“The banking system in Turkey is in good shape,” assured the state minister of economy Mehmet Simsek as the government launched an important initial public offering (IPO): a 15% stake in Turk Telekom, the nation’s fixed line phone company. Speaking at FT Global Events’ Turkey Capital Markets forum at the Istanbul Stock Exchange, Mr Simsek emphasised the banks’ strong capitalisation, with capital adequacy of 19% and good profitability with return on equity of 24%.
While stressing Turkey’s economic potential to overtake countries such as Canada and Italy and the 5.7% growth rate achieved in 2007, Mr Simsek did not duck the major challenges being faced, such as a possible $50bn current account deficit this year and high inflation, rising in March to 9.2%. He noted, however, that 60% of the higher inflation figure (6%) reflected higher energy and food prices.
Mr Simsek said that, although neither Turkey nor its banks had been directly affected by the US subprime crisis, it would be naïve to expect that the country could avoid the impact of a US economic slowdown. Turkey had to move up the value chain, making Turkish companies more valuable, and also focus on reducing tax rates and reducing payroll taxes, he said.
Litmus test
The Turk Telekom IPO, which is seen as an important litmus test of Turkey’s ability to continue to attract foreign direct investment, was launched in early May and was expected to raise about $2bn for the government. Critics claim that the shares were being put on sale “dirt cheap” and at much the same price as when 55% of Turk Telekom was sold to Saudi Oger for $6.6bn in 2005 in a block sale. Nevertheless, bankers believe that the IPO will be a success, with 65% of shares allocated to foreigners.
In the past two years, Turkey has attracted record volumes of foreign direct investment: $19.8bn in 2007 and $19.2bn in 2006. In the current environment, bankers suggest that the country will be hard pressed to reach those levels this year but, with the IPO of Turk Telekom, the government is pushing on with its privatisation plans. After selling 25% of Halkbank last year, raising $1.9bn, the government announced at the end of April that it may decide to sell its majority stake in Halkbank as a block or hold a second IPO to investors by the end of June. A final decision on the sale strategy has not been made yet.
Arzu Atik, project group head of the Privatisation Administration, said that as well as the IPOs of Petkim and Turk Telekom this year there was plenty more to come with the privatisation of the national lottery, various sugar factories, the sea ports, electricity distribution companies, the highways and roads. Privatisation revenues reached $4.7bn in 2007 and revenues totalled $20bn during the 2004 to 2007 period, but no forecasts were given for 2008.
Cautious perspective
Among some optimism at the forum, there was also some caution. Ersin Ozince, chairman of the Banks Association of Turkey and chief executive of Isbank, warned that taxes on banking and insurance transactions were a major impediment to the banking sector’s development. He said the tax code needed streamlining and banking laws needed to be harmonised with US laws and European legal regulations. The financial sector in Turkey was still small, accounting for 66% of gross domestic product in 2006, but had the potential to grow, he said.
Huseyin Erkan, chairman and CEO of the Istanbul Stock Exchange, was a little more bullish, noting that Turkish banks had no subprime losses, accounting and auditing standards in the Turkish financial sector were in accordance with international standards, and Turkish banks had high credit and asset quality. He said that the share of foreign investors in IPOs had been 66% on average during the past three years, with the IPO total reaching $5.9bn.
He added, asserting the credibility of Turkish regulation, that the country’s strict rules and new disclosure requirements went beyond international standards in many respects.
Political landscape
While the speakers painted a broad picture of Turkey’s complex financial situation, they avoided discussing the country’s current political dilemmas. In early April, Standard & Poor’s cut Turkey’s credit rating outlook from stable to negative after the country’s chief public prosecutor demanded the closure of the ruling Justice and Development Party (AKP). The prosecutor also wants 71 people, including Prime Minister Recep Tayyip Erdogan and President Abdullah Gul, banned from political life for five years.
Analysts believe that the constitutional court’s possible closure of the AKP threatens Turkey’s political stability and that banning the AKP from politics might lead to the kind of fractious coalition governments that helped spark the financial crisis in 2001. Speakers studiously avoided discussing the court case but the outcome is critical to Turkey’s future. Some suggest that in 2007 Turkey managed to be resilient enough to withstand similar political travails and still attracted $20bn in foreign direct investment and, therefore, it will be able to withstand another political onslaught.
But although confidence in the country’s resiliency may be buoyant, the current global financial environment and the weight of the constitutional court ruling put a heavy burden on the economy and its prospects. The outcome is expected to be known in a matter of months but in the meantime, uncertainty continues to grow and this political ‘elephant in the room’ cannot be ignored.
A QUIET REVOLUTION: FINANSBANK AND NATIONAL BANK OF GREECE
Bankers are rarely acknowledged for their political skills and achievements but in a globalised world, cross-border banking structures can often run well ahead of political structures because the business imperative demands it. After decades of hostilities between Greece and Turkey, ‘earthquake diplomacy’ in recent years has helped to ease tensions between the two former adversaries, although issues relating to Cyprus are still unresolved. Nevertheless, bankers have been able to see the financial opportunities of working together and have quietly overcome the inherent political hurdles.
In 2006 and 2007, two significant deals helped to break the financial ice between Greece and Turkey. First, Greece’s largest bank, National Bank of Greece (NBG), acquired a 46% stake in Turkey’s eighth largest bank, Finansbank, for $2.8bn in 2006. A year later, Greece’s third largest bank, EFG Eurobank, bought a 70% stake in Turkey’s smaller Tekfenbank for $182m. Among a host of acquisitions in Turkey by foreign banks at that time, these deals were essentially unremarkable except that they represented a major breakthrough in Greek/Turkish financial relations, which this year has taken another key step forward.
NBG, which had increased its stake in Finansbank to 85%, had also bought controlling stakes in five neighbouring countries. With United Bulgarian Bank (2000), Stopanska Banka in Macedonia (2000), Banca Romanescu in Romania (2003), Volvodianska Banka in Serbia (2006) and Finansbank, NBG aims to be the leading bank group in south-east Europe with its market of 125 million people. And this group of high-growth subsidiaries, including Turkey, now accounts for 37% of NBG’s earnings.
| As this group develops, the real personal integration within the group emerged in February. Dr Omer Aras, a co-founder of Finansbank during the late 1980s and now vice-chairman and chief executive, was appointed to the seven-member executive committee of NBG (the bank’s senior management group) and given responsibility for the south-east Europe region, including Turkey. |
For a Turk to be on the executive committee of Greece’s largest bank and in charge of its south-east Europe operations is a tremendous achievement and almost a revolution in the politics of the region. Just as Finansbank expanded by 101 branches in 2007 and aims to add another 60 to reach 475 branches in 2008, Dr Aras, a former academic, plans another 65 new branches in the south-east Europe group in 2008, and believes strong education and training will strengthen NBG Group performance in the region.
Dr Aras’s role at the helm of NBG’s operations in south-east Europe is not just an important political milestone for the region, but also emphasises how well financial initiatives by bankers can help to strengthen regional development.
