Turkish banks face a major shake-up that will inevitably lead to consolidation. For years most of them have fed off hyper-inflation. At long last, though, the government has committed itself to a programme of disinflation with the backing of an IMF standby agreement. The target of the three-year long standby agreement is to bring down inflation to single digits by the end of 2003. For the first time there is widespread public support for this and the government has displayed remarkable determination and consistency. “This is not a three-year programme – it is a 10-year programme and the 10 years recommence every morning,” Gazi Ercel, central bank governor and one of the programme’s chief architects told Euromoney.
His meaning was that there will be no going back. “The old economy is dead. There is no choice except to bury it,” he says.
It will be a traumatic process. A generation of Turks has come of age with no idea of life without inflation, and businessmen have long forgotten how firms behave in a stable macroeconomic environment.
Banks were the chief financiers of the public debt and benefited hugely from real interest rates that have averaged between 20% and 30% since 1998. For most banks – Yapi Kredi and Is Bank are notable exceptions – such plum rates removed any incentive to monitor costs or to engage in such classic banking activities as lending. “It was impossible to be interested in anything else when government paper yielded 40% real interest,” says Piraye Antika, general manager of the HSBC affiliate in Turkey.
In the past decade, revolving-door governments have fielded programmes that were quickly abandoned. But prime minister Bulent Ecevit’s coalition does not possess “an option of partial compliance” as a report by JP Morgan puts it. “The choice is either programme success or programme blow-up.”
Failure would be so costly that Democratic Left Party (DSP) chairman Ecevit and his partners have no choice but to press on.
Ecevit and his senior coalition ally, ultra right-wing Nationalist Action Party’s Devlet Bahceli, come from opposing ends of the political spectrum and have traditionally been antagonistic. But, unlike many Turkish politicians, they appear immune to the pressure of powerful business interests.
Low inflation, new rules
The rules of the Turkish banking game are changing. Large banks, such as Garanti and Yapi Kredi, are reducing branch numbers or opening small branches with three to four people in strategic locations. At about $18,000 at the end of 1998, annual revenue generated per employee is low. Yapi Kredi has recently retired 900 employees and opened small branches whose only service is accepting payments for utilities bills.
If the Turkish banking system now follows a similar pattern to other parts of the world, there will be waves of consolidation. Many of the 38 family-owned commercial banks will disappear. The power of the four state-owned commercial banks, which control 34% of banking assets, will diminish. Foreign banks, which account for only 5% of assets, will increase their activities and share of business.
The 10 largest Turkish banks, including the four state banks, share 67% of total assets and 71% of total deposits. The main privately-owned players – Yapi Kredi, Akbank, Is Bank, and Garanti – are poised to make the largest gains. But the small and medium tier ones have not given up the struggle. Oyakbank (ranked 46 by asset size among 75 banks) is reportedly trying to acquire Esbank (ranked 16) and Egebank (36) in order to get a branch network to catapult itself into the front ranks.
Oyakbank is owned by the army pension fund and has the financial muscle to show for it. “They have a cashflow problem in reverse,” says a banker, referring to the steady inflow from officers’ salaries. Turkey Economy Bank TEB (23) has recently reinforced its capital base by undertaking its first initial public offering. Iktisat Bank is shedding its loss-making media investments in order to concentrate on core banking activities.
“This is the Darwinian age of Turkish banking,” says David Edgerly, board member of Istanbul-based Garanti Securities. Competition is hard. “For many it will be difficult. You have to be good. The big four are fine. They have enough capital, people, technology. They are in good shape. But for the rest: who knows?”
Hayri Culhaci, a deputy general manager at Akbank, believes that volume and market share will be crucial. “If you want to live you’ve got to have at least 10% market share,” he says.
A good measure of survival prospects is the extent to which banks have become bloated over the long fat years. “If you want to see who is going to do well, look at operating expenses,” says an American banker. “That will give you a sense of the spread they need to cover their expenses. This is 2% to 4% for US banks. In the average Turkish bank it is 8% to 10%. This means they need very wide margins. If they lose the profits of holding treasury paper, it will be very difficult for them.”
Squeezed margins, will be a catalyst for change. Net interest income to average assets is high in Turkey. It is nearly 20% for Akbank, 17% for Garanti, 13% for Is Bank and 9% for Yapi Kredi, according to JP Morgan.
Interest income is mainly derived from treasury bills and bonds, which have began to shrink as a source of easy and plentiful earnings. Yapi Kredi has the lowest average because it doggedly persisted in classic banking activities, concentrating on corporate lending and consumer banking even in the direst times.
As happened in Latin America, banks are likely to try to compensate for margin loss by credit expansion. Then, inevitably, mergers and acquisitions will follow in a drive to bring about cost synergy. Part of the consolidation will come from the privatization of state banks.
John McCarthy, ING Barings’ general manager, discounts speculation about foreign interest in acquiring Turkish banks, calling it “the triumph of optimism over reality. The equity market would be quite happy to invest in these (big and middle-tier banks) and maybe that’s the way they will go.”
Referring to the successful IPO of TEB, a middle-tier bank, he adds: “Capital will be the name of the game.”
Multilaterals force a change
The IMF and World Bank have played a vital role in the momentous changes that have been taking place in Turkey since last December.
| Ajay Chibber | ||||||
Had it not been for their persistence, Turkey would not have set about banking reform or set about in an effective way. The banking law had to be rewritten and enacted twice. The IMF said the first banking law did not include the provisions that would allow Turkey to qualify for a standby agreement. Another law, written and passed in record speed last December, calls for the establishment of a fully autonomous banking regulation and supervision board that will, at least in theory, remove political interference. The board will have the power to grant and withdraw banking licences, an authority that was previously vested in ministers who often used it to bestow licences on cronies and supporters. Many of these so-called banks were started with tiny amounts of capital and effectively run as hedge funds.
Turkey has had a 100% deposit insurance scheme since 1994. This enabled these banks to offer high interest rates to attract deposits, secure in the knowledge that they had the full backing of the central bank. Banks and depositors enjoyed a free-for-all party that only recently began to dissipate when interest rates sharply declined. During this period it was the smallest and least stable of the banks, rather than the state treasury or large banks, that determined money market rates.
The IMF told Turkey that unless some banks were weeded out there would be no standby agreement. In December, after the passage of the banking law and on the eve of the IMF board meeting, the central bank seized Yasarbank, Esbank, Yurtbank, Egebank and Sumerbank.
Egebank belonged to a cousin of president Suleyman Demirel. Sumerbank had been privatized a year earlier. Not long afterwards, its owner was arrested because of alleged organized crime connections. In 1998 the central bank had been obliged to re-nationalize Turkbank after Turkey’s most wanted crime boss was implicated in fixing its privatization.
That scandal brought down the government of Mesut Yilmaz, whose Motherland Party is now the junior member of prime minister Bulent Ecevit’s three-party coalition. In March 1999, Bank Ekspres and Interbank (belonging to Cavit Caglar, an ex-assembly member and one of president Demirel’s closest friends) were taken over by the central bank’s savings deposit insurance fund, as their owners suffered financial difficulties.
The insurance fund now has eight banks in its custody. But the weeding out of infirm banks is far from complete. Disposing of these will be one of the banking board’s main headaches.
With the help of the World Bank the finance ministry is preparing a bill that will establish tax and other incentives for mergers and acquisitions, central bank governor Ercel says.
Although the banking board is supposed to be autonomous, its members will be selected by the government. It remains to be seen how unfettered it will be. A few days before the IMF deadline for making appointments, no-one had been named, indicating that the usual wrangles between political leaders to get their favourites appointed remained unresolved. It seems almost certain that, as is customary, the board will be populated with stern ex-bureaucrats and failed politicians.
As such people are not renowned for agility and independence, the board’s autonomy could be severely compromised. This is what befell Turkey’s competition board, which was established in 1995 at the request of the European Union but proved to be completely ineffectual in dealing with oligarchic industrial groupings.
The Turkish economy is burdened by state intervention, regulation and oligopolistic structures owned by politically influential families. This mixture makes Turkey probably the most uncompetitive market in Europe.
According to a JP Morgan report, the banking system is likely to be “the most serious long-term test” of the government’s economic programme. “If the experience of other countries is any indication it could prove to be the Achilles heel of the Turkish adjustment effort. The smaller private banks and the state banks are likely to prove the main challenge in the second and third years of the programme.”
Nonetheless, the IMF’s continued support is brutally contingent on compliance with the spirit and letter of the agreement and the release of funding tranches is dependent on meeting quarterly performance targets.
The World Bank continues to play a vital role in banking reform by providing expertize, loans and occasional arm-twisting. Agreements have already been reached for a $750 million financial sector adjustment loan to support reform in the banking sector including establishment of the banking board and the first steps towards privatization and commercialization of the state-owned banks.
“Some time in May we will do another [$500 million] loan for the banking sector after the framework law on the privatization and commercialization of state banks is passed,” says Ajay Chibber, the World Bank’s Turkey manager. “It will give the government an option which is not available to it now.”
Chibber says that in April World Bank teams will arrive to work on the state banks. They will also discuss the fate of the eight banks in the custody of the central bank and methods of disposal. “Within a year [these banks] will be sold,” says Chibber. “We hope that by March 2001 they will have all gone.”
Citigroup is reported to be close to deciding whether it will buy one of the banks in the central bank’s custody. Many Turkish groups and banks are also interested.
Loads and loads of money
For banks in Turkey long public holidays can be a nightmare. Holidays mean spending and in Turkey, where credit cards and cheques are still not widely used, this means spending cash. Of Akbank’s three million customers, for instance, half don’t have debit cards. Most of the big banks have a similar customer profile.
| Naci Sigin | ||||||
Providing spending money for 65 million people is no mean feat. On the eve of a public holiday the average Turk will rush to the bank to stock up on cash and then queue up at ATMs to replenish supplies. Keeping dispensers stocked with notes is a logistical problem of gigantic proportions that keeps even the central bank awake. And Turkey has very long public holidays.
Probably because civil servants are so badly paid, Turkish governments are inclined to be generous with time off. Often the three- or four-day bayrams ( muslim religious holidays) are extended by cabinet decree to cover the whole week. On occasions when bayrams, which are fixed through the lunar calendar and advance every year, coincide with national holidays, public holidays have been known to run to two weeks. Schools close down. The stock market stops functioning. Although private businesses and factories are under no obligation to close, most do anyway. GNP growth declines because exports fall and manufacturing activity declines. Spending sprees are a shot in the arm for inflation in which Turkey holds the world endurance record.
The last bayram in March was a mere nine days and one banker who was not on holiday was Yapi Kredi Bank’s new general manager, Naci Sigin. “Just on Friday [the last day before the holiday] and Saturday TL34 trillion [$58 million] in cash was withdrawn from our branches and ATMs,” he says. “On Monday TL10 trillion was withdrawn. On Tuesday TL6 trillion.”
The total would add up to between five billion and 10 billion individual notes depending on whether five million lira or 10 million lira notes were withdrawn. It is estimated that up to 50 trillion notes could have been withdrawn from the banking system.
“Such an upsurge in cash circulation is inefficient, whatever way you look at it.
Because it has lived with inflation for such a long time our society has become a cash society,” says Sigin. “I’ve been in this bank for 15 years and never have I seen inflation below 35%. In a dynamic, cash-based society it is difficult to keep monetary targets in sight. It will push up inflation whether you like it or not.”
It is not only the bayrams that Sigin has to keep a close eye on. He must also watch the weather reports. There is a difference of 35% to 40% difference in money withdrawn from ATMs depending on whether it’s fair or foul.
Akbank looks towards big-four merger
The ink on the Turkey-IMF agreement had hardly dried before Akbank publicly started courting the idea of a partnership with an international bank.
It was the only one among Turkey’s big four to do so. This was perhaps to be expected as Akbank remains the only member of the Sabanci group – whose unconsolidated 1999 turnover was $9.5 billion equivalent – not to have established either a joint venture or partnership with a leading international financial player. Sabanci’s industrial partners read like a roster of international blue chips: Philip Morris, Du Pont, Toyota, Bekaert and Hilton.
Erol Sabanci, the bank’s chairman, believes that the time has come to end Akbank’s splendid isolation. “We have been preparing for this,” he says. “Akbank is clean as a whistle and robust. In the last five years we sold off our non-financial participations and became a pure bank. I believe that for any foreign bank that wants to invest in Turkey we are the most attractive.”
Like the rest of the bank-owning families, the Sabancis have used Akbank to finance their growth cheaply. Turkish rules governing loans to owners are lax and generous although this will gradually change under the new banking law. The ratio of total loans to loans to owners in Turkey is an “astronomical” 75% according to JP Morgan. All 10 banks that have collapsed since 1994 went under for the same reason: their owners borrowed from their own banks and could not or would not repay the loans. But unlike many other bank-owning families the Sabancis used their money wisely, investing in dozens of profitable joint ventures in which Akbank was a shareholder.
Erol Sabanci denies persistent rumours that he is talking to Deutsche Bank, saying that these arose from a favourable analysis that the German bank’s research department published on Akbank.
At the end of 1999, Akbank’s pre-tax profit was $1.1 billion and total assets $8 billion, a small increase in both cases over the previous year. Akbank’s shares are divided between Sabanci Holding (48%) Sabanci family members (30%) and free float (22%), of which over half is held by non-Turkish institutional investors.
Erol Sabanci believes that ideally the prospective partner should buy the family’s share so that from then on it deals with a corporation, instead of with individual family members. “If we are talking about the family share we are talking about $1.5 billion,” he says.
One proposal that he himself makes is a merger between the big four – Akbank, Yapi Kredi, Is Bank and Garanti. “Even what we call big here is small,” he says. “Total assets in the Turkish banking sector is under $130 billion, which is the size of a small bank in Europe. We must unite as banks elsewhere have united.”
To a seasoned observer of the Turkish scene this doesn’t sound feasible. Is Bank has a curious ownership structure: 28% of its shares are owned by a political party, 44% by the pension fund and the rest are free floating.
Even Sabanci agrees that this set-up might put off the most determined invader. Yapi Kredi is controlled by the reclusive billionaire Mehmet Emin Karamehmet, who is a fiercely individualistic empire builder. Ayhan Sahenk, who owns Garanti, is a buyer not a seller.
Apart from Garanti (and not counting his overseas banks) he owns the Ottoman Bank, Korfezbank and until a few years ago owned Bank Ekspres. It is difficult to conceive him merging his own banks let alone merging with the banks of others.
“The economy is changing,” says Sabanci. “I am changing. If I had not changed I would not have told you what I’ve just told you. When an idea is put forward it does not necessarily mean that it must be implemented right away.”
One name that constantly appears on the list of banks interested in an acquisition in Turkey is HSBC, whose Turkish operation started 10 years ago as Midland Bank. Piraye Antika, the bank’s Istanbul based general manager says: “Our expansion policy is not based on acquisition,” But this may change. “If something comes up that makes sense, we may go for it. But right now our plan is to grow organically.”
