Turkish banks are seeking to broaden their funding sources and could turn “sooner rather than later” to mortgage backed covered bonds to help fund a property boom in the country, said S&P yesterday (Monday), with the funding instrument also attractive as a means of meeting regulatory requirements.

Şekerbank last year issued covered bonds, but these were backed by loans to small and medium enterprises (SME) and took place under asset backed covered bond (ACB) legislation, and not under legislation dedicated to mortgage backed covered bonds – Ipotek Teminatli Menkul Kiymetler (ITMK) – that has been in place since 2007.

(See related articles further down the right-hand column for previous coverage of developments in Turkey.)

However, Standard & Poor’s said that as their mortgage portfolios grow Turkish banks will want to tap into longer term funding instruments such as covered bonds to fund these assets.

It noted that residential mortgage lending has experienced strong growth, increasing from almost 0% of GDP in 2004 to 5.5% in 2010, although it is still very small compared with an average of 52.4% in the euro-zone. At 81%, the homeownership rate in Turkey is higher than in any other euro-zone country, according to the latest Hypostat figures.

Most existing residential mortgage lending stock is non-bank financed, said S&P, but changing demographics are likely to lead to growing demand for mortgages that banks will need to find ways to meet.

Turkish banks have so far issued few asset-backed securities, relying instead on senior unsecured or deposit funding, according to S&P.

“However, compared with those for mortgages, maturities for customer deposits are typically shorter, making it harder for banks to meet the requirements of the Basel III framework,” it said. “Therefore, we believe that banks with growing mortgage portfolios will favour more long term funding options such as covered bonds.”

The rating agency said that it would be highly likely to assign any mortgage backed covered bonds issued by Turkish banks under the relevant legislation to programme Category 3 because the country’s history with covered bonds is limited, the mortgage market as a percentage of GDP is very small, and there is no mortgage covered bond market.

“Covered bonds therefore have so far failed to become an integral product in the provision of housing finance,” said S&P. “This would, in our view, most likely suggest that the motivation among market participants, the government, and regulators to come up with a market solution to address a programme’s ALMM (asset-liability mismatch) risk, and to support financial stability, would not be strong.”