Yapı Kredi will consider launching its first euro benchmark covered bond next year, according to the Turkish bank’s head of debt capital markets, as investors’ price expectations are currently “too high”, and she hopes that euro area accounts will in the longer term warm to Turkish risk.

Yapı ve Kredi Bankası (Yapı Kredi) established a Eu1bn (TL3.4bn) mortgage-backed covered bond programme last month, and on 24 October received a provisional Baa1 covered bond rating from Moody’s for a first series of euro-denominated issuance. The Turkish bank has previously issued SME-backed covered bonds out of another programme, although these have been privately placed.

VakıfBank sold the first and to date only euro-denominated benchmark covered bond out of Turkey, a Eu500m five year mortgage-backed issue, in April.

Speaking at the 20th Central European Covered Bond Conference – organised by HypoVereinsbank and the Association of German Pfandbrief Banks (vdp) – in Munich on Friday, Tules Akıncı, head of debt capital markets at Yapı Kredi, said the Turkish issuer will consider selling its first public euro benchmark covered bond next year.

“For 2017 we are talking to a number of International Financial Institutions (IFIs) to do a bilateral transaction,” she said. “For a market transaction, depending on the market price, of course we will consider it.

“We have the programme ready, and we want to put it into use.”

Akıncı said, however, that investors’ price expectations are too high for Yapı Kredi to enter the market at present.

“For us, the most important thing when issuing covered bonds is the yield and the cost of issuing,” she said. “At the moment, investors are still asking for too high a yield.

“Covered bonds are a bit expensive these days, but hopefully going forward investors will become more comfortable with the Turkish credits and will maybe ask for lower yields.”

Akıncı described investors’ hesitancy to invest in Turkish paper as one of the biggest obstacles to banks’ covered bond issuance, which she attributed to covered bond investors being more comfortable with investing in triple-A rated notes.

Moody’s rates Turkish covered bond programmes Baa1, capped at Turkey’s local currency ceiling, which was lowered in September. Akıncı said she believes the programmes deserve higher ratings.

“I would like to underline the fact that mortgages are a very strong product in Turkey, because culturally home ownership is very important,” she said. “You may not pay back your auto loans, you may fall behind paying your credit card payments, but with your mortgage payments, you always pay.”

Akıncı said this is reflected in the Turkish banking sector’s average non-performing loan (NPL) ratio of 0.5%.

She added that Yapı Kredi intends to join the euro market partly because it has a need for euro liquidity to meet the financing needs of Turkish companies that do business internationally.

“But the more important reason is diversification, as Turkey has in the past heavily depended only on emerging market investors,” she added. “Turkey has a bit of difficulty working with more conservative euro area investors.

“Hopefully over time, when these investors start buying Turkish covered bonds, they will feel more comfortable with Turkish risk and start investing in other products as well.”