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  • Turkish distressed debt market review

    www.pwc.at

    PwC Portfolio Advisory Group

    March 2017

    The landscape is about to change

    www.pwc.com

  • PwC

    Contents

    1. Macroeconomic environment 5

    2. Financial sector overview 7

    3. Supply-side view on NPLs 9

    4. Demand-side view on NPLs 11

    Appendix 13

    2Turkish distressed debt market review

    Foreword

    The Turkish distressed asset market isset to open up with increasing investorinterest from both regional andinternational names.

    Expecting a surge in distressedvolumes in 2017, banks are looking foralternative resolution strategies todispose of their non-performing stock,both in the retail and corporate space.

    Further, local asset managementcompanies (AMCs) are in the need ofoutside funding and signal greatwillingness to team up withinternational players to realisemutually beneficial deals.

    We hope you will enjoy discoveringthe opportunities of the Turkishdistressed asset market through thisreport and wish you pleasant reading.

    PwC

    Bernhard EngelLeader Financial Services DealsPartner, PwC Europebernhard.engel@at.pwc.com

    Serkan TarmurFinancial Services DealsPartner, PwC Europeserkan.tarmur@tr.pwc.com

  • PwC

    In a nutshell

    3

    Turkish economy on its way to overcoming recentchallenges

    The dynamic and diverse Turkish economy, the worlds 17th largest, proved its resilience in spite of recent events, delivering continued growth. It is expected to stay the course in the upcoming years backed by solid macroeconomic fundamentals.

    Expansive financial sector in search of a new profitability model

    Well capitalized Turkish banks have delivered solid returns during challenging years. Yet, an expected deterioration in asset quality is foreseen to put pressure on their profitability, with most banks reconsidering their strategies to maintain prior years earnings.

    NPL stock anticipated to rise

    The countrys low NPL ratio to date was driven by repeated restructuring practices coupled with (mostly retail unsecured) regular debt sales. However, NPL volume growth is expected to accelerate in the upcoming year(s) driven by macro dynamics. On the upside, state banks are foreseen to be allowed to perform NPL sales, contributing to the easing of system pressure.

    Distressed debt opportunities for early movers

    A relatively young distressed asset management industry with significant upside opportunities. Local AMCs willing to team up with foreign investors to put themselves in a competitive position for the upcoming expected surge in NPL deal activity.

    Turkish distressed debt market review

  • PwC4

    Macroeconomic environment

    01

    Turkish distressed debt market review

    Growing economy with favorable demographics

    Supportive monetary policy with built-in resilience to severe shocks

    Political stability expected in the second half of 2017 and thereafter

  • PwC

    9.2%8.8%

    2.1%

    4.2%

    3.0%

    4.0%

    3.3%3.0% 3.2%

    3.3% 3.5% 3.5%

    2.1%1.7% -0.4%

    0.3%1.6%

    2.3%1.9% 1.7% 1.8% 1.8% 1.8% 1.7%

    -2.0%

    0.0%

    2.0%

    4.0%

    6.0%

    8.0%

    10.0%

    2010 2012 2014 2016 2018 2020

    Turkey EU

    5

    Strong macroeconomic fundamentalsYoung and growing populationPolitical focus back on economic agenda

    Country highlights (YE 2016)

    Population: 78.9 million

    Democracy: Secular democratic state

    Currency: Turkish Lira (TL)

    GDP: USD 820-830 billion (7th in Europe)

    GDP per capita: USD 11,000

    Key economic sectors: Services, manufacturing,

    agriculture and financial services

    Ratings: Moodys (Ba1; stable), S&Ps (BB; negative),

    Fitch (BB+; stable)

    Source: PwC analysis, IMF, Turkstat, Rating Agencies

    GDP by sector of activity (YE 2016)

    Growing economy Turkey is the worlds 17th largesteconomy and projected to be ranked 12th by 2050, nextto UK, Russia and France. Despite security concerns andpolitical turmoil, GDP growth for 2017 is expectedto be ca. 3.0%, still higher than the EUs forecastedgrowth of ca. 1.7%. This upward trend is expected toaccelerate by 2018 with an average annual growth of ca.3.5% for the following few years.

    Favorable demographics Turkey, an OECD and G20member, is one of the largest middle incomecountries with a young and growing population.Ca. 56% of the 79m population is under the age of 35.Further, the countrys population is forecasted to growconsiderably (close to 90m) by 2030.

    Diverse economy with robust labor supply Thelarge and dynamic economy is relatively diverseacross industries. Services, manufacturing andagriculture constitute more than 50% of the total GDP.Turkey has a robust and educated labor supply tosupport the economy (unemployment rate of ca. 10% inOctober 2016).

    Strong fiscal discipline The governments balancesheet is still resilient despite the challenging events inrecent years. The public debt to GDP ratio was reducedfrom 72% in 2002 to a mere 27% in 2016, which issubstantially lower than in many European countries.

    Supportive monetary policy Notwithstanding ca. 8%inflation in 2016 (above target), monetary policyloosened during the year and expansionary measureswere taken for household credits such asextensions of term limits on credit cards andconsumer loans. Lower global oil prices helped toweaken price inflation. Yet, recent depreciation of theLira is likely to continue to put pressure on inflation (ca.8.2% in 2017E).

    Resilient to severe shocks The failed coup attempt inJuly, geopolitical uncertainty, and the followingdowngrades in ratings have challenged Turkeythroughout 2016. Yet, the countrys economy provedits resilience by delivering moderate growth andmaintaining its solid macroeconomic fundamentals.

    Turkish Sovereign Wealth Fund The newlyestablished SWF is likely to be supportive forTurkeys macro economy. It aims to contribute 1.5%to the annual GDP growth, particularly by funding large-scale projects.

    Political agenda and economy A public referendumin April 2017 regarding constitutional amendments islikely to lead to political stability in the second halfof 2017 and thereafter. Hence, political focus will beput onto Turkeys economic agenda.

    Source: PwC analysis, Turkstat, Sep 2016

    GDP growth at constant prices (in %)

    Source: PwC analysis, IMF, Oct 2016

    Agriculture13%

    Manufacturing17%

    Construction9%

    Services23%

    Information & Communication

    3%

    Financial Services4%

    Real Estate Activities

    9%

    Other 23%

    Turkish distressed debt market review

  • PwC6

    Financial sector overview

    02

    Turkish distressed debt market review

    Second largest banking system in emerging Europewith remarkable loan growth over the past years

    Top 10 banks dominate the market

    Regulatory supportive measures to help withstandmacro turbulence

  • PwC

    172 182

    257 279

    338 357

    440 467 467

    212 238

    301 285 328 322

    373 392 392

    81%76%

    85%

    98%103%

    111%118% 119% 119%

    0%

    20%

    40%

    60%

    80%

    100%

    120%

    140%

    -

    100

    200

    300

    400

    500

    600

    700

    2008 2009 2010 2011 2012 2013 2014 2015 2016

    Loans Deposits LDR %

    7

    Substantial loan volume growth in the past 10 yearsTop 10 banks account for 85% of the marketFinancial sector profitability challenged

    by provisioning costs

    Loans and deposits in banking (EUR bn)Second largest banking system (after Russia) inemerging Europe, even though still underpenetrated(loans to GDP ratio of ca. 58%; EU: ca. 101%). TheTurkish banking industry dominates thefinancial sector with total assets of ca. EUR736bn. It is comprised by 32 deposit banks, 5 Islamic(participation) banks, 13 development and investmentbanks.

    Remarkable loan growth The total volume of loansreached ca. EUR 467bn in 2016, with a CAGR of ca.25% since 2008. Recent developments have slightlyslowed down growth to ca. 17% in 2016 (forecastedgrowth of ca. 10-15% in 2017).

    Highly liquid with solid deposit base Deposits,being the largest source of funding, account for ca. 53%of total liabilities in the banking sector. Still, Turkishbanks are particularly reliant on short-termexternal funding.

    Well capitalized with strong profitability Thebanking industry is generally well capitalised with anaverage CAR of ca. 15.6% which offers a good bufferto absorb unexpected losses. Turkish banks profitabilityis still higher than in Western Europe with an averageRoE of ca. 14%. This will, however, be challenged by anexpected deterioration in asset quality and a moderategrowth forecast.

    Dominance of top banks The sector is highlyconcentrated with the top five and top ten banksowning ca. 58% and ca. 85% of the total bankingsectors assets, respectively. Among the top fivebanks, the biggest lender is a state-owned bank, namelyZiraat, while the other four banks are private. Halkbankand Vakifbank are the main successors of the top fivefollowed by a group of players such as Finansbank,Denizbank and TEB, with market shares between 3% and4%.

    Regulatory support To support banks in withstandingmacro challenges, BRSA lowered the provisioningon unsecured retail loans and simultaneouslyincreased the term limits for consumer loansand credit cards, encouraging banks to supporthousehold lending. A new Credit Guarantee Fund hasbeen established to stimulate lending to SMEs.

    Challenges ahead Higher funding costs and risingexpenses for provisions due to a rise in NPLs willlikely squeeze margins in the banking sector anddrive banks to consider their current business modelsand strategies.

    Source: PwC analysis, BRSA

    Top five banks by loan volume (YE 2016)

    Key banking system indicators YE 2016 (%)

    CapitalAdequacy Ratio

    NPL Ratio

    Cost-to-Income Ratio

    Return on Equity

    Source: PwC analysis, Turkish Banking Association, ECB

    1

    Bank Total loans

    EUR 64bn

    2 EUR 56bn

    3 EUR 51bn

    4 EUR 48bn

    5 EUR 45bn

    1.8%

    NPL ratio

    2.4%

    2.8%

    4.9%

    2.6%

    Source: PwC analysis, Turkish Banking Association

    15.6%

    3.2%

    44.0%

    14.0%

    Turkey EU

    17.2%

    6.5%

    64.2%

    5.4%

    Turkish distressed debt market review

  • PwC8

    Supply-side view on NPLs

    03

    Turkish distressed debt market review

    Substantial distressed debt stock already presentwith further NPL stock increase expected

    Regular sales of non-performing portfolios ongoingwhile secured portfolios to be brought back to market

    High seller appetite for new buyer market entrantswith state banks expected to be allowed to sell NPLs soon

  • PwC

    7

    10 10 8

    10 10

    13 15 16

    3.7%

    5.3%

    3.7%

    2.7%2.9% 2.8% 2.9%

    3.1% 3.2%

    0%

    1%

    2%

    3%

    4%

    5%

    6%

    7%

    -

    5

    10

    15

    20

    25

    30

    35

    40

    45

    50

    2008 2009 2010 2011 2012 2013 2014 2015 2016

    NPL NPL ratio

    9

    NPL stock increase expectedRegular sales of retail unsecured to continue,

    with corporate to start and accelerateState-owned banks expected to be allowed to sell soon

    NPL stock and ratio in banking (EUR bn)

    NPLs in banking by main players YE 2016 (EUR bn)

    Restructured loans in banking (EUR bn)

    Source: PwC analysis, Banking Regulation and Supervision Authority

    Source: PwC analysis, Turkish Banking Association

    NPL ratio

    4.9%

    4.2%

    2.8%

    3.2%

    2.4%

    2.6%

    1.8%

    5.8%

    Source: PwC analysis, Banking Regulation and Supervision Authority

    Substantial distressed debt stock alreadypresent In banking alone, the total NPL stock sumsup to ca. EUR 15.7bn (YE 2016), split between:

    Private banks ca. EUR 11.6bn (74%)

    State banks ca. EUR 3.2bn (21%)

    Participation banks ca. EUR 0.9bn (5%)

    The distribution across corporate (30%), SME(37%) and retail (33%) segments is fairly equal,with each making up roughly a third of the total stock.

    Further stock increase expected NPL volume hasincreased by ca. 22% YoY 2016, to ca. EUR15.7bn, mainly driven by growth in the SME andcorporate segments. The rising trend in NPL volumesis expected to continue with a forecasted NPL ratioof ca. 4% by eoy 2017 due to 1) easing regulatory curbson retail lending, 2) recent TL depreciation by ca. 20% in2016 hurting companies with FX loans and 3) moderateeconomic growth mostly impacting SMEs.

    NPL ratio remains relatively low, with systemratios between 2.7% and 3.2% from 2011 to 2016.This is essentially caused by three factors: 1) privatebanks regularly selling their (mostly retail unsecured)NPLs, 2) a cultural aversion towards being indebted,and 3) a distinctive restructuring practice in Turkey.

    Eased regulation to restructure corporate loansin selected industries. Accordingly, banks had theflexibility to restructure corporate loans inshipping, tourism and energy twice until YE 2016.

    Regular sales of non-performing portfoliosongoing Banks have sold ca. EUR 8bn NPLs since2008, with the peak reached in 2014. Historically, mostNPL sales were largely corporate secured portfolios.Nowadays, the market mostly observes unsecuredretail deals, which are frequently disposed of by privatebanks on an ongoing basis.

    Secured portfolios to be brought back to marketA number of secured (corporate and retail) portfolios areexpected to be brought to market in 2017 and after,driven by banks looking for alternative resolutionsolutions to their internal processes.

    High seller appetite for new buyer marketentrants Seller banks are interested in expanding therange of potential buyers, given the high concentrationin the market.

    State banks expected to be allowed to sell NPLssoon A new legislation has been published in January2017 authorising the BRSA to resolve the principles ofstate banks receivable sales to AMCs. While state banksare currently awaiting BRSA guidance, it is expected thattheir portfolios will be traded in the market soon. 1.0

    1.1

    1.2

    1.3

    1.4

    1.4

    1.7

    2.3

    Finansbank

    Ziraat

    Akbank

    Bankas

    Halkbank

    Garanti

    Vakfbank

    Yap Kredi

    Turkish distressed debt market review

    2 2 3

    7

    9 10

    12

    14

    0.2%

    1.0%0.9% 0.9%

    2.2%2.4% 2.4%

    2.7%

    3.1%

    0%

    1%

    1%

    2%

    2%

    3%

    3%

    4%

    4%

    5%

    -

    5

    10

    15

    20

    25

    30

    2008 2009 2010 2011 2012 2013 2014 2015 2016

    Restructured loans in % of total loans

  • PwC10

    Demand-side view on NPLs

    04

    Turkish distressed debt market review

    13 licensed AMCs, with top two covering ca. 60% of themarket

    Buyer appetite driven by existing stock, expected volumeincrease and state banks coming to market

    New AMCs encouraged by local regulator

  • PwC

    Established in 2005

    Owned by Fiba Holding, which is a well known, diversified conglomerate

    Merged with Giriim Varlk in 2015

    Gven has acquired a total loan portfolio of ca. EUR 3.5bn by paying a total price of ca. EUR 530m since 2007

    Established in 2008

    Main shareholder is a local reputable PE firm

    EBRD became the minority shareholder investing TL100m in 2011

    Turkasset became the legal successor after the merger with LBT in 2014

    Turkasset acquired +100 portfolios with total amount of ca. EUR 2.5bn from 35 different institutions

    Established in 2011

    Owned by Altinbas Group

    Purchased portfolios from several banks and financial institutions, including factoring and leasing companies

    Final acquired ca. EUR 520m for a total of ca. EUR 50m from different financial institutions in 2014 and 2015

    Financial information of key AMCs YE 2015 (in EUR m)

    11

    Rising international investor appetiteBuyer market dominated by two

    largest AMCs

    Source: Audited financial reports 2015, PwC analysis

    13 active local AMCs licensed by BRSA with a totalportfolio of ca. EUR 7.2bn of claims. The two largestAMCs, Gven and Turkasset, dominate the market withca. 60% market share. Three new local playersentered the market in 2016.

    License from BRSA required for buying an...

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