Akbank and Garanti Bank on Tuesday each received regulatory approval for the issuance of up to Eu1bn of mortgage covered bonds, paving the way for the first publicly sold international mortgage-backed issuance from the country, and a Garanti official said he believes the omens are good.

Akbank and Garanti applied for regulatory approval in January and July, respectively, while VakifBank has also applied to sell mortgage covered bonds.

The only previous covered bond issuance from Turkey has been of asset-backed covered bonds under Turkish legislation, with SME collateral. That issuance has also only been privately placed internationally, mainly with supranationals and development agencies.

The two banks now have the approvals necessary from the Capital Markets Board of Turkey (CMB) to embark upon international sales of their mortgage covered bonds. The approvals are for issuance in euros, Turkish lira or other currencies of up to Eu1bn over the course of a year.

“We will monitor the market throughout the course of next year and, depending on market conditions, will target a benchmark offering in the international markets for the residential mortgage covered bond programme,” said Batuhan Tufan, senior vice president, financial institutions at Garanti Bank in Istanbul.

He said that the bank sees covered bonds as a strategic instrument for funding its mortgage book.

“The mortgage market has been there in Turkey since 2000, but as a percentage of GDP it is very low,” said Tufan, “but it is developing and we believe that going forward covered bonds will be a viable option for funding mortgage lending.

“It is also a good instrument to diversify our funding sources.”

He said that 55%-60% of Turkish banks’ funding typically comes from deposits, but international funding has also grown gradually in recent years, in Garanti’s case from up to 8% in 2008 to around 12%-13%, comprising syndicated loans, Eurobonds and future flow securitisations, for example.

Tufan said that while covered bond investors might not have considered Turkish covered bonds in the past, they may do so now.

“Back then the covered bond market was only triple-A and Turkish banks didn’t have any investment grade ratings,” he said. “But since 2012, with upgrades from Fitch and then Moody’s, we now have two investment grade ratings (Baa3 from Moody’s and BBB- from Fitch), and if we can achieve ratings better than our country ceiling then the investor community could show interest. Alongside the downgrades of big European banks, covered bond investors could now buy single-A or double-A covered bonds for their portfolios.

“Also, the negative net supply and ECB purchase programme will have a spillover effect, even if Turkish covered bonds are not eligible for the ECB operations. So I believe the stars are aligned for this kind of issuance.”

The Turkish term for mortgage covered bond is İpotek Teminatlı Menkul Kıymet (ITMK).