“Spillover”, “contagion”, “transmission”, etc. etc.
All the usual buzzwords have been bandied about this week as market participants scramble to assess the who, what, when, where and why when it comes to exposure to Turkey’s worsening currency crisis.
We know some European lenders are at risk. One of the catalysts for Friday’s bloodbath in the lira was a Financial Times article that suggested the ECB is concerned about BBVA, UniCredit and BNP Paribas in the context of Turkey. That tanked the euro. CDS spreads for BBVA and UniCredit hit their widest levels since the late May turmoil in Italy.
Opinions vary on just how much spillover risk there is for European financials. Generally speaking, analysts seem somewhat sanguine, but the Stoxx 600 Banks index has taken a fresh leg lower of late and is now basically in a bear market.
“In our view, the potential impact on BBVA is likely to be the largest, partly because BBVA fully consolidates Garanti, even though it owns just below 50% of the Turkish bank [and] a large proportion of its earnings come from Turkey, which contributed 18% of group operating profit in 1H18”, BofAML writes, in a note assessing the exposure of the three banks flagged in the FT post. They go on to say the following about UniCredit:
Unicredit owns about 41% of Yapi Kredi through a complex JV structure. Unlike Garanti, Yapi Kredi is equity accounted and as a result, its contribution to the group’s P&L is entirely through dividend income and less than 2% of revenues. We note Yapi Kredi has capital metrics below average, even after the recent rights issue. The book value of the Yapi Kredi investment was about €2.3bn at end-2017.
On Monday, amid the malaise in Turkish banks, we talked quite a bit about Yapi Kredi, noting that the lender’s 2026s have lost 30 cents on the dollar in the past week alone.
There’s also concern that the turmoil in Turkey could hit Gulf banks. Those interested in more color on that are encouraged to check out “Gulf Banks Dive As Fallout From Turkey’s Currency Crisis Spreads“. Suffice to say there’s contagion risk to a number of GCC banks including Kuwait Finance House, National Commercial Bank (in Saudi Arabia), and Qatar National Bank which is the largest stakeholder in Turkey’s QNB Finansbank.
And then there’s obviously the risk that Turkey’s woes create a crisis of confidence in the rest of the EM space, which is already laboring under the threat of an unapologetic Jerome Powell and a dollar that looks like it has no choice but to rise.
That said, Credit Suisse’s Mandy Xu was out on Tuesday noting that according to implied vol. on EEM, which is sitting right at its five-year average, traders aren’t pricing in much in the way of fear.
Meanwhile, Goldman is out with a new piece that takes a look at “a simple gauge of what cross-asset spillovers there may have been from the TRY last week.” Specifically, the bank “compares implied returns using previous 3-month TRY/USD betas with actual returns.” Here’s the visual documenting the results:
Basically, havens outperformed their implied returns vis-a-vis the lira last week, while risk underperformed. Goldman goes on to note that “previous 3m betas to TRY/USD remain low relative to history” despite the fact that the situation was escalating well before the Andrew Brunson drama served as gasoline on the fire.
“This might signal that investors had little concern about systemic risks prior to last week”, the bank concludes.
Ultimately, it’s still an open question: to spillover or not to spillover?
On the “bright” side, if Turkey does descend into outright chaos, it would given Jerome Powell some plausible deniability when it comes to taking a pause on rate hikes without being accused of pandering to Donald Trump and his express desire for a weaker dollar.