Turkey's Türkiye Halk Bankası AŞ, or Halkbank, is struggling to borrow on international money markets following a U.S. indictment, which will further weaken profitability as it expands lending as part of government efforts to kickstart the shrinking economy.
Halkbank, founded in the 1930s to fund small businesses, faces fraud charges related to its alleged participation in a multibillion-dollar scheme to evade U.S. sanctions on Iran. U.S. prosecutors claim Halkbank used front companies in Iran, Turkey and the United Arab Emirates to get around prohibitions against Iran accessing the U.S. financial system.
They say the proceeds from Iran's sale of oil and gas to Turkey's national energy companies, among others, were deposited at Halkbank.
The bank, 51%-owned by the Turkish government, denied it violated sanctions and said that, as it has no branches or employees in the U.S., the case amounts to judicial overreach.
Halkbank said in its nine-month financial results that it had put no money aside to account for its U.S. troubles, and analysts have been wary of commenting about the potential size of a potential fine due to what they say is a lack of public information.
"The bank thinks the case is politically motivated and there isn't any wrongdoing in its banking operations, and so hasn't taken provisions," said Recep Demir, an analyst at Istanbul's Garanti Securities.
But the case is causing problems for the bank and the wider financial system in Turkey.
Former Halkbank executive Mehmet Hakan Atilla served a brief prison sentence in the U.S. after being convicted of helping Iran evade U.S. sanctions. Following his recent appointment as CEO of Turkey's main stock exchange, the European Bank for Reconstruction and Development said it would sell its 10% stake in the bourse, Reuters reported.
Against this backdrop, Italian bank UniCredit SpA is weighing options for reducing its exposure to Istanbul-based bank Yapı ve Kredi Bankası AŞ.
Turkish banks do semi-annual rollovers of syndicated foreign-currency loan facilities. The March rollover was close to 100%, but in September this fell to around 80% due to slumping demand for foreign-currency loans. Halkbank could not do a rollover at all, analysts said.
Consequently, it is funding itself through domestic deposits and the central bank's short-term money market, analysts said.
"International banks don't want to lend through international syndications for fear of there being potential problems," said Demir.
Futhermore, two five-year eurobonds totaling about $1 billion will mature in 2020.
"There will be a squeeze in funding — we don't know how Halkbank will close the gap," said Demir. "Maybe its entire wholesale funding will be in lira, but it's an expensive form of funding."
Halkbank is offering higher rates on dollar-denominated accounts than rival domestic banks in order to attract more dollar deposits — its foreign exchange deposits have increased by 42% in dollar terms over the past year.
"They need some [forex] liquidity and can't get it from the U.S., so are trying to collect dollars on the open market," said Duygun Kutucu, an analyst at Unlu & Co in Istanbul.
This will affect the bank's profitability, but there are also larger factors affecting that, such as a government push for state-owned banks to lend more to a contracting economy, Kutucu said.
"This is weighing on their margins right now — deposit accounts were paying 15% interest in September, while state banks were lending at 13% to 14%, so they're running below their funding costs," he said.
SMEs, energy market
Nonperforming loan ratios at Turkey's banks have soared over the past year. Halkbank's NPLs as a proportion of loans at amortized cost increased to more than 5% in the third quarter, although that it still lower than at many peers, data compiled by S&P Global Market Intelligence shows.
The banking sector's NPL ratio from lending to SMEs surged to 8.5% at September-end, from 5.2% a year earlier, while that of Halkbank was 5.2% at the end of September. And troubles in the energy sector have led to worsening asset quality.
"Turkey's energy sector has had a problematic year — companies borrowed in dollars and the lira has fallen significantly, so they've faced difficulties in repaying their debts to banks," said Sevgi Onur, a bank analyst at Istanbul's Seker Invest. "Every bank has reported rising NPLs from the energy and construction sectors since the start of 2019."
Garanti's Demir warned that Halkbank's provisioning level needs to rise because the bank is very active in construction, energy and infrastructure loans, which are the riskiest segments in terms of asset quality.
Its cost of risk rose to 148 basis points in the quarter, up from 106 basis points a year ago. But private banks' average cost of risk is nearly 250 basis points, according to Garanti.