Turkey gets a foreign bank makeover

ONCE UPON A time the Turkish banking sector was exactly that – almost entirely Turkish in character. In the 1980s there were only a few foreign banks in the country’s financial services sector, which comprised a mix of state and private ownership with a collection of large universal banking institutions and small-sector specific players. Nowadays the banking scene is much more cosmopolitan, with a wide range of banks from across the globe pursuing increasingly aggressive expansion plans to take advantage of an improving economic climate and the consequent increase in the so-called bankability of Turkey’s large and fast-growing population.

International bank participation in Turkey is also being driven forward by the country’s growing political significance – poised to become the most populous country in the European Union within the next 10 years and having a strategic geographical position as a bridge between the developed markets of western Europe and the emerging economies of the Caucasus and central Asia.

The net effect of recent political-economic developments is that Turkey is not only seen as an attractive investment destination in its own right but also as a launch pad for accessing the markets of the former Soviet Union, where a wide range of Turkish companies are already taking advantage of strong historical, cultural and trade links to establish themselves as major players. The strong draw of Turkey’s improving credit story at home and abroad means that the country has been able to attract a geographically diverse group of banks, with a heterodox mixture of both global players such as Citi, regional leaders such as Italy’s UniCredit, and sector specialists such as Dexia.

Given the prospect of EU membership in the next decade, bankers believe that there will be more new market entrants. "We’re still really at the beginning of the EU convergence process, and that makes the Turkish banking market interesting to foreign banks," says Hayri Culhaci, executive vice-president at Akbank, in which Citi has taken a 20% interest. Certainly, internationalization has shown no sign of slowing down, with a series of transactions concluded in recent months that will further change the banking landscape in Turkey. These include Israel’s Bank Hapoalim’s acquisition of Bank Pozitif, Kazakhstan’s Bank TuranAlem buying into Sekerbank, Dexia’s purchase of Denizbank, and Greece’s Alpha Bank taking a stake in Alternatifbank. Possible future transactions include the sale of Oyakbank, whose owner, Oyak Group, has mandated Morgan Stanley to find it a strategic partner.

Meanwhile the initial public offering of a 25% stake in state-owned Halkbank will further the privatization of the banking sector and give equity investors a welcome opportunity to buy into a large, liquid stock in a fast-growing industry sector.

It’s all a far cry from 2001, when an economic crisis wreaked havoc in the banking markets, forcing the Turkish government into a multi-billion dollar bailout, and foreign investment in Turkish banks was seen as being as appetizing a prospect as dining out on polonium 210-laced sushi.

In retrospect the events of 2001 are widely viewed as a watershed in the recent development of the financial services sector in Turkey, prompting a series of government and private sector initiatives to bolster public confidence in the country’s banks and strengthen balance sheets and risk management practices. Although the banking sector is by no means immune to economic shocks – in May and June 2006 it was battered by a mini-crisis – it has emerged leaner and fitter from recent events and confidence in the future of the industry is palpable in the bustling financial services district of Levent in Istanbul.

What’s more, virtually all the major players are looking to expand their branch networks across the country and to increase their headcounts to take advantage of increasingly favourable market conditions – a welcome development in a country where unemployment has stubbornly remained around the 10% mark for most of the present decade. Mehmet Erten, chief executive officer of Tekfenbank, in which EFG Eurobank of Greece has a 70% stake, tells Euromoney: "Foreign banks have helped boost employment in the banking industry and we expect this to remain true for the next few years. Realizing the true potential of the banking market in Turkey will help to cut unemployment across the country." In the coming 12 to 15 months Tekfenbank plans to add a further 10 branches to its existing 31-strong network. "Pre-EFG Eurobank buying into the bank the pace of expansion would have been much slower," admits Erten, adding that the bank is looking to hire about 100 new employees to supplement its current staff of 570.

As well as broadening the bank’s geographical reach, Erten says that EFG Eurobank’s participation in the bank has enabled it to expand the scale of its lending activities. "There’s a misguided belief that foreign banks won’t lend to the real sector of the economy, which just isn’t true," says Erten. He adds that one of the most important contributions of international banks to the Turkish market has been to increase the availability of longer-term financing, which had hitherto been a scarce commodity. "The average maturity profile of lending has grown considerably since foreign banks started coming to Turkey," he says. "Historically, Turkish businesses have suffered as a result of expensive short-term financing." Erten says that the increased competition resulting from foreign banks coming to Turkey has benefited small and medium-sized enterprises (SMEs) in particular, which have been able to gain access to cheaper, long-dated funding. "Two things matter to SME owners – low interest rates and access to longer-term financing, not whether a bank is Turkish or foreign," says Erten, adding: "Foreign banks bring a more disciplined approach to risk and credit control management and we expect to see better financial discipline among SMEs as a result of improved lending practices."