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Western EuropeSeptember 28 2010

A smooth transition

Tolga Egemen, Garanti's executive vice-presidentThe lack of fuss surrounding GE Money's sale of its 21% share of Turkey's Garanti Bank is a testament to the bank's strong performance and the trust engendered by the country's banking regulator. Writer David O'Byrne
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A smooth transition

GE Money's (GE's) announcement earlier this year that it planned to sell its 21% stake in Turkey's Garanti Bank surprised no one. Globally, the US conglomerate has been divesting its banking assets and, having paid only $1.5bn for a 25.5% stake in Garanti in 2005, GE stands to make a healthy profit on its stake in the bank now that its market capitalisation is about $21bn.

Moreover, according to Garanti's executive vice-president, Tolga Egemen, it is equally unsurprising that neither the bank's market cap nor its management strategy have been affected by the uncertainty over the future of GE's stake.

"Being responsible for the bank's international business, I talk with our correspondent banks all the time, but nobody has yet asked me what's happening," says Mr Egemen, a lack of curiosity he puts down to the level of trust in Turkey's banking regulator.

"Everyone knows that the regulator will not approve a new shareholder that will not be appreciated by the financial community. And everyone expects Garanti to continue its good performance," he says. That performance has seen Garanti outstrip its peers to generate a 25% return on equity - the highest of any Turkish bank and no mean feat on a capital adequacy ratio of 19%.

Options for GE stake

The main question still hanging over the sale of GE's 21% stake is whether it can be realised in a single block or whether GE will be forced to sell smaller blocks of between 2% and 10% to a larger number of strategic investors. According to Mr Egemen, there has been interest in both options, although the number of potential buyers for the full GE stake is limited due to the bank's high market cap and the small number of companies with $4.4bn to spare.

A further brake on the possible sale of GE's stake in a single block is the question of whether any such buyer would want to operate the bank as a joint venture with Turkey's Dogus Corporation, which holds 30% of Garanti, having bought 4.5% from GE three years ago. The remaining 49% of Garanti Bank is floated on the Istanbul and New York stock exchanges.

To make such a joint venture work, the buyer "would need to buy GE's 21%, then convince Dogus to sell it a further 4.5% and share the management rights", says Mr Egemen.

Although unable to confirm any of the rumours reported in the Turkish media over who might be interested in buying GE's stake in Garanti, Mr Egemen does foresee a swift end to the uncertainty.

"Personally, I think the sale will be concluded by the end of the year. It doesn't have to be, but it probably will be," he says, adding that, whatever happens, he does not foresee any major changes in Garanti's strategy.

"GE has been a very pleasant shareholder to work with in that it allowed the professional management to run the bank," he says. "The strategy is obvious - you have to grow, increase market share and increase profitability. Whoever buys GE's stake won't be paying billions of dollars to make the bank grow less."

Growth assured

Given Turkey's impressive economic record, the resilience of its banking sector and its comparatively low penetration into consumer markets, that growth seems assured for Garanti.

Thanks to prudent fiscal policies, Turkey's public sector debt is only 40% of gross domestic product (GDP), well within the 60% limit set in the Maastricht Treaty for EU member states, while prudent restructuring of the banking sector over the past eight years has resulted in a sector with minimum capital adequacy of 12% (50% higher than that specified in the Basel II international banking regulations), a ratio of bank loans to GDP of 36%, and of mortgages to GDP of only 4%.

"The [Turkish] banks have benefited from the stable economic environment and the economy has benefited from the stable banking sector. Turkey appears almost unique in terms of its potential dynamism - growing faster than the rest of the world and with the potential for further leveraging," says Mr Egemen.

It is an environment that has enabled Garanti to become one of Turkey's biggest lenders, the country's most profitable bank and the second biggest private bank in terms of assets, and has enabled it to dominate Turkey's nascent mortgage market.

"Garanti's real success is to be the biggest by not being the cheapest. All the rating agency reports agree that we are differentiated from the competition by having the best technology, the best people and the best customer relationships," says Mr Egemen.

These are three strengths that will doubtless prove useful over the next five years, when analysts and banks alike predict that increasing competition in Turkey will hit margins, leading in turn to pressure for a spate of mergers and acquisitions, aimed at boosting efficiency.

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