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Western EuropeFebruary 3 2004

Clean-up boosts investors’ trust

Erol Sabanci, chairman of Akbank, tells Stephen Timewell of his optimism on recent sector reforms and the political and economic outlook for Turkey.
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Q: Given the new government at the start of 2003, the problems concerning Iraq and Cyprus and the recent terrorist incidents in Istanbul, how do you view Turkey at the end of 2003?

A: I am very happy to say that the curiosity of the Turkish people and our foreign partners regarding the new government has turned out to be positive. The actions of the new government proved they are the right people to tackle the problems and the right people with whom to negotiate business; their perceived weaknesses turned out to be positives.

For many years we had lived with coalition governments; these coalitions with different types of mentality among the partners did not do a good job for the country in terms of creating stability and building reputation for both local and foreign investors. The election in late-2002 brought a new, young party into power and the old government looked like a curiously outdated act.

The new government had a majority in parliament and only one other opposition party was represented. This was good for the country.

They needed time to warm up for the job, but unfortunately the Iraq crisis came in March and the traditional problem of Cyprus was on the table to be solved.

I think the government did a good job in tackling the Iraq situation. There were some hard feelings with our US strategic partners, but events have proved that the Turkish government’s decisions were, in general, correct.

The government’s biggest problem has been coordinating the International Monetary Fund (IMF)/World Bank programmes and tackling the inflation rate. For many years Turkey had an inflation rate of more than 70%, bigger than all the rates of all the Organisation for Economic Change and Development (OECD) countries added together. The government set an inflation target of 20% for the end of the year and in December it showed it will be 18% to 19%, which is a very successful achievement.

Another major economic problem has been in the related area of interest rates as well as in the exchange rate. What has happened in these areas?

Due to high inflation we have very high interest rates both in nominal and real terms. The figures were 75% to 80% interest rates, but now compound interest rates are down to 28%. Coming from such high figures to 28% is a great success.

On foreign exchange, the rates were ‘drunk’ in 2002, reaching TL1.75m to the US dollar. At the end of December 2002 the rate was TL1.665m to the US dollar and in early December 2003 it was TL1.45m. At the ‘drunk’ level of TL1.665m, people could not make plans; they did not know where the rate was going. Was it going to reach TL2m or TL2.5m?

In 2003, with the good implementation of economic policy, the stability of the exchange rate has been established. Another important factor has been the performance of the stock exchange. The index at the end of 2002 was 10,000 and at the end of November 2003 it had increased to more than 16,000, which is an extraordinary performance.

How has the investment climate changed in relation to Turkey?

These improved performances and key economic factors bring additional comfort for investors and the people. But there are a lot of international problems that affect us, especially in terms of our privatisation activities. These international problems prevented us from reaching the government’s privatisation target for 2003 of $4bn; I think we will end up with only $1bn.

The main reason is that, because of their home problems, the international institutions are not that interested in coming here at this point and their appetite for Turkey is low. Therefore the Turkish government is also taking it slow. It is not selling at any price, it does not need to because at this stage it has enough ammunition.

What has happened to the banking system in recent years and where does the banking sector stand today?

In the banking system in the last two years there has been a very serious clean-up. This follows a period in which we had seen reckless issuing of new banking licences, with banks coming into operation without a proper study of the ownership and management having been made. Some of these banks brought a big headache to the system. This was in the area of the private banks and 22 of them have been cleaned up. We must give thanks to Kemal Dervis, minister of economics (in the previous government), who did a good job in cleaning up the banks.

The government-owned banks, which occupy a major position in the system, were very careless in terms of staffing. They were overloaded with staff and were also very careless in lending policies. Now the management of the three remaining government-owned banks (one was closed) are good professional teams, so the two headaches of overstaffing and poor lending have been sorted out.

The banks are in a much better position, especially with the establishment of the new supervision authority with the advice and support of the IMF. This new authority, similar to the UK’s Financial Services Authority (FSA), was established only 18 months ago; it is independent and this gives a lot of confidence to everyone in the market.

One big headache in the banking system remains the deposits in the Turkish banks, which, regardless of the amount, are fully insured by the government. The new government has promised that it will put a ceiling on the amount insured by July 2004, but we at Akbank believe that there should be no waiting and a ceiling (on the deposits insured) should be implemented immediately. The ceiling should be like the EU standards of e10,000 to e20,000 to give support to small depositors.

This system (of unrestricted deposit guarantees) created a big problem in the banking sector because this umbrella with its limitless guarantee enabled careless, poor quality banks to generate a lot of funds. This system gave them extraordinary funding possibilities. These banks offered higher rates, customers were insured and they put deposits in these lower-quality banks. The stronger banks had to follow suit to some extent and this brought unnecessarily higher rates.

How has Akbank performed throughout recent years and where is your bank positioned in the market?

In these recent clean-up years we have performed well, but if you look back over the past 25 years and ask which Turkish company, banking or non-banking, has made the highest profit you will find that Akbank has been the most profitable of all Turkish institutions in 18 of those 25 years and was in second place in the remaining seven years. This is a strong performance that has continued in the recent crisis years.

But don’t take my word for it. To add an independent element to this analysis, it is worth looking at our shareholders and stock exchangeposition. Of the 29% of Akbank held on free float (or outside of Sabanci Holdings), 70% of this is held by institutional investors. This gives us additional comfort. And of the 300 shares quoted on the Stock Exchange, Akbank is seen as the most valuable company, today it is worth $6.2bn.

To be the most valuable bank on the stock exchange is a great asset to us. And when you look at the emerging markets, Akbank is the most valuable bank. The reason for this is not luck, but 25 years of continuity, stability and good performance.

In terms of performance, for the first nine months of 2003, figures for the 10 banks listed on the Stock Exchange, show that Akbank accounts for 61% of the total pre-tax profit of the 10 banks, another important indicator.

How do you see the future for Akbank and Turkey?

We are in a good position for the expected new banking environment. Because of low inflation and low interest rates, margins will shrink and new markets will come into action, especially in consumer lending activities, credit card activities and, hopefully in three or four years’ time, mortgage activities. No mortgage markets have developed because of the high interest rates, but when inflation and interest rates come down further, lending on mortgages will become feasible. Once we are able to lend at 50 to 75 basis points per month, then normal people will be able to get mortgage loans and this will strengthen stability.

On Iraq, we cannot change what is done, but in hindsight it has been an advantage not to be involved militarily and our wide range of products and industries will prove to be a big advantage in dealing with a neighbouring country of 25 million with huge overall demands.

In summary, the outlook is good for Akbank and good for Turkey and we look forward to better years ahead, especially with important political developments due to take place in the EU and also in Cyprus.

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