A senior Turkish banker, at breakfast in the courtyard of Istanbul’s most famous prison – now the Four Seasons Hotel – considers the banking sector’s addiction to the government securities market. “It’s like a Prozac pill,” he says, attacking a brioche in the brilliant October sunshine.
Even after depreciation against the dollar, three-month Turkish treasury bills can yield a 30% annual return. This has been going on since 1985, with a brief blip in 1994 when the lira fell 85.8% in 10 weeks including a 38% dip over two days. Even then those holders of T-bills who didn’t panic made money.
Why bother with corporate lending and consumer banking when even a small bank can borrow dollars, buy treasury bills, repo them out to customers, and rake in a healthy return? Especially since the government insures all bank deposits 100% – something it was forced to do after the 1994 crisis. “The banking system has lost some of its talent to do real banking,” says the banker, brushing away a marauding wasp.
The 1994 blip at least showed responsible banks that the T-bill game cannot last for ever. The treasury, which supervises banks, put in stiffer controls on the ratio of foreign borrowing to Turkish lira assets – a ceiling of 80% of a bank’s capital.
The major Turkish banks say they are making efforts to wean themselves off the Prozac pill. Akin Ongor, chief executive of Garanti Bank, now Turkey’s second-biggest private bank by assets, declared in his bank’s 1996 annual report: “We strongly believe that real banking means serving customers to help them make money, not merely making money from financial placements.” The fact that Garanti Bank increased its securities portfolio from TL21 trillion ($196 million) at the end of 1996 to TL116 trillion ($785 million) by the end of June is explained by Ongor as “taking advantage of the market in the short term”. The exposure is only 20% to 21% of the bank’s balance sheet, Ongor says.
A financial controller at one of Garanti’s chief rivals is a little more sceptical: “When you add Garanti’s repo portfolio, the bank’s exposure to government securities is 37% of assets – that’s higher than Akbank.” (Repos – agreements to sell and buy back securities – don’t show up on the balance sheet while the repo is running but they are still a contingent exposure to the securities’ price. The banking sector’s exposure to these repos is TL2.7 quadrillion – $15 billion)
Akbank has traditiona]lly been the big investor in government securities. According to figures reported to the Istanbul Stock Exchange it had a portfolio of securities totalling TL77 trillion ($522 million) in June 1996 (24.7% of assets) which grew to TL159 trillion ($1.1 billion but only 23.1% of assets) by the end of June 1997. That doesn’t include repos, but Akbank is more of a portfolio investor than a trader. “It’s like a safe, a vault for the [Sabanci] family,” the banker says, happily paying the TL9 million breakfast charge.
Trading to survive
Foreign investors aren’t concerned about these two banks’ exposure to government securities. They regard Akbank, with its 34.5% BIS ratio, to be the safest name in Turkey, perhaps safer than the government itself. And Garanti they believe is capable of quickly trading its way out of its short dollar position. Garanti Bank has been borrowing actively in the Eurobond market and in October added another $350 million to its medium-term foreign currency war chest. The Turkish treasury wants banks to be able to close their short foreign currency positions in two to four days. “Liquidity is what can bring you down,” says Garanti’s treasurer Erdal Cetin, “not [lack of] profitability.”
Some smaller banks are more heavily dependent on their ability to trade T-bills. Demirbank, with a balance sheet a third the size of Akbank’s or Garanti’s, claims 16% of T-bill trading volume. “Banks like Demirbank and Interbank have to be actively trading in the market to survive,” says Cetin. “We [at Garanti] don’t depend on government bond trading.”
The dilemma for the players of this game, the banks and the government, is that, for the time being, both need it to continue. Until the Republic of Turkey can borrow cheaply abroad again, as it did before January 1994, it has to borrow heavily in the domestic market. The high premium the government pays for Turkish lira has crowded out other domestic borrowers. Since 1994, and even before then, banks have found it uninteresting to make corporate loans, although the far-sighted ones have continued to do so. All banks must hold some government securities to meet liquidity requirements. In today’s market, for a bank not to invest a chunk of assets in government securities could almost be seen as a lack of fiduciary care.
But that could be changing. The four-month-old coalition of prime minister Mesut Yilmaz looks like gaining the confidence of the IMF and the international financial community. More important, it is making a serious attack on inflation. If that continues, the T-bill game will no longer sustain the banking sector. Banks will have to get back to serious banking.
The leading banks have anticipated that change for the past year or so and are repositioning themselves: in consumer banking, corporate lending, corporate finance, investment services, technology and training. Four of Turkey’s leading banks: Is Bank, Akbank, Garanti Bank and Yapi Kredi are converging on the same market segments, and competition is heating up by the day. A handful of smaller banks have developed important niches, in trade finance, corporate finance, securities and private banking, where they have a chance of survival. But many other smaller banks – among the 72-strong banking sector – are doomed to decline, takeover and closure, especially when the government lifts its 100% deposit guarantee.
Foreign banks have hardly tapped the domestic market, being content to lend to multinationals operating in Turkey, or to fund the operations of domestic banks. Paribas sold Ottoman Bank last year. Dresdner Bank and BNP have a small joint venture with Akbank. Bankers Trust has a small subsidiary. But some major global banks are poised to do more on the commercial banking side, including ING Barings, Westdeutsche Landesbank and Citibank.
Citibank is widely regarded as the most interested in domestic expansion. Rumours that it is in discussion with the Dogus Group over the sale of Ottoman Bank or even Garanti Bank aren’t taken seriously. But there is a fear of Citibank’s potential if it took over a Turkish bank with, say, 50 branches.
“If Citibank come in,” says Yapi Kredi Bank president Burhan Karacam, “they would really be competition for us.” But until Citibank makes a move, the Turkish market is a battleground for Turkish banks, each positioning itself to take best advantage of whatever the future and Turkey’s volatile political and economic environment might bring.
Karacam regards his bank, perhaps rightly, as the best prepared for the downturn in inflation. An accountant rather than a banker, he took over Yapi Kredi Bank in 1987, having been with Arthur Andersen until 1981, followed by spells at Pamukbank, owned like Yapi Kredi by the Cukurova Group, and Egebank. Karacam started his own restructuring programme in 1987, cutting the number of branches and reducing staff. But in 1994, advised by his former firm Andersen Consulting, Karacam made a fresh bid for market share in retail banking and trade finance. “The others thought we would fail,” says Karacam. “They left us alone in the market for more than two years.”
It’s true that Yapi Kredi’s profits have lagged those of its two main rivals Akbank and Garanti. But Karacam rates the quality and range of deposits and the level of non-interest income above simple return on equity: “We positioned ourselves as the bank for the private sector. For that reason we’re the only bank with very little investment in government securities.” Yapi Kredi’s portfolio of securities totalled TL33 trillion in June 1996 (9.4% of assets) and TL59 trillion (7.8% of assets) in June 1997. Its fee and commission income was $73 million in the first half of this year, and $34 million in the same period last year. That compares with Garanti Bank’s $32 million and $9 million, and Akbank’s $27 million and $11 million during the same periods. The reason, explains Karacam, is that Yapi Kredi is better at selling additional services to account holders.
Garanti Bank chief executive Akin Ongor explains the lower fee income earned by his bank as follows: “In an inflationary environment the float on the customer account is higher yielding than service charges, so deliberately we give up fees for the sake of our whole cashflow. This is what we decided with McKinsey. As inflation comes down we’ll switch to charging more fees for the services.”
Garanti Bank argues that it is the most advanced bank in Turkey in terms of management, use of its balance sheet, and its standing in the international banking community. According to figures submitted to the stock exchange, the bank had a 51% pre-tax return on equity in the first half of the year, compared with Akbank’s 68% and Yapi Kredi’s 27%. That return in Garanti’s case came from securities trading (5%), interest on securities (35%), other interest income (36%) and fee income (5%). It has raised more funds abroad than its major rivals a total of $1.4 billion in outstanding bonds and syndicated loans. Akbank and Yapi Kredi are just beginning this exercise – Yapi Kredi did its first global depositary receipt and its first Eurobond this year.
Garanti Bank is the most advanced in treasury and risk management – the only bank to apply Raroc (risk-adjusted return on capital). While Yapi Kredi claims that 50% of its staff are now university graduates, Garanti puts its own figure at 74%. And while Yapi Kredi and Akbank are just beginning to develop investment banking, Garanti has just sold its interest in an investment subsidiary, Garanti Yatirim, and is redeploying its investment banking talent between Garanti Bank, Garanti Securities, and Ottoman Bank. Of the big commercial banks it is the only one, apart from Is Bank, active in domestic initial public offerings.
Since 1995, when Garanti hired Leyla Etker from Citibank, it has been developing its corporate lending. But there are questions about the dramatic growth of Garanti’s loan book, from TL132 trillion ($891 million) to TL361 trillion ($2.4 billion) in the space of a year. If this is mostly in corporate loans, as Garanti claims, then it suggests great confidence in medium-term economic stability and its credit assessment of medium-size firms. Garanti lags in consumer banking: it has only 160 branches compared with the 500-plus of its peer group. But Garanti says it is targeting a selected customer base in Turkey, not the mass market. “A survey with McKinsey showed us that 12% of Turkish citizens hold 58% of the wealth,” says Ongor. “Those are our market.” On the other hand, Garanti’s Acik (open) credit card, which it launched last month, is aimed at a wider market, expecting a million accounts within three years.
Consumer, corporate and private banking are the areas where all big banks are now desperately scrapping for market share. The targets are the so-called Anatolian Tigers, the cities with export-oriented companies and citizens who are as happy to hold foreign currency deposits as deposits in Turkish lira. Around 50% of the deposits in the banking system are in foreign currency.
Akbank is a sleeping giant whose conservative balance sheet was recently equalled and overtaken by asset-hungry Garanti. “Akbank have lost it,” says a big-bank rival. “They could have been six times our size. They’re like the Swiss watchmakers who got overtaken by the Japanese.” Akbank’s problem, say analysts, is that it’s run as a family concern, and major decisions are made by one man: vice-chairman Erol Sabanci. “Erol reminds me of Edmond Safra [chairman of Republic National Bank]. He knows where every penny in his business is,” says an American banker in Istanbul. While Erol Sabanci is regarded as an excellent banker, “nobody knows the name of his general manager”, say colleagues at other banks.
Loosening family ties
Akbank has relied heavily on its portfolio of government securities (33% of pre-tax revenue in the first six months of this year). Although it increased its loan book by 50% in the same period it has extremely narrow lending criteria. It won’t lend to the public sector – nor will Yapi Kredi – and it will lend only to what it regards as real industry (transport, trading and services are out). “Our figures have proved that we’re not missing out on the service industry,” says Ziya Akkurt, executive vice-president for corporate lending at Akbank. The bank’s loan-loss record is 0.3% of assets, compared with its rivals’ 0.6%.
As a family profit machine Akbank tended to neglect technology and retail banking. But that has changed. It has invested over $100 million in new systems and is putting a further $20 million a year into on-line services, and telephone- and PC-based consumer banking.
Although Akbank is criticized for its closeness to the Sabanci group, that too is changing. Akbank has been selling its non-financial assets, now estimated at $450 million of hidden value after a sale of around $100 million worth of participations this year. In defence of its group involvement Akbank argues that the Sabanci companies, some of the premier companies of Turkey, provide the bank with liquidity, rather than the reverse. “Our group companies are milk-givers to Akbank,” says Erol Sabancž. Loans to group companies, including those owned only 25%, total 15% of assets.
By contrast the less profitable Cukurova group, which owns Yapi Kredi and Pamukbank, has historically been a drain on the two banks’ resources. But that is changing too. Yapi Kredi’s loans to Cukurova companies total 22% to 23% of assets. It has an estimated $1.6 billion worth of holdings in non-financial companies of the group, but that is better than it was. In 1995 it sold Canakkale Cement, which was a millstone around its neck, for $225 million. Karacam argues that the family group no longer tells the bank what to do. It’s rather the other way round. Three of the bank’s board members sit on the board of Cukurova Holding. “They can’t take a decision without our say-so,” says Karacam. However, Cukurova chairman Mehmet Emin Karamehmet, perhaps the most reclusive of Turkey’s industrialists, sits on the Yapi Kredi board. One rival says unkindly: “The only reason Karacam is chief executive is because he was Karamehmet’s classmate.”
Each major Turkish bank, apart from Is Bank, has its éminence grise in the form of a family board member. Erol Sabanci is the most visible, and he has just appointed his daughter Suzan to Akbank’s board. “In every privately owned bank you will see members of the family,” says Erol Sabanci. “I’ll have to retire soon. Sir Jeremy Morse [former chairman of Lloyds Bank] always recommends you must have a capable family member on the board. A capable member of the family is a security for the shareholder, as long as the member is accepted by the professionals.”
The Dogus group, which owns Garanti Bank, is controlled by Ayhan Sahenk. He and his son Ferit sit on the board, although Ferit has traditionally been more involved on the securities side. Ayhan Sahenk’s reputation as a brilliant trader and dealmaker is a mixed blessing for Garanti Bank. The assumption is that everything is for sale at the right price, including the financial cluster around Garanti Bank, and even Garanti Bank itself. This year Dogus sold Bank Ekspres, which it bought for $15 million after the 1994 crisis, for a profit of $70 million. It sold Garanti Yatirim. Might it also sell Ottoman Bank which it bought last year for $245 million? Garanti’s chief executive Akin Ongor discourages this view. “We bought it because it was cheap, at a price/earnings ratio of three to one”, he says. “It’s earning $90 million a year.”
Garanti Bank, however, is distancing itself from Dogus management. Dogus board member Zekeriya Yildirim, former deputy governor of the central bank, who brought considerable central banking talent into Garanti Bank, no longer sits on the bank’s board, although he’s still chairman of its Amsterdam subsidiary. Rumour has it that Yildirim lost a power struggle with Ongor. The issue was use of the bank’s resources, including those of Ottoman Bank, to expand the group’s T-bill portfolio. Ottoman Bank was recently downgraded by rating agency IBCA because of its sally into T-bill investments and an increase in its short foreign currency position. Ongor and Yildirim deny any split, saying the reason for Yildirim’s role change is division of labour.
Garanti regards itself as the only major Turkish bank making proper use of its capital and resources. Its BIS ratio is 14% compared with Akbank’s 34% and Yapi Kredi’s 11.4%. Competitors refer to it disparagingly as “like a hedge fund … they borrow outside Turkey and invest in certain assets. They’re tiny in retail. It’s a growth that is not based on their own deposits.”
Competitors also criticize the fancy footwork used by Garanti to buy Ottoman Bank without having to write anything onto its consolidated profit-and-loss account. Ottoman Bank is owned by Clover Investments, a Malta-based company which bought the shares of Compagnie Ottomane d’Investissement (COI) of Amsterdam, the parent of Osmanli Bankasi AS of Istanbul. The $245 million purchase was financed with a three-year $200 million loan syndicated by Union Bank of Switzerland, which holds the shares of COI Amsterdam as collateral. If Garanti held Ottoman Bank through a Turkish vehicle it would have to declare translation gains or losses on the asset in Turkish lira. “If they had booked that asset as their own in Turkey they would have eaten about $80 million to $90 million in foreign exchange losses,” says a competitor. “I’m not saying this is illegal, but they avoided the P&L effect of the participation. When the day comes the bank will have to repay the $200 million. I can’t buy a bank with a three-year loan! It pumped up their balance sheet by $200 million.”
Ongor dismisses this criticism as nonsense: “The shareholders were selling the shares outside Turkey. I think these people are just envious.”
Karacam at Yapi Kredi Bank pays the structure enough of a compliment by saying he intends to copy it. Yapi Kredi paid $50 million this year for a 10% stake in cellular telephone company Turkcell. “The value has fallen because it’s booked in Turkish lira,” says Karacam. “So we’re going to set up a vehicle company outside Turkey and transfer the assets, so that we can present our real position, now that we have international investors.”
Erol Sabanci at Akbank clearly hates the games that Turkish banks can play with their balance sheets: “The biggest headache is that the balance sheets are not compared apples with apples.” Corporate taxation is applied inconsistently from bank to bank, he says. Some banks, like his, make a provision for tax deferred until the next year – others don’t. Some banks inflate their profits by taking extraordinary income, such as the sale of industrial participations, into their profit-and-loss account. Akbank adds the proceeds of any sale to its reserve capital.
Changes to the banking law and reporting requirements are attempting to standardize reporting and make it more comparable. The bank supervisor, the treasury, in March ordered all banks to make provisions for deferred taxation for the year ended December 31 1996. But the banks said they couldn’t possibly do this - they had already announced dividends for the year. As a compromise they will make gradual provisions quarter by quarter, reaching 100% by the end of next year. From June this year they are expected to report on a consolidated basis. Inflation accounting is demanded in a new banking bill, although banks whose shares are listed abroad already produce a second set of accounts according to international accounting standards.
Under-regulated playground
Bank supervision in Turkey is dangerously fragmented, says Yavuz Canevi, former central bank governor, now chief executive of Turk Ekonomi Bankasi and acting head of the stock exchange. There are four separate bodies vying for oversight of the banks: the treasury, which is the supervisor by law; the central bank by virtue of the central bank law; the finance ministry as the taxation authority; and the capital markets board as the supervisor of listed companies. “There are loopholes,” says Canevi. “Everyone thinks the others are handling it.” Canevi favours a single supervisory body, on the planned UK model, “then you have a real grasp of the sector.” That is exactly what the Yilmaz government is planning, but the reform may be some time in coming.
Banks in Turkey have thrived in a supervisory vacuum. “The government needs the banks’ finance so badly it can’t afford to get heavy with them,” says one analyst. Rating agencies and concepts of shareholder value are starting to have a disciplinary effect, so are the rigours of the stock market. But the banking sector is still something of a playground for the privileged few, and many banks are the toys of rich industrialists. International standards are changing the culture, but slowly.
Burhan Karacam, the workoholic chief executive of Yapi Kredi Bank, looks across from his high-rise tower at the Sabanci Center’s twin towers – Akbank territory. It’s nine o’clock at night, still only 2pm in New York “There’s not a light burning over there,” he says.
School for bankers
The Turkish banking sector’s blessing and curse is that top management all came out of practically the same school. In the 1960s the main English language school was Robert College. Arthur Andersen and Citibank recruited from Robert College and its successor, Bosphorus University, and the Turkish banking sector, when it was liberated after 1980, saw these firms as their main hunting ground. Pamukbank, in its turn, became a springboard for the country’s senior bankers. Yapi Kredi’s Karacam and Garanti Bank’s Ongor, now arch-rivals, worked together at Pamukbank – “we talk to each other but I wouldn’t say we’re buddies”, says Karacam. Their then boss, Husnu Ozyegin, now runs his own institution, Finansbank, which recently became a rich source of talent for the investment banking sector. Ozyegin, despite the inspiration he has given others, is ironically not an institutional man. “He’s a dealer, a merchant, not a banker,” says a former colleague. “He doesn’t believe in institutions and systems. He believes in deals.”
Erol Aksoy, who ran Garanti Bank when Koc and Sabanci jointly owned it, then Interbank, is regarded as another pioneer in Turkish finance. In a move parallel to Ozyegin’s he created a banking group for himself out of Iktisat Bankasi, and its French subsidiary Banque Internationale de Commerce. Aksoy like Ozyegin has drifted out of the mainstream and is more concerned with newspapers and satellite television.
Turkey’s banking sector has since received a shot of talent from the US MBA circuit and apprenticeships at US and London-based investment banks. At home, some of the brightest graduates from Bosphorus University, Middle East Technical University, and the privately funded Bilkent University see Turkish finance as their first choice. In the search for talent, team transfers are also becoming a feature. Demirbank recently took a team of six analysts from Eczacibasi Securities, while in August Yapi Kredi Investment lifted Coskun Akdeniz, head of fixed income at Eczacibasi – but a former Yapi Kredi man – three securities traders from Ozyegin’s Finansbank, and six corporate finance specialists from the renowned team at Turkish Industrial Development Bank (TSKB). This was all the more surprising since Melih Sensoy, head of securities at Yapi Kredi, who masterminded the heist, is a friend and former Robert College classmate of TSKB president Safa Ocak. Metin Ar, executive vice-president of TSKB, and Karacam of Yapi Kredi went to Robert College too, although they weren’t classmates. “Burhan thinks I’m not upset, but I am,” says Ar. “The team would have left anyway,” counters Akdeniz, “they felt their careers at TSKB were blocked.”
Yapi Kredi’s move suggests a sudden decision to add corporate finance, securities trading and asset management to its quiver of financial services. “We feel it will be complementary to our existing services,” says Karacam. “We have trade financing for 2,600 companies, and asset management has a definite synergy with private banking. All the retail banks in the US and Europe are acquiring investment banking companies to support their activities.” To this extent, Yapi Kredi is moving closer to ground that Garanti Bank has covered, although Yapi Kredi is already an active market-maker for customers in T-bills and manages 12 mutual funds.
For Akbank capital markets are still practically virgin territory. Akbank set up Ak Securities last year, but the embryonic operation in downtown Taksim so far has only a handful of traders and three researchers. “A year ago we were a division of Akbank,” says Huseyin Kayar, a manager at Ak Securities. “And our market share in equities trading is only 1%, which we’re not happy with.” Admittedly the market is shared by 138 brokers, but 1% is not great for Turkey’s second or third private bank. In government bonds and repos its share is 2% and it has three listed investment funds. However, at the grass roots Akbank is making a big investment. It has nine trading rooms countrywide, in which customers can watch the ticker and give orders to customer dealers. “In 51 branches we’ve established a specialist capital markets desk,” says Kayar.
Erol Sabanci has called in some favours to get Ak Securities into syndicates for initial public offerings (IPOs) to gain some experience. But he appears to see corporate finance as an extension of corporate lending, not equity business. “We’ve had a corporate finance activity in the bank for two years,” he says, “it was corporate loans.” And it seems Erol Sabanci has low horizons in investment banking: “In international IPOs we’re not very active. It needs specialized staff, and we get help from Morgan Stanley and others.”
Akbank and Yapi Kredi are concentrating on domestic business, although for tax reasons Yapi Kredi books half its foreign currency deposits with its offshore banking unit in Bahrain. Yapi Kredi has a joint venture bank in Moscow, Yapi Toko Bank, a trade finance bank in Geneva, and a branch in Düsseldorf, but no intention to go elsewhere. “We have no immediate plans to increase our international presence,” says Kemal Kaya, executive vice-president at Yapi Kredi, “for that, we’re happy to rely on our correspondent banks.” Akbank has an affiliate in London, Sabanci Bank, six branches in Germany, and one each in London, Paris and Rotterdam. Garanti has subsidiaries in Moscow, and Amsterdam.
Yapi Kredi believes it is six years ahead of its nearest rivals in retail and consumer banking. It claims a 35% market share of the credit-card business and 15% of all bank deposits. It says 10% of its loans are to small and medium-size enterprises – high-margin business.
Akbank believes it is ahead in technology, and telephone banking. Erol Sabanci proudly demonstrates a system that shows senior managers the business done in all branches the day before. By Tuesday of each week management can see the profit-and-loss position of the bank up to the previous Sunday. But the system won’t handle options or other derivative positions – Akbank’s balance sheet isn’t that complicated. Akbank was the first to introduce telephone banking, which involves renting out telephones with a screen attached for TL1 million a month. It claims to have placed 10,000 such telephones. The opposition has counted 3,000. “If we didn’t have 100,000 customers in the first year we’d call it a failure,” says one competitor.
Telephone banking has huge potential in Turkey. Yapi Kredi Bank is preparing to launch its brand. But there’s no reason why a smaller bank shouldn’t compete head to head with the bigger banks. Turk Ekonomi Bank for one has plans in this area.
International banks and fund managers aren’t necessarily aware of the scrap for market share taking place in Turkey’s domestic financial sector. They see presentations from banks’ and brokers’ top management. For them, Akbank, Garanti Bank and Yapi Kredi are embodied in the personalities of Erol Sabanci, Akin Ongor and Burhan Karacam. Balance sheets don’t tell them a great deal, although they are improving. Rating agencies don’t say much about the banks’ competitive positions. Brokers’ reports tend to look at the banks’ stocks as a buy, hold or sell. Reading the future of these banks depends on knowing the level of management just below the top – if there is one. Akbank tends to recruit from within, which makes these people less visible. In Garanti and Yapi Kredi there is a trickle of new blood. Garanti has two board members who joined since 1995. Yapi Kredi has some bright new recruits from Arthur Andersen, its favourite hunting ground, and the IMF. In the next few years the battle between these banks, for market share and international investors, will be exciting and perhaps bloody.
