Banks face up to the capital crunch

Engin Akçakoca, the new director of Turkey's banking regulation and supervision agency, takes on the challenges of reforming the Turkish banking system, which is suffering from a deficiency of capital.

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Engin Akçakoca

Sometimes the worst thing that can happen to someone advocating reform is to be told to go ahead and organize it. This is what seems to have happened to Engin Akçakoca, the new director of BDDK, Turkey's banking regulation and supervision agency.
The last time Euromoney interviewed Akçakoca he was sharply critical of lax supervision and bad governance and waxed lyrical about the need for reform. The ex-Citibank and American Express banker was then general manager of Kocbank, a medium-size bank owned by Turkey's richest family, the Kocs. Less than two years on he is chief regulator. But the system he wanted to change has become so frail that he is administering first aid, not proper surgery.
"The situation is far from ideal," he says bluntly. "The Turkish banking system has lost its capital base." Rating agency Fitch agrees: "Capital is the critical issue for the future of the banking system," proclaims a recent report.
Some analysts fear that undercapitalization, poor profitability and a high level of non-performing loans might trigger a new crisis. The NPL ratio was 17.7% ($5.1 billion) of outstanding loans in August, up from 11.2% the previous year, says JPMorgan's Serhan Cevik. Even this may be an underestimate. The Turkish NPL definition, though tighter than it used to be, is loose by western standards. To minimize loan-loss provisioning, banks tend to under-report NPLs.

Fitch forecasts that there will be further weakening of the Turkish banking sector before things begin to improve. "Earnings will remain under severe pressure in the short term, asset quality will continue to deteriorate and further voluntary or compulsory rationalization of the sector appears likely," warns a recent report.
Akcakoca is busy alerting the politicians to the fact that they may have to pump in cash to beef up the capital of needy private banks.
"This is the picture I envisage at the beginning of 2002," he says with surprising frankness. "The banks will have trouble meeting the 8% ratio of capital to liabilities. There will be a serious increase in non-performing loans. There will be a substantial decrease in profitability. I expect a further increase in foreign bank appetite [for acquiring Turkish banks]."
He adds "I expect merger instinct [among domestic banks] to become more pronounced. In brief, I expect transition to an environment where everything will be healthier."
Akcakoca concedes that some bank shareholders will not be able to fulfil their written commitment for recapitalization by the end the year. Commitments of $1.4 billion were given but have been only partly met - and not all in cash. This means that banks that were given until the end of the year to meet regulatory requirements or face possible takeover or liquidation are in trouble.
Akcakoca believes that taking fresh banks under government administration is no longer a good idea. By the year-end, he says, all but one of the banks still unsold will have been closed down. One may be kept open in order to collect receivables of the defunct banks.
The cost of cleaning up the banks under administration stands at 10% of GDP. The value of treasury bonds given to these banks to cover their losses and the cash injection totalled nearly $19 billion. When recapitalization of state banks is also taken into account, the cost rises to a staggering 30% of GDP.
The BDDK chief says the state must intervene to inject capital into banks that have lost, or are losing, their capital base because of sharp devaluation, high non-performing loan portfolios and unprofitable investments. Although he has not formulated concrete plans he speculates that this could be done through "dilutive capital instruments". The treasury would buy a proportion of the shares of a bank for a period of five years after which the shareholders would buy them back. Or, if the bank is privately owned , he says, the treasury's exit could be through an initial public offering.
"I've spoken to Kemal Dervis [the economics minister] and asked him to prepare the politicians," Akcakoca says. "We may have to act quickly when we see the first-quarter results in 2002 or even earlier."
He is considering a three-pronged plan. First, he wants banks to be paid retroactive interest on the deposits they are obliged to keep in the central bank. Secondly, he wants to bring banks and large corporations together to restructure debts. Lastly, he wants the state to upgrade the capital of banks by buying a stake in their equity.
"It is necessary to inject capital," he says. "Core banks have to be supported. But we need to prepare the political ground for this. We need a new law. We need to get the agreement of the IMF."
The IMF had originally opposed this plan because it might dilute the shareholdings of institutional investors. Akcakoca seems to think that the situation is far too critical to worry about that.
Majority shareholders have found it impossible to improve their capital position - the economic climate is against disposing of non-banking assets. Minority shareholders would probably also be loath to participate in a rights issue. "Since there would be no buyers in a rights issue and since taking banks under administration has proved to be costly and futile, the treasury will have to step in and become a shareholder," says one Turkish banker.
Akcakoca reckons there is at least a new sense of realism. "The banks now know in what kind of a sea they are swimming. We still live with risks, but I believe we are now more vigilant against them".

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Banks face up to the capital crunch

Engin Akçakoca, the new director of Turkey's banking regulation and supervision agency, takes on the challenges of reforming the Turkish banking system, which is suffering from a deficiency of capital.

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