“We view Yapi Kredi as the weakest positioned on capital levels”, Goldman wrote last week, in a widely circulated note that painted a rather dour picture with regard to what ongoing lira weakness might mean for Turkish banks.
On Monday, trading in Yapi Kredi was halted after heavy selling apparently tripped the circuit breakers. Put simply: things aren’t looking great.
Again, there isn’t anything encouraging about that visual, nor is there anything encouraging about Goldman’s assessment, which, if you missed it last week and need a refresher, reads as follows:
The CET 1 ratio for Turkish banks under our coverage is around 13.2% on average on a bank-only basis and 12.2% on a consolidated basis, vs. 8%-9% fully-phased in requirement. We calculate that every 10% Lira depreciation impacts bank’s capital by c.50bp on average. Indeed, 14% Lira depreciation in 2Q18 took away around 80bp off bank’s CET 1 ratios. We estimate that the c.12% depreciation of the Turkish lira since June 30, 2018 would further reduce capital by c.60bp on average (pre internal capital generation and any management action).
At one point on Monday, the Borsa Istanbul Banks Index fell some 12% – the steepest one-day slide since 2006. It’s since recovered (a bit), but is still sitting near levels unseen since 2012. Apparently, the index is now trading at just 3X forward earnings.
Meanwhile, Bloomberg notes that nine bonds issued by Turkish banks in one of their joint indexes with Barclays were all trading below 80 cents on the dollar on Monday, versus just one a month ago.
The worst of the bunch: some 2026s issued by Yapi Kredi. They’ve lost 30 cents on the dollar in the past week alone.
That’s a disaster.
Meanwhile, Halkbank shares were crushed on Monday as well. You’ll recall that the bank is at the center of the diplomatic row between Washington and Ankara. Last week, a delegation dispatched to Washington ostensibly to mend ties refused to negotiate for detained pastor Andrew Brunson and instead used the meeting to talk about Halkbank, which has been living under the cloud of the Reza Zarrab drama for months on end.
According to reports, there was a deal in place for Brunson that would have called for Mehmet Hakan Atilla to be shipped back to Turkey from a U.S. jail. Atilla was convicted earlier this year for his role in a plot to avoid American sanctions on Iran and was sentenced to 32 months in prison in May. As part of the deal for Brunson, Halkbank would get off with a “lenient fine” for its role in the oil-for-gold scheme. Long story short, that fell apart.
A quick check on some of Halkbank’s 2020 dollar debt shows yields have blown out even further, hitting a laughable 28%.
I could go on, but do I really need to?