Turkish banks are following the lead of the country’s vibrant export sector and expanding into new regional markets, but their strategies vary widely.

As the oft-quoted mantra has it, Turkey is the bridge between East and West. That has always been a geographic truth, but a more detailed analysis might also note that the country is increasingly becoming an economic bridge between the established markets of the EU and a wide arc of emerging markets taking in south-eastern Europe, north Africa, the Middle East and the former Soviet Union.

Indeed, a closer look still might reveal that Turkey’s role in the region is changing rapidly and far from being a geographical accident, is the direct result of both global economic conditions and Turkish government policy.

The path to growth

Faced with a crisis in Turkey’s traditional European export markets, the authorities and businesses in Turkey have over the past few years begun aggressively courting new markets, and negotiating visa-free travel and trade agreements with countries across the region. This has been helped by still minority state-owned Turkish Airlines, which has opened a number of routes to newly visa-free destinations throughout Africa, eastern Europe, and the former Soviet Union countries and the Middle East – targeted squarely at the Turkish business sector.

Already the numbers speak for themselves. While the Turkish economy grew at a more than healthy 8.5% last year, the share of Turkey’s exports bound for traditional EU markets reached only 46% – a considerable drop on the 56% recorded as recently as 2004.

Not that Turkey has in any way turned its face away from Europe. The value of exports to the EU rose by more than 200% from 2004 to 2011. But quite simply, trade with emerging regional markets has heavily outstripped that growth rate over the same period. No surprise then that having survived the 2008 global crisis and the subsequent eurozone crisis relatively unscathed, a number of Turkish banks are now looking to capitalise on Turkey’s new-found economic strength by expanding operations into other countries in the region.

Aims and models vary, with some looking to new mergers and acquisitions either to follow their existing Turkish customer base into new markets, or to export successful domestic business models. Other banks that have shareholders from outside Turkey are looking to leverage those existing relationships to the benefit of their Turkish customer base.

Isbank’s new frontiers

With Isbank’s asset base growing by 23% in 2011 on the back of an aggressive expansion that saw it open 65 new branches, chief executive Adnan Bali points to the growing opportunities for the bank outside Turkey. He is especially focused on the new markets where the bank’s corporate clients are increasingly drawn to do business.

“We believe the very active policy of our government in diversifying trade relations will create big opportunities for Turkey,” he says, explaining that Isbank’s interests in expanding abroad directly reflect the growing needs of its Turkish corporate client base.

“We should be active in the same places where our customers are, and we already have a very extensive network in Europe,” he says, stressing that new overseas growth is going to come in those new markets where Turkish businesses are increasingly active. “That means the Middle East, north Africa, the Caucasuses and the Balkans – all these markets are very important for our strategy.”

Only 18 months ago that strategy saw Isbank add the 15 branches of Russia’s Bank Sofia to its overseas portfolio at a cost of $40m. “Especially over the past 10 years, we’ve seen a rapid growth in economic relations with Russia,” says Mr Bali, pointing to the success of Turkey’s ambitious construction sector in winning major Russian infrastructure contracts.

Other overseas initiatives are under way, with Isbank about to open new branches in Kosovan capital Pristina, Georgia’s main port of Batumi and Pakistani commercial centre Karachi – all three on the back of growing activity in these countries by Turkish businesses. “We’re also planning to open a branch in Baghdad, and some additional branches in Iraq depending on the growth of trade,” he says.

Arab springboard

Mr Bali says that Isbank has just opened a new representative office in the Egyptian capital Cairo, and is very interested in Azerbaijan. Both of these could be significant investments, given the size of Egypt’s population and the large hydrocarbons sector in Azerbaijan.

“We’ve had some contacts with parties in Baku and in Cairo – looking at a broad-based investment, not just a branch concept,” Mr Bali explains, declining to comment directly on claims in the Turkish media that Isbank has opened negotiations over the possible purchase of Piraeus Bank Egypt.

“We’re interested in all opportunities in that market, but any new investment should follow the same prudent strategy,” says Mr Bali. “On the one hand, we should know about the market, and on the other, we should be able to use our existing expertise in this market.”

One opportunity that has already presented itself is that of Libya. Isbank already owns a stake in A&T Bank – formerly ArabTurk Bank, a joint venture bank established back in the late 1970s between the Central Bank of Libya (62.37%), Turkey’s then state-owned Isbank (20.58%) and still state-owned Ziraat Bank (15.43%), and the Kuwait Investment Company (1.62%).

Established with the aim of helping Turkish companies do business in the Middle East and north Africa region, A&T Bank prospered during periods when Libya enjoyed good relations with its regional neighbours. Less than two years ago, however, Isbank took the decision to sell its stake in A&T – a decision that was somewhat overtaken by other events. The so-called Arab Spring led first to the seizure of A&T’s assets in Turkey by Turkey’s banking regulator BDDK under the internationally imposed sanctions, and subsequently to the ousting of Libyan dictator Muammar Gaddafi.

Now with the decision by BDDK in March this year to return control of A&T to its majority owners, the Libyan Foreign Bank – itself controlled by the Libyan Central Bank a whole new set of scenarios has emerged, causing Isbank to review its decision to sell. “It is a fast-moving situation; the statutes of the bank have been changed. We will evaluate it according to the new conditions and see if there is the potential to do good business together,” says Mr Bali.

Halk's organic growth

Also expanding overseas through acquisitions is Turkey’s still majority state-owned Halk Bank. Its aim is not only to support Halk’s existing Turkish customer base, but also to export the bank’s extensive expertise in small and medium-sized enterprise (SME) banking.

“We have had a good understanding of SME banking and expertise in that area for more than 70 years,” says Halk CEO Süleyman Aslan, who adds that the bank was created with a specific mission to serve SMEs in Turkey. It has worked extensively with the European Investment Bank, World Bank and Agence Francaise de Developpement, disbursing specialised SME loans in Turkey.

The model has enjoyed particular success. Halk Bank has a portfolio of legacy non-performing loans (NPLs), which it inherited from before Turkey’s 2001 banking crisis, amounting to just Tl550m ($305m), or 0.8% of the bank’s total loan book.

“Ignoring those bad loans, our NPL ratio is only 2%, below the sector norm of 2.8%, and we do not write off or sell on any bad debt. SMEs create few delinquency problems,” says Mr Aslan.

Management freedom

Although controlled by the state, with a 25% float on the Istanbul Stock Exchange, Halk still enjoys a large degree of autonomy. “Previously we were subject to public law and now we work under the same code as the non-state-owned banks,” says Mr Aslan, explaining that the bank’s executive management is free to manage the bank as it sees fit in line with board decisions. This includes the decision to export its successful approach to SME lending to other markets in the region.

“We have the models already and we think we can implement them very easily in other markets,” says Mr Aslan, explaining that in Turkey 37% of Halk’s loan portfolio is dedicated to SMEs compared with an industry average of only 24%.

Halk’s first dedicated overseas investment was completed in April 2011 when the bank completed the purchase of a 91.56% stake in Macedonia’s Bank Izvozna i Kreditna Banka (IK Banka) – now rebranded as Halk Banka Skopje. Halk is implementing plans to merge this new subsidiary with Ziraat Banka Skopje – the Macedonian subsidiary of another large state-owned Turkish bank, Ziraat Bank.

“This is the just the beginning. From now on we will be focusing more on the Balkans. Once the merger is completed by the end of this year, we will be looking for other opportunities in the region,” says Mr Aslan, adding that Halk is already looking at opening a representative office in the Serbian capital Belgrade.

“After that we can start looking at other areas: the Middle East, north Africa, and maybe some Asian countries. We have a road map showing which direction we can go,” he says, identifying north Africa as offering particularly strong potential following the regime changes of the Arab Spring.

Mr Aslan says the debt crises in Europe have encouraged Turkish businesses to look elsewhere, pointing to the success of Turkish construction companies working in particular in Libya and Egypt. “Activities came to an abrupt stop last year but now they are resuming again. These countries have plenty of resources which Turkey lacks – if our customers have projects there we will make sure we are close to them,” he says.

Akbank's cautious approach

However, while some Turkish banks are keen to expand abroad, others are more cautious. Akbank, which was ranked in 96th place in The Banker’s Top 500 Banking Brands ranking for 2012 (see February issue), the highest position among Turkey's banks, is one such institution where caution remains a by-word.

Akbank has long established operations in Germany and the Netherlands, offering mainly commercial and corporate banking but also with the facilities to take deposits. It also has a branch in Malta and a representative office in Dubai.

As CEO Hakan Binbasgil explains, Akbank’s German and Dutch operations are currently in the process of being merged with the aim of streamlining and increasing efficiency. However, this does not entirely rule out the possibility of Akbank opting to look for other overseas investment opportunities.

“As a leading bank, inorganic growth is not something we can ignore. But it has to be the right potential and we have to make sure that whatever we invest in offers the same growth potential compared to Turkey, which is not easy,” says Mr Binbasgil.

TEB's wide reach

As Turkish banks open overseas ventures to serve the needs of their customers active in other markets, Turk Ekonomi Bank (TEB) finds itself in a particularly fortunate position.

Majority-owned by France’s BNP Paribas and having last year emerged from a merger with the 100% BNP-owned Turkish operations of Fortis Bank, TEB customers now have access to BNP’s global network. Turkish companies have a particular interest in several markets where BNP is present, including Algeria, Egypt and Ukraine, says TEB CEO Varol Civil. The main benefit of the BNP system, explains BNP’s Turkish head and TEB deputy-chairman Jean-Paul Sabet, is the access it affords to the bank’s international network of platforms, reducing the need for a direct TEB presence.

“TEB sends people in-country when there is a real local specificity, but if you can work within an existing platform it is much more efficient,” he says.

Interestingly though, despite the access to BNP’s network, TEB does have its own highly successful subsidiary in Kosovo, established in 2008 before the merger with Fortis appeared on the horizon. “Kosovo is a small country, so it was a good test market for us to start in,” says Mr Civil, explaining that the bank turned in a profit after only three years and now, with 22 branches, is one of the largest banking operations in the country. 

Despite that success, he cautions that TEB’s main focus is in the Turkish domestic market. He says he takes note of “huge potential” for growth in the wider region, but his main aim at present is to grow efficiently in Turkey.


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