MS: EM Corporate Credit Strategy Comment: Russia and Turkey Banking Sector Update

§         Russian and Turkish banks are the most prolific issuers in hard currency bond markets in CEE and CIS. Turkish banks’ bond issuance has ballooned, with US$9 billion printed last year versus the current outstanding amount of US$14 billion, and close to US$2 billion issued this year.   §         Turkish banks have outperformed Russian banks since January 2012.  Spreads tightened by an average 300bp since January 2012, outperforming Russian banks’ spreads by 40bp. Valuations are now quite tight despite the recent 30bp sell-off, with Turkish banks on average at z+290bp versus Russian banks at z+327bp.   §         Fundamentals offer different perspectives. In general, key credit metrics look more solid in Turkey. At the same time, high-quality quasi-sovereign banks dominate the Russian banking sector.   §         Strategy implications: We remain market-weight on EM banks in our sector allocation. We maintain a preference for senior bonds in both countries. We add two new trades in Turkey: Buy AKBNK ’18 and add HALKBK ’17 as a pick-up over the sovereign. We reiterate our preference for quasi-sovereign banks in Russia and short-dated paper of the private sector banks. Russian and Turkish banks are the most prolific issuers in hard currency bond markets in CEE and CIS. The combined assets of the two sectors represent 58% of the banking universe in this region. Of note, the Russian banking sector is more consolidated than Turkey’s – Sberbank has a 27% leading market share of assets, while in Turkey the largest bank controls only 13% of market share. While Russian banks have been regular issuers in the hard currency bond markets, Turkey is a relative newcomer. Turkish banks have issued close to US$11 billion hard-currency bonds since January 2012, nearly tripling the US$4 billion outstanding back in 2011. In January 2013 alone, Turkish banks printed close to US$2 billion, and this excludes the first TRY-denominated Eurobond from Akbank, equivalent to US$600 million (see Exhibit 1). Of further note, Russia and Turkey financials bond supply has seen an increase in subordinated bonds and perps, especially in Russia (see Russian Banks – Squeezing in Subs, November 29, 2012).

morgan stanley