With a green light from the EU and the successful economic reform programme of the past three years, particularly bank reform, Turkey is climbing up the ranks of attractive destination countries for foreign capital, including investments in the country’s banks.
At the beginning of this year, foreigners had control of 7% of Turkish banking – the largest foreign financial institution arising from HSBC Bank’s 2001 purchase of Demirbank – but that percentage is changing fast. So far this year:
The latest bank sold is Dis Ticaret Bankasi (Disbank), ranked number seven and owned by leading conglomerate Dogan Group. As The Banker went to press, Belguim’s Fortis put in the winning bid.
Turkish banks this year have been reporting strong profits. Earnings of the leader of the big four private banks, IsBank, are up 50% in 2004 on the previous year at YTL648m ($473.7m). And most banks are expanding their branch networks and loan books at the same time.
Retail attraction
As most Turkish banks are based in Istanbul, perhaps it is natural that they are moving into retail with a vengeance, shying away from the declining yields and volumes of government borrowing. Denizbank, owned by export powerhouse Zorlu Holding, aims to be among the top five banks in Turkey up from eighth position and has been growing fast, with 2004 net profit up 60% at $103m on assets of $6.0bn. The bank, with 200 branches, reported a decline in exposure to government debt at the end of 2004 to 18.5% of assets from 21.2% a year earlier.
Every sector in Turkey has at one time or another trumpeted itself as the “locomotive” for the whole economy and bankers would be justified in taking pride of place this year. Sustainable growth depends on a sound banking infrastructure.
Now that Turkey has cleaned up its banking act and the effects have had time to kick in, is it mere coincidence that the country just turned in its best gross national product (GNP) performance – 9.9% growth in 2004 – in nearly 40 years? Additional legislation is being prepared for parliament that will clarify regulatory responsibility for bank inspection, disposal of non-financial equity assets and the handling of troubled banks. A team from the IMF visited Ankara and Istanbul in early April to confirm the draft legislation. The continuing bank reform effort is a key part of the IMF’s new $10bn loan agreement with Turkey.
Following the money
The biggest financial services deal in Turkey this year has come from Italy. UniCredito, together with its Turkish partner Koç Holding, is in the process of completing the purchase of a 57% controlling interest in YKB, the fourth of Turkey’s big four private banks, for about $1.5bn. The acquisition gives the Italian financial services giant a strong foothold in the country.
Now, the Italians are focused on seeing that happen, says Carlo Vivaldi, chief financial officer at Koç Financial Services, the unit responsible for the deal. He says that 50% of the deal will qualify as foreign direct investment, along with half of whatever Koç Financial Services acquires in a tender.
“This deal shows how interesting Turkey is now,” says Mr Vivaldi. “Many banks were after the YKB deal, which confirms the opportunity now in Turkey. The more such deals happen, the more foreign investors will come, especially since the EU decision in December.”
The new appeal
Part of Turkey’s new appeal for foreign banks may be the profitable combination of strong IT infrastructure, strong economic growth and retail operations that follow the bancassurance model, in which banks not only take deposits, but also sell insurance, for example.
The Turkish financial services sector is advanced compared with other European markets, according to Onur Umut, managing director and board member of Finansbank. The flagship and main business of Fiba Holding is unusual among Turkish banks in that its business outside Turkey is almost equal to its business in Turkey, with total assets exceeding $8bn.
“Eastern Europe is one thing – still a cash-driven market – but even if you look at Europe in general, you will see that in terms of new technology and new products they’re behind us,” says Mr Umut.
Europe has a limited credit card market, with 80%-90% of plastic being debit cards or overdraft facilities. Real credit cards mainly exist in the UK and US markets, therefore Finansbank is not launching a credit card until it can see whether the income level of consumers will feed the demand. “The instalment card and all that entails does not exist in many of these markets. For one thing, the technology is complicated, with too many merchants, applications, internet banking and call centres,” says Mr Umut. “Even some bankers find it hard to understand.”
Moving obstacles
Obstacles still exist in attracting foreign banks to invest in Turkey. Most important may be the slow-moving legal process – it can take years to pursue a court case. The current government has been working hard on legal reforms but is struggling with a heritage of centuries, so the necessary change in mentality will take time.
An example of how strong the resistance to change can be comes from an investment banker who last year helped to organise the project financing for a Russian-Turkish joint venture to purchase the country’s main oil refinery, Tupras. Talking about the judicial decision that reversed the sale, he says that the “mysterious forces against the deal seemed to have had expert advice in writing their legal brief of opposition, but the state had no-one in court to argue the merits of the deal”.
Turning point
A cultural turning point for some banks came with the 1999 signing of a letter of intent with the IMF. While the government failed to uphold its part of the deal, some bank managers read the signs and foresaw declining yields on government securities and smaller spreads between public and private borrowing. Those who foresaw the possible danger of getting caught short in the liquidity squeeze of 2000 or failing in the crisis of 2001 had to decide then between short-term greed – milking T-bills – and preparing for the ensuing battle for retail market share.
Risk factors
It may be that Turks tend to overestimate the value of their assets while foreigners tend to overestimate the risks. “Their risk estimates are based on reality,” says Tayfun Bayazit, chairman of Disbank. “One or two notches’ increase to investment grade [by rating agencies] would bring Turkey more to investors’ attention.”
Has the government lost its momentum on reforms? Not according to Mr Bayazit. He believes that the reforms are not easy. Of tax, social security and bank reforms, the latter is probably the easiest but “you cannot just pass it through parliament and say we’re done”, he says.
These major structural reforms have a lot of repercussions in the economy and among top players. The delays may have led people to believe that the whole process was in danger. But Mr Bayazit says recent activity has given him confidence.
The difficulty of the reforms is partly why they are so important. “The sooner you move, the sooner Turkey discerns itself from the crowd. Any divergence from that is a danger and that’s why I say the government is not derailed, which we will see more as all the reforms pass and the letter of intent [with the IMF] is signed,” says Mr Bayazit.
While unable to disclose details of talks with an unnamed international bank on the possibility of a strategic partnership or share sale, Mr Bayazit gives his opinion on the attraction of Turkey’s banking sector for foreign investors. The ratio of bank assets to GNP is 75% in Turkey versus 150%-300% times GNP in developed markets. There is great potential, right there.
“If we have 5% growth a year for five years we can double our asset base, which is a major chance for large European retailers,” he says.
The TEB-BNP Paribas deal and the Koç-Unicredito acquisition of YKB prove that much.
