Turkey’s state-controlled lender Vakifbank on March 21 launched bookbuilding to sell 5-year USD-denominated eurobonds, with the initial price guidance set at 8.375%-8.5%, unnamed bankers told Reuters on March 21.

The bookbuilding was expected to be completed on the same day, they added.

Citi and JP Morgan were acting as global co-ordinators for Vakif’s Reg S/144A benchmarks while ING, Mizuho, MUFG and SMBC Nikko were acting as book-runners, Global Capital reported on March 20.

Fitch Ratings rates Vakifbank at B+/Negative with its latest rating assessment recorded last October. Moody’s Investors Service rates the lender at B2/Negative with its latest recorded assessment dated March 9. Standard & Poor’s rates the bank at B+/Negative, with the latest recorded action last October.

With Japanese bookrunners drawing attention, it should also be noted that JCR Eurasia Credit Ratings rates Vakifbank at BBB-/Negative. Its latest assessment was made in August.

Earlier this month, Moody’s said that Turkey’s move to lower the interest rate cap on public institutions’ deposits at state-owned banks was credit positive and would reduce funding costs for lenders such as Ziraat Bank, Halkbank and Vakifbank.

Moody’s estimated that the three banks would save TRY 600mn ($110mn) in aggregate because of the lower rate cap, or 2% of the banks’ consolidated pre-tax profit for 2018.

Last month, however, the same rating agency warned that measures announced by the Turkish authorities to increase loan growth provision at state banks were credit negative for the lenders.

Moody’s said at the time that moves by the three public banks to offer some loans at below market rates or current inflation levels, as well as government requests that they sustain lending, “add unseasoned risk, and negatively affect margins.”

Outstanding portfolio of $2.2bn
Vakifbank currently has an outstanding eurobonds portfolio of $2.2bn. Its latest eurobond auction was held in January 2018 to sell $650mn worth of 5-year senior unsecured notes at a yield of 5.85% and a coupon rate of 5.75%, according to an earnings presentation published last month with the lender’s 2018 financials.

In June 2014, Vakifbank sold €500mn worth of eurobonds due in June this year at a yield of 3.65%. It sold $500mn of 5-year eurobonds at 5.614% in October 2016 and $500mn of 5-year eurobonds at 5.625% in May 2017.

The lender also has $2.33bn worth of outstanding syndicated loans with partial redemptions scheduled for April and November this year, while it has $1.4bn and TRY525mn worth of outstanding Tier II, and TRY5bn worth of Tier I notes.

Vakifbank issued €500mn worth of mortgage-backed bonds in 2016 due May 2021 with an interest rate of 2.375% while its total amount of outstanding lira denominated mortgage-backed bonds stands at TRY6bn, according to its February 2019 investor report on its covered bonds.      

On February 13, Vakifbank said in a bourse filing that it had sold an additional TRY1.12bn worth of 8-year mortgage covered bonds abroad. The public lender said in a previous bourse filing on January 22 that it had issued TRY396mn worth of 8-year mortgage covered bonds abroad, adding that total international funds obtained simultaneously reached TRY550mn together with the swaps under Treasury transactions. Vakifbank did not provide any details as to who bought the paper or at what cost.

Unemployment fund used to buy debt
In October, Turkish President Recep Tayyip Erdogan’s spokesman Ibrahim Kalin confirmed that the government used the country’s unemployment fund to buy a total of TRY10.9bn worth of subordinated debt from Vakifbank, Halkbank and Turk Eximbank.

In December, Turkiye Kalkinma Bankasi (Turkish Development Bank, or TKB) completed the issuance of TRY3.15bn (€521mn) worth of asset-backed paper based on mortgage-backed securities to be issued by Ziraat Bankasi, Halkbank and Vakifbank and Garanti. Vakifbank put forward its TRY13.2bn mortgage loans pool as collateral against its issuance of TRY1bn.

Political and geopolitical developments in Turkey, inflationary pressures, volatility in the banking sector, volatility in interest rates, the overdeveloped construction industry, government control exercised over Vakifbank that could create a conflict of interest for creditors, failures in credit risk assessments, Vakifbank’s rapid loan growth, the bank’s loan concentrations in certain industries and large customers, its exposure to exchange rate fluctuations and its high lending in government debt were listed among possible risk items for the lender in its base prospectus for its €3bn global mortgage-backed bonds programme published in November.

“In 2018, three public lenders [along with Vakifbank’s and Ziraat Bankasi’s Islamic lending units Vakif Katilim and Ziraat Katilim] carried almost the whole weight of the economy,” Vakifbank general manager Mehmet Emin Ozcan said on December 19, reported local business daily Dunya.

IIF: Markets want turn away from recent years
“On a quarter-on-quarter basis, Turkey's positive Q1 credit impulse—led by public banks—is larger than 2017. Short term this boosts GDP, but that's not necessarily positive for the Turkish Lira, as markets want less credit-dependent growth, i.e. a turn away from recent years,” Robin Brooks of the Institute of International Finance (IIF) said on March 20 in a tweet.

Vakifbank has $966mn of publicly known exposure to a loan provided for the new Istanbul Airport in 2015. The financing put into the government’s mega infrastructure projects is unclear. Bloomberg reported in May last year that the consortium building the mega airport had secured an additional €1bn loan.

Vakifbank shares were flat at TRY5.56 as of 15:00 local time on March 21 while the Istanbul stock exchange’s benchmark BIST-100 was down 0.3% to 103,001. The annual loss on Vakifbank shares stood at 28% versus the 13% y/y gain on the BIST-100.

Vakifbank is the seventh largest Borsa Istanbul listed lender with a market cap of TRY14bn. The General Directorate of Foundations controls a 43% stake in the lender while its pension fund has 16% and 41% is on free float.

Norway’s Government Pension Fund Global had a 0.04% stake in Vakifbank as of end-2018 and it had $47mn worth of securitised bonds issued by the lender, Norges Bank said on February 27. 

The lender’s shares were trading in the 3.60s on January 3 and tested the 5.65s as of March 19 while the BIST-100 was moving around the 87,000s on January 3 before reaching the 104,000s on January 29.

Seker Invest’s target price for Vakifbank shares stood at TRY4.91, according to the Istanbul-based brokerage house’s recommendation list published on March 21.

“The weight of restructured loans reached an all-time high of 3.1% in 4Q18 (YE17: 0.9%),” Sevgi Onur of Seker Invest said on February 14 in a research note on Vakifbank’s Q4 earnings.

In a research note entitled “Turkish Banks – Time to take a breather” published on February 19, Akin Tuzun of VTB Capital said that the Russian investment bank had revised its view on the Turkish banking sector to Neutral from Strong Buy. However, it kept Vakifbank at Buy while hiking the lender’s target price to TRY7 from the previous TRY5.3.

Top pick
Tuzun underlined that Vakifbank was VTB’s top pick. VTB is more upbeat than the street on Vakifbank and Yapi Kredi and less positive on Akbank and Garanti.

“Our preferred names are Vakifbank and Yapi Kredi. During the rally of Turkish banks since September, Vakifbank and Yapi Kredi lagged their peers mostly amid capital concerns. However, we believe the capital concerns are exaggerated. Both banks chose to raise AT1 (additional tier 1 capital) and have no imminent capital needs in the foreseeable future. Moreover, they trade at significant discounts to their historical average and to their peer group average. The 2019F P/BV and P/E discounts are around 25% on average. Also, both banks also have the highest NPL coverage at the moment,” Tuzun also said.

He added: “The foreign investors have been selling Turkish banks since April last year and the sell-off intensified during 3Q18 in tandem with the currency crisis in August... 4Q18 was mixed with foreign investors first coming back and then selling off again in December. However in January 2019 there has been a sharp come-back and the average foreign ownership of Turkish banks almost increased to the levels of precurrency crisis. In the longer-term context, the average foreign ownership currently at 66% has upside room to the peaks of 70 %levels, but still well above the average of the past 5-6 years. So, there is room for further positioning of foreign investors but this is limited. In terms of the individual banks, the most sold-off banks were Vakifbank and Yapi Kredi, but in January, they have also shown a sharp pick-up.”

“In 2018, the banking index (XBANK) fell 31% in local currency. Only Garanti and Akbank outperformed the banking index… as they are widely seen as more defensive and better capitalised. Vakifbank and Yapi Kredi were the worst performers. In 2019 YTD, Isbank, Yapi Kredi and Vakifbank started to perform reversing some of their underperformance in 2018,” according to Tuzun.

Capital concerns ‘easing’
VTB said it believed that with capital concerns easing, the re-rating of Vakifbank was likely to restart. In 2019, VTB expects lira interest rates to ease and thus those with a higher TRY mix in their funding would likely benefit more.

VTB forecasts Vakifbank’s net income will decline by 27% y/y in 2019 versus the 12% y/y rise to TRY4.15bn in 2018 while its lira loans will grow 12% y/y and FX loans will contract 3%, with an overall NPL ratio of 7.01%.

Vakifbank is the seventh largest lender in Turkey by asset size.