Turkey Finance: Resurrection

Turkey's banking sector has averted catastrophe and is now attracting foreign buyers, despite recent concerns about economic prospects

As recently as five years ago Turkey's banking sector was on the verge of meltdown, with more than 20 banks taken into administration, and confidence, both from consumers and investors, at an all-time low. Now after four years of solid growth and three years of relatively stable one-party government, confidence in Turkey's banking sector has never been higher. Indeed the past year has seen the sale of five commercial banks to foreign buyers with three more expected to be sold before the end of the year. Analysts predict that others may yet be offered for sale--although a mid-June market rumour that Citigroup was on the point of buying a 20% stake in the blue-chip Akbank for some US$12bn was firmly denied by the Turkish bank's owners, Sabanci Holding.

Seller's market

Not so very long ago the idea of foreign banks buying their way into the Turkish banking sector was considered unlikely, and the idea of Greek banks doubly so. But if the recent sale of 46% of Finansbank to the National Bank of Greece for US$2.9bn and the subsequent sale of 70% of the smaller Tekfenbank to Greece's Eurobank for US$182m are an indication of how relations between the two neighbours have changed, they are far more an indication of the current strength of the Turkish banking sector and its potential for growth. Indeed those two sales were swiftly followed by that of 75% of Turkey's fifth biggest private bank, Denizbank, to Dexia, a Franco Belgian group for US$2.44bn, with the offer for sale of Sekerbank reported as having attracted the interest of a number of international banks and investment groups. Other entrants via acquisition since 2001 include HSBC (Demirbank), Unicredito (Yapi Kredi), GE Finance (Garanti Bank), BNP Paribas (Turk Ekonomi Bank) and Fortis (Disbank).

The change in international attitudes to the Turkish banking sector is not difficult to fathom. Since of 2001 the return of political stability, steady economic growth and falling inflation have provided the right conditions for banks to clean up their act. All now have far stronger capital bases, are hedged on their forex positions and operate far more conservative criteria on allocating loans. Most now also allocate 100% provision for non-performing loans.

Equally important is the perceived potential that the Turkish market offers, both as a rapidly growing market for financial services and as a regional banking hub. The majority of Turkey's 70m-plus population still do not hold bank accounts, let alone use other financial services. Indeed the loan:GDP ratio is only 22%, way below the 35% average for central and eastern Europe, while interest rate spreads on credit cards and other instruments remain high and show no signs of decreasing. Enhanced regulation of the economy is expected to force many companies to abandon cash payment of employees while the imminent implementation of a new mortgage law is expected to result in a boom in property loans. High growth is also predicted in lending to small businesses, which have traditionally found difficulty in raising loans because of the generally high interest rates that have prevailed in Turkey--spreads on local currency loans are typically in the 5-8% range, while those for foreign currency range from 2% to 4%.

Technology

But while Turkey remains "under-banked", its banking sector is technologically very well developed. Bizarrely, this is a direct result of the economic turmoil of the 1990s which saw banks earning 25% real yields on government securities and investing disproportionately heavily in new banking technology. The rush to implement new systems put many banks at the forefront of the IT revolution in Turkey, with their IT departments soon developing new in-house solutions, and several even being spun off into separate IT businesses. This has left many Turkish banks technologically far ahead of their regional counterparts and ideally placed to compete with them, while at the same time allowing them the luxury to experiment with adventurous new products such as the latest to hit the market--processing consumer loan applications via mobile phone.

Indeed such is the current attraction of Turkish banks that many analysts are talking of a shortage of suitable candidates for prospective buyers, despite the recent dip in the Turkish lira following poorer than expected inflation and growth figures. They point to the high prices paid for banks immediately before the recent wobble as indicating the strength of interest. For example the most recent sale, Denizbank, went for around 30% more than its market value, which analysts claim is likely to be repeated with Sekerbank and in expected sales of two other smaller banks, Alternative Bank and Tekstil Bank.

And with demand showing no sign of evaporating many are predicting that Turkey's semi-autonomous military pension scheme, Oyak, may opt to cash in on the rapid successful growth of its banking arm, Oyak Bank, and that interest in the planned sale next year of the smaller of Turkey's two remaining state banks, Halk Bank is likely to be intense.