by Asli Kandemir and Onur Ant
Turkish policy makers are desperate to get the Middle East’s largest economy out of the rut it slipped into after last year’s failed coup. They’d love to see more lending by banks, but lenders are struggling with maxed-out balance sheets, with loan-to-deposit ratios at historic highs. Now the government is preparing what it sees as a way around that problem: a plan to allow banks to bundle outstanding loans into securities and sell them. That could free up half a trillion dollars on bank balance sheets. It could also mean fat profits for investors abroad — if they have the stomach for whatever risks might go along with heady yields.
- What do we know about the securitization plan?
Deputy Minister Nurettin Canikli, whose portfolio includes the nation’s banking regulator BDDK, told Bloomberg last week that legislation would soon be announced. Details of the plan are scarce, but Canikli said it would not rule out loans made in foreign currency or restrict them to those of certain maturities. Selling significant chunks of loan portfolios would lower the banking sector’s current loan-to-deposit ratio of 125 percent, enabling banks to extend more credit. As an example of the kind of debt that might be sold, Canikli said that investors abroad had already expressed interest in buying state lender Ziraat’s share in a $2.3 billion financing package raised for a new bridge in Istanbul.
- How tight is credit in Turkey?
Even before last year’s coup attempt, the annual rate of expansion was well below 15 percent, which the central bank considers the optimal level to spur growth without bringing foreign imbalances to unsustainable levels. But credit expansion dipped even further to around 5 percent later last year, prompting the government to intervene with incentives to boost lending which has since then accelerated to over 21 percent, according to central bank data. Allowing banks to issue loan-backed securities would give a further boost to credit growth as lenders would be able to take the underlying assets off their balance sheet — something they couldn’t do previously.
- What do banks have to do?
Pick the loans to sell and do the work of bundling them. The newly created securities will be called Bank Certificates, Canikli said. Bankers said that any securities that would be marketed to foreign investors would have to be evaluated by a credit rating firm first.
- Who would buy them?
The hope is that foreign investors would, and the big lure would be high yields. Outstanding project finance loans in foreign currencies may attract investors as they would offer up to 500 basis points return on top of Libor and Euribor, much higher than deposit interest rates in euros and dollars, said Hakan Ates, the chief executive of Denizbank, Turkey’s seventh-largest listed lender by assets. The $100 billion in project finance loans that banks now hold might be the most attractive for foreign investors. The majority are for energy and infrastructure projects whose incomes are sometimes entirely guaranteed by the state. Potential buyers for lira-denominated loan packages would likely be Turkey-based pension funds that are currently sitting on 63 billion liras ($17.5 billion) of cash, with another 100 billion liras expected over the next decade from a mandatory pension scheme. The funds are already suffering from a mismatch between the maturity of their liabilities and assets and desperately need longer-term bonds to manage their commitments to pensioners.
- Do bankers think this is a good idea?
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Some do and some don’t. Ersin Ozince, chairman of Isbank, the nation’s largest listed lender by assets, is doubtful of demand. Banks might struggle to find buyers for these securities unless Turkey really attains political and economic stability. “We’ve always wanted securitization,” Ozince said in an interview. “The reason it’s not being done is because it’s thought that there wouldn’t be enough demand. What’s important is stability in the country. If we have that, of course the demand will also come.” Denizbank’s Ates is more hopeful. State guarantees for infrastructure projects make securities backed by project finance loans an easy sell, he said. “Who wouldn’t buy such an instrument?” he asked, adding that once the legislation’s passed, “I will sell them on the phone immediately.”
- What are the risks?
Most critics are currently focusing on whether there is enough demand for such securities. Another possible risk down the road is how these securities might perform in the event of a slowdown. The packaging and selling of existing loans to investors is partly what led to problems a decade ago in much of the developed world, led by the U.S., ultimately causing one of the most severe financial crises of modern times.