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Western EuropeOctober 2 2005

Criticism of foreign ownership grows

Economic stability has brought foreign banks streaming into Turkey to buy or partner its own banks, causing some locals to question the trend. Michael Kuser reports from Istanbul.
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Turkey’s new economic reality, including inflation that was down to single digits for the first time in more than 30 years, has led to declining interest rates that have fed a boom in retail banking. Consumer loans have nearly doubled in the past year as the Turkish public has become willing to borrow.

Single-party rule in Ankara and the government’s single-minded attention to fiscal discipline as part of economic reforms backed by the IMF have led to almost unprecedented macroeconomic stability in Turkey.

All this has not escaped the attention of foreign banks. They have been eyeing up Turkey for a long time but were always deterred from acquisitions by its high inflation and poorly regulated banking sector.

A liquidity crisis in December 2000 – and a much deeper financial crisis two months later – led the government to carry through a much needed reform of the banking sector. Ankara restructured state-owned banks, tightened reserve/asset ratios for commercial banks, resolved to dispose quickly of failed banks and created an independent regulatory agency, the BRSA.

Following the assumption of some $50bn in guaranteed deposits at banks taken over by the state, Turkish lawmakers capped the previously unlimited guarantee on deposits at NTL50,000 ($37,000) and separated the savings and deposits insurance fund (SDIF) from the regulatory agency.

Investment boom

These measures all bore fruit in 2005, bringing a wave of foreign bank investments into Turkey, either through partnerships or outright purchase. The latest investment came on August 25, when US heavyweight General Electric announced that its consumer finance unit was paying $1.8bn for a 25% stake in Garanti Bank, the country’s third-largest publicly-traded lender. The deal lifted the total valuation of Garanti to $6.6bn.

The deal-making started small in February, when BNP Paribas bought a 50% stake in mid-sized Turk Ekonomi Bankasi (TEB) for $216.8m, followed by UniCredit and its partner Koç Holding together buying a controlling interest in Yapi Kredi Bankasi (YKB) for $1.5bn. In August, Turkish bank regulators approved the purchase by UniCredit/Koçbank of 57.4% of YKB shares.

Belgium’s Fortis Bank agreed in April to buy Dis Ticaret Bankasi (Disbank) from leading conglomerate Dogan Group and, in August, finalised the payment of €987m for 89.34% of shares. In August, Dutch co-operative bank Rabobank also confirmed plans to acquire a majority interest in small Sekerbank (the bank is valued at $1.8bn).

Nationalist voices

Meanwhile, some leading Turkish businesspeople have expressed uneasiness at the march of foreign capital into the country’s financial services. Although it has become impossible to obstruct foreign investment in Turkey's banking sector, some control on foreign investors is needed to maintain a healthy balance in domestic banking strategy, says Sinan Aygun, head of Ankara’s chamber of commerce.

Domestic banks, and in particular state-owned banks, constitute a kind of safety valve for crises, says Mr Aygun. In times of crisis, foreign banks have “the effect of throwing fuel on a fire”, he says. Italy in particular is good at defending national interests in its banking sector, he says, crediting Italy’s central bank with having refused to sign off on ABN AMRO’s attempted takeover of Banca Antonveneta, “thereby preserving an important domestic source of agricultural credits” for Italian farmers. Turkey takes no such commonsense steps, says Mr Aygun.

Similar voices were raised against the sale of Turk Telekom to a Saudi firm that is paying $6.55bn for a controlling interest. A federation of consumer associations went to court in August to file an objection to the sale of the 55% stake in the national telecom company, saying that “the sale is not conducive to Turkey’s security, defence, independence and well being”, and that no public benefit would come from it.

Sector statistics

The latest figures released by the Turkish Banking Association show that from January to the end of June this year the number of banks in Turkey held steady at 48, of which 35 were commercial banks and 13 were non-depository institutions, such as development banks. Commercial banks traded on the Istanbul bourse accounted for 31% (NTL43.4bn) of the exchange’s total valuation as of June 30.

The total assets of Turkey’s private commercial banks at the end of first half 2005 stood at NTL180.5bn, up 28% from December 31. The total loans extended by private commercial banks at the same time were NTL76.2bn ($56bn), a rise of 42% from NTL61bn at the beginning of the year.

BNP-Ak Dresdner Bank was moved to the category of privately-owned commercial bank from its previous status as a foreign bank established in Turkey, and its name was changed to Ak Uluslararasi Bankasi (Ak International Bank). With the transfer of Disbank’s majority paid-in capital to Fortis, it switched status from privately-owned commercial bank to foreign bank.

According to the association, state banks continue to control about one-third of total banking assets, dominated by the largest bank in Turkey, TC Ziraat Bankasi. State-owned commercial banks have an average of 680 branches per bank compared with 199 branches for privately-owned commercial banks. Foreign banks average only 17 branches per bank but this figure does not include the Fortis takeover.

The number of branches decreased in the first half by 53 to 6053. State-owned banks shut 110 branches – mostly Halk Bank closing the branches of Pamukbank that overlapped its own network. Pamukbank had been taken over by the SDIF and was merged with Halk Bank last year after no private buyer could be found.

In contrast, privately-owned commercial banks opened 57 new branches in the first six months, finally recovering to near the high-water mark of 2000. Non-depository banks opened one new branch in the period and foreign banks closed one.

Turkey’s banking sector now employs about 130,000 people; it hired 2724 new workers in the first half of 2005. Commercial banks employ 97% of the sector’s staff: 30% at state-owned banks and 61% at privately-owned institutions. Broadly speaking, state banks cut staff while the private sector expanded its payroll. Privately-owned commercial banks now employ the same number as in 1998, even though dozens of banks dropped out of the system during restructuring.

Health of the system

In August, Turkey’s central bank advised banks to be careful with their open foreign currency positions, making this the lead statement in its financial stability report on the second quarter. The report pointed out the risks of liquidity problems and the increasing costs inherent in insufficient hedging against a change in the value of the underlying asset or currency.

The report said that increasing foreign direct investment (FDI) flows into the country should help to stabilise the economy. The central bank also noted the private sector’s growing use of foreign bank loans, however, and advised firms to evaluate their foreign exchange (FX) risks carefully.

The financial stability report said that the share of foreign capital in the Turkish banking sector had reached 6.7% as of May, noting that this level would increase with the completion of several purchase agreements. Foreign banks will hold an estimated 14% share of the sector by end-2005 following the UniCredit, Fortis and GE deals.

As Turkish banks restructured themselves after the crisis they also developed a programme to help their corporate customers restructure their bank debt, launching the so-called Istanbul Approach ( the Framework Agreement on Financial Restructuring Program) in June 2002. This August, the banks association recommended extending the three-year programme, saying that financial assistance provided under the programme to 35 groups and 219 large companies had helped many of the businesses to avoid more serious difficulties.

Loans made under the Istanbul approach totalled more than $6bn, with more than 90% of the special financing being extended to large enterprises. Most of these groups and holding companies, large and small, had found themselves caught in a classic cash squeeze over their FX-denominated liabilities following the collapse of the lira in February 2001.

The financial stability report also called for further measures to assist corporate debt restructuring, including special tax discounts.

The banks association also reported an improvement in the profitability ratios of the whole sector following restructuring, with state banks in particular showing marked gains. The report compared net profits of state-owned banks and private banks in 2001 and last year and found that state bank profits nearly tripled in the period and privately-owned bank profits climbed by about 20%.

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