrambling to cover positions, foreigners have dumped Turkish debt. Data from Turkey’s bank regulator shows they owned only 8.3% of the debt in mid-January. That compared with nearly 17% in early 2018.

As Turkish President Recep Tayyip Erdogan drives hard for a fast economic rebound fuelled by cheaper money, ratings agencies and analysts have become increasingly jittery about a big acceleration in lending in an already hugely indebted economy, along with a widening budget deficit risk. Dark clouds are once again gathering on the horizon and could thicken rapidly should any of Turkey’s numerous geopolitical rows suddenly flare up and bring about meaningful sanctions.

State banks have since March tapped up to $32bn of central bank reserves in buying up lira, a Reuters analysis of the central bank’s balance sheet shows. The state banks then re-deposit lira at the central bank, officials and bankers with knowledge of this loop told the news agency, with one official at a state lender saying Turkey’s banks are now staffed by traders at all hours, part of what some call a “national team” ready to respond to any lira weakness. Nevertheless, the lira lost 11% last year.

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