Last year was a record-breaking one for Turkey’s leading banks. Net profits for the four largest privately owned banks (which account for about 40% of assets) were up 15% at Tl9.44bn ($6.14bn) and return-on-equity was close to or more than 20% for many of the top players. With gross domestic product (GDP) rising 8.9%, growth prospects have come from all segments, says Tolga Egemen, executive vice-president at Garanti Bank, the third largest in the country by capital.
“A few years ago, we thought that our retail and SME [small and medium-sized enterprises] segments would grow faster than corporate lending, because we already had a big market share in corporate loans. But corporate lending has also grown quickly, thanks to high foreign direct investment, rising private equity activity and big project finance needs,” he adds.
However, the past two years have also provided echoes of the 1990s, when the largest banks engaged in relatively limited customer-lending activity, and focused on trading portfolios of government securities, because a large budget deficit had squeezed out private sector credit. Today, government debt is only 43% of gross domestic product (GDP), and most banks are primarily engaged in lending activity. Akbank’s loans are 48% of total assets and this is the lowest ratio among the top four privately owned banks (the other three are Garanti, Isbank and Yapi Kredi Bank).
Rate cycle turning
Even so, securities holdings have earned a tidy profit for banks over the past two years, especially on inflation-indexed bonds. With inflation falling from 10% at the end of 2008 to 6.4% at the end of 2010, these bonds recorded significant capital appreciation, returning about 18% for the banks over the course of 2010.
Inflation continued to fall in the first quarter of 2011, but has almost certainly reached the bottom of the cycle. The central bank has begun tightening monetary policy, initially via sharp hikes in deposit reserve requirement ratios that will push up the cost of funding and cut net interest margins for banks (see Turkey monetary policy article in this issue). Those banks with the lowest loan-to-deposit (LTD) ratios and larger securities portfolios will be able to grow customer loans simply by liquidating some of their bond holdings to free up cash.
Among the four largest banks, Isbank’s LTD ratio is just 73% (based on 2010 results) and securities account for about 35% of its assets, while Akbank’s LTD is 80% and securities are 42% of total assets. But for Yapi Kredi and second-tier banks such as Finansbank or Türk Ekonomi Bank (TEB), the LTD is about 100% or higher, and securities are only about 20% of assets.
Demanding customers
In practice, however, most of the privately owned banks have very high capital adequacy ratios, in excess of 16% by Basel definitions, so they have the financial means to grow despite tightening monetary policy. As playing the government bond market becomes less attractive, this is stimulating a battle for loan market share. In anticipation of lower margins and profitability, the bank component of the Istanbul Stock Exchange index fell by around 30% in dollar terms from November 2010 to March 2011.
The effect of higher oil prices on the Turkish economy will be beyond banks’ control. But their competitive position lies in their own hands, and the customer service culture of each bank, together with cost control, will become the main differentiators. In the retail market in particular, this is no easy task according to Omer Aras, CEO of Finansbank.
“Clients are quite opportunistic. The older generation are more likely to stick to their banks, but the younger customers are part of the communications age and are well aware of the offers that every bank is running,” he says.
Lifelong loyalty
Finansbank’s strategy revolves around the concept of the lifelong customer, to reduce attrition rates. Initiatives include providing non-bank services, such as taxi hire and dry cleaning for credit card customers via the bank’s call centres, and supermarket-style loyalty functions on credit cards that enable the bank to track purchases and offer discounts on related products and services.
The bank also launched a dedicated multifunction card for medical doctors with a specific set of appropriate features, which has attracted 50,000 out of an estimated 120,000 qualified doctors in Turkey. And for SMEs, the bank offers dynamic credit lines, providing a larger overdraft to those companies that use more of the bank’s other products.
“It is not about just giving auto loans or mortgages, it is giving bundles of products so that people will be lifetime clients. You have to catch a client and offer the right services – those who are cash-rich want better investment advice, not just 25 basis points more on their deposit account. So it all comes back to having very strong customer analytics. The management of our retail and SME banking is very data-heavy because we want to understand the customer base that we have,” says Mr Aras.
Focus on fees
Other mid-tier banks have traditionally carved out a niche in particular geographical regions or segments. Şekerbank, originally the sugar co-operative bank founded in 1953, retains a strong presence in agribusiness, construction and tourism, mainly in the Anatolian region (western Asiatic Turkey) where clients are relatively conservative in their use of banking services. But Şekerbank executive board member Tatiana Filippova says the bank must be still very active to maintain key clients.
“The top 10 banks have a widespread presence across Turkey, and most have good technology and products. So you cannot be a clear market leader in any sphere, there are usually four or five strong players in that sphere, especially the state-owned banks in the agricultural sector,” she says.
Şekerbank has introduced specialised products to the market, including 'eco-credit' programmes backed by multilateral organisations to fund clean energy or energy-efficiency projects in the SME sector.
In addition to market positioning, specialised SME loans can also generate extra fee income if banks offer associated business consulting services. Given declining interest margins, fee and commission income is inevitably a focus across the banking sector, closely tied to efforts to raise cross-selling ratios and revenues per branch and per employee. Yapi Kredi has the highest fee income as a percentage of total income at 26%, and its concept of leasing, factoring, asset management, pensions and insurance services as 'product factories' for the bank has provided momentum for fee generation.
For those banks with foreign participation, cross-selling opportunities include cross-border co-operation. Ziya Akkurt, CEO of Akbank, says the bank has a critical project close to completion that will be a joint project with the bank’s 20% shareholder Citi. TEB has plans for closer co-operation with BNP Paribas, which owns about 50% of the bank since a merger with the Turkish operations of Fortis in February 2011.
“This is a good starting point for TEB to develop classic corporate and investment banking services for larger corporates in co-operation with BNP; mainly fixed-income capital markets products. We are one of the only banks that combines size in Turkey with the potential of a global corporate and investment banking franchise that has still to be exploited,” says Mr Sabet.
Slow consolidation
In a context of high return on equity, efficient operations and strong capital ratios, there has been little pressure for consolidation among the first- and second-tier banks. But Mr Egemen of Garanti Bank believes this could begin in a few years, if net interest margins of about 4% in 2010 start to drift down towards 3% as interest rates rise and competition remains intense.
Particularly well-capitalised banks such as Garanti and Akbank would be the most likely consolidators. And while Garanti already has a large geographical footprint in Turkey, Mr Egemen says the country’s private sector debt-to-GDP ratio of just 47% means that inorganic growth is still worthwhile.
“Any incremental acquisition adds value, because the population is still underbanked, so an acquisition still means new customers for us,” he says.
The merger of TEB with Fortis also appears to have laid to rest fears provoked by an earlier merger between Yapi Kredi and Koçbank in 2006, which had been the largest in the sector at that date. Although Yapi was the larger bank, Koç Holding had pushed for the merged entity to adopt the Koçbank IT platform, with disruptive results for Yapi Kredi customers. By contrast, TEB applied its own IT system to Fortis, which was the smaller bank by assets in Turkey as at end of 2009. Little more than a month after the merger was finalised in February 2011, the combined bank was offering 98% of products from both legacy banks to any customer in any branch.
Reluctant sellers
But in the short term, willing sellers are rare given the strong performance of many Turkish banks. The most likely candidates seem to be foreign shareholders that have their own financial problems or, as with GE Capital’s sale of its stake in Garanti to Spain’s BBVA last year, are undertaking strategic reappraisals.
National Bank of Greece (NBG), which owns almost 95% of Finansbank, is under pressure due to the sovereign debt crisis in Greece. Volatile market conditions forced Finansbank to delay a 20% share offering on the Istanbul Stock Exchange in March 2011. This would be a combination of primary offering to give Finansbank capital for expansion, and a secondary offering that would allow NBG to sell down part of its stake and thereby boost its own capital position.
“Finansbank is already well capitalised, and NBG does not have to sell, so we have gone into 'wait-and-see' mode. We expect a recovery in stock prices later this year, and we will be ready to respond,” says Mr Aras.
Another shareholder in doubt is Kazakhstan’s BTA Bank, which owns 34% of Şekerbank. Following BTA’s rescue and debt restructuring in 2009-10, the Kazakh government is seeking a strategic buyer and the bank’s future is uncertain. Şekerbank’s capital adequacy and return on equity are lower than those of the top-tier Turkish players, but still good by international standards. The bank has begun to play a growing role in fostering economic relations between the two countries, and its future has apparently been discussed during bilateral government meetings.
Barriers to entry
Russia’s state-owned giant Sberbank, which is the only bank to show interest in BTA as a whole so far, has indicated that it is also considering a stand-alone bid for Şekerbank. However, Turkish bankers believe the probability of this succeeding is low. The local regulator has apparently rebuffed previous attempts by Russian banks to buy into Turkey, owing to its scepticism that they could comply with high Turkish regulatory and disclosure standards.
One other foreign bank has already exited Turkey at the end of 2010. Portugal’s Banco Comercial Português sold its Turkish subsidiary Millennium Bank to Amsterdam-based Credit Europe Bank, the new bank built up by Hüsnü Özyeğin after he sold Finansbank to NBG in 2006 with a three-year non-compete clause. The Turkish bank will rebrand in May 2011, using a Turkish name rather than the Credit Europe brand that is used in 10 countries across Europe and Asia.
Millennium is a witness to the difficulties of smaller foreign investors competing with the largest players in Turkey – the 20-branch bank suffered 36 consecutive months of losses before its sale to Credit Europe. Murat Basbay, the Turkish CEO of Credit Europe Bank, says Millennium’s new owners have already returned the bank to profit in the first quarter of 2011. This was achieved by building on Credit Europe’s existing Turkish corporate client network, to which the bank had offered mainly trade finance services via its major markets of operation, including western Europe, Russia and Romania.
“We aim to double assets in Turkey to about €1bn by end-2011. If this was our first entry into the market, it would be quite a challenge as competition is stiff. But it is a re-entry, and we had Turkish corporate customers even when we did not own a bank in Turkey directly. When we reach a certain size, we will start to compete with other banks for new customers, and we will need to retune strategy, perhaps resuming a retail focus,” says Mr Basbay.
Foreign fields
The success of Millennium Bank in tapping into the trade finance networks of its parent is a reminder that Turkey is a historic crossroads between western Europe, the Middle East and central Asia. Isbank and Akbank, as the country’s two largest banks, clearly aspire to national champion status with an associated regional role.
“Turkey holds a key geopolitical location at the centre of this regional market with an estimated total GDP of $26,000bn by 2015. We are the only country in the region who could offer the know-how necessary for the tremendous project financing and infrastructure investment needs of the region,” says Mr Akkurt.
Akbank opened a Dubai branch in December 2009, which Mr Akkurt firmly believes can act as a catalyst for greater economic co-operation between the Gulf states and Turkey, and a bridge for funds to flow from the oil-rich states to the large Turkish market.
Meanwhile, Isbank purchased a small Russian bank, Bank Sofia, in October 2010, to obtain a licence in a country that is vital in meeting Turkey’s substantial energy import needs. However, Isbank chairman Ersin Özince is most excited about the prospects for Iraq as a very underdeveloped market to which Turkey has a key geographical link. Isbank opened a branch in Erbil in northern Iraq in March 2011, and he anticipates opening another three or four branches in the country during 2011.
“The financial habits of the [Iraqi] society are parallel to those in Turkey. There is a willingness to save, this is the type of banking that we love. Turkey has the best-regulated banking sector in the region, we were the first emerging market to adopt Basel II, and this region is thirsty for the development of the banking sector,” says Mr Özince.
