The Strategic Implications of Garanti Bankasi's Dollar-Denominated Subordinated Notes for Turkish Banking Sector Stability

The issuance of dollar-denominated subordinated notes by Garanti Bankasi in 2025 underscores a strategic recalibration of its capital structure, with broader implications for the stability of Turkey's banking sector. As one of the country's largest financial institutions, Garanti BBVA's recent $500 million Tier 2 subordinated bond -its first such transaction in 2025-reflects both regulatory imperatives under Basel III and a calculated effort to diversify funding sources amid macroeconomic volatility. This move, coupled with a $750 million Tier 2 issuance in November 2024 and an early redemption of TRY 750 million in Tier 2 debt in February 2025, highlights the bank's proactive approach to managing capital adequacy and liquidity risk; the early redemption was covered in an Investing.com report.

Capital Structure and Regulatory Compliance

Under Basel III, Tier 2 capital-comprising subordinated debt and hybrid instruments-serves as a supplementary buffer to Tier 1 capital, which includes common equity and retained earnings. While Tier 1 remains the primary shock absorber, Tier 2 instruments are permitted up to 2% of risk-weighted assets, according to Accounting Insights. Garanti BBVA's 2025 capital adequacy ratio of 16.2%, reported by BBVA, well above the regulatory minimum of 12.16%, suggests a robust foundation. However, the bank's reliance on Tier 2 instruments, such as its recent dollar-denominated notes, introduces liquidity and interest rate risks. For instance, the June 2025 bond's 10.5-year maturity and 8.25% coupon (reduced from an initial 8.75%), as noted in the BBVA announcement, indicate a trade-off between long-term capital stability and the cost of debt.

The Turkish banking sector's adherence to Basel III standards, confirmed during its 2024–2025 Regulatory Consistency Assessment Programme (RCAP) review, is detailed by Türkiye Today, and provides a supportive backdrop. Yet, the sector's heavy use of subordinated debt-particularly in emerging markets-raises questions about resilience during stress scenarios. Garanti's early redemption of Tier 2 bonds in 2025, approved by the Banking Regulation and Supervision Agency (BRSA), signals a dynamic approach to capital optimization, balancing regulatory requirements with strategic flexibility.

Foreign Investor Appetite and Market Confidence

Garanti BBVA's subordinated notes have attracted significant foreign investor interest, with the June 2025 issuance drawing an order book of $2 billion-four times the final amount. This demand, despite Turkey's macroeconomic challenges, including inflation and currency volatility, underscores confidence in the bank's creditworthiness and the broader sector's stability. Foreign investors, particularly institutional buyers in Europe and the Middle East, view these instruments as a hedge against geopolitical risks in more developed markets.

The success of these issuances aligns with broader trends in emerging market banking. A Fitch report notes that Turkish banks have maintained resilient investor appetite for subordinated debt, including Additional Tier 1 (AT1) instruments, post-2024 regulatory adjustments. This suggests that Garanti's strategy resonates with global capital flows seeking higher yields in emerging markets, provided there is a credible regulatory framework.

Risk and Liquidity Considerations

While Garanti's capital structure appears robust, the liquidity profile of Tier 2 instruments warrants scrutiny. Subordinated debt is inherently less liquid than Tier 1 capital, and its value can fluctuate with interest rates and credit spreads. For example, the 10.5-year maturity of the June 2025 bond, coupled with a call option after five and a half years as described in the initial BBVA announcement, offers the bank flexibility to refinance at favorable rates but exposes investors to reinvestment risk.

Moreover, the Turkish banking sector's reliance on foreign currency-denominated debt-exemplified by Garanti's dollar and euro bonds-introduces FX risk. A depreciation of the Turkish lira could increase debt servicing costs, though Garanti's diversified funding base and strong asset quality mitigate this concern, according to Garanti's investor relations. The bank's 2025 first-quarter results, which highlight a loan portfolio of TL 2.95 trillion and 28 million customers, are available in its annual reports and further reinforce its ability to absorb shocks.

Broader Sector Implications

Garanti's actions reflect a sector-wide trend of capital strengthening. The Turkish banking sector's post-2024 capital buffers, bolstered by regulatory forbearance on foreign currency risk-weighted assets and adjusted security portfolios, are discussed in a BBVA Research note, and have enabled institutions to maintain high capital adequacy ratios. However, the concentration of Tier 2 instruments in the sector's capital structure could amplify vulnerabilities during periods of stress, particularly if liquidity dries up or credit ratings are downgraded.

For foreign investors, Garanti's subordinated notes represent a high-yield opportunity in an emerging market context. The 8.25% coupon on the June 2025 bond, compared to global benchmarks, offers attractive returns, albeit with elevated credit risk. This dynamic is likely to persist as long as Turkey's regulatory environment remains stable and the central bank continues to signal inflation control.

Conclusion

Garanti Bankasi's issuance of dollar-denominated subordinated notes exemplifies a strategic balance between regulatory compliance, capital optimization, and investor demand. While Tier 2 instruments enhance short- to medium-term stability, their long-term risks-particularly liquidity and FX exposure-require careful management. For the Turkish banking sector, Garanti's success in accessing international capital markets signals resilience, but broader systemic stability will depend on maintaining this delicate equilibrium amid evolving global and domestic challenges.