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THE ANNOUNCEMENT THAT Banca Intesa is wooing Garanti Bankasi is a positive sign for Turkey’s banking sector. The Italian bank’s offer to buy a controlling share of Turkey’s third-largest private bank is said to be set for conclusion this coming autumn.
Garanti’s takeover is being treated in Turkey – even by rivals – as both an encouraging prospect in its own right and a sign of even better things to come. If indeed Intesa signals a revival in the Turkish banking sector, a foreign capital injection will ensure Turkey can service its sovereign debt, cash-starved industries will make long-delayed investments in technology and formal EU entry negotiations will begin in December.
Minority shareholders that hold a third of Garanti’s stock might even get a bonus of sorts beyond the obvious appeal of deep foreign pockets. That outcome involves a deal in which Garanti’s parent, Dogus, agrees to buy non-core assets weighing heavily on the balance sheet without minority shareholders’ participation. Those assets, including an automotive import franchise, an interest in a supermarket chain and a Mediterranean hotel, figure heavily in the bank’s negative free equity of $390 million.
This list of positives might seem a lot to read into a single partnership negotiation. But apart from a few private grumbles in the banking sector noting the many false springs of the past, it is a widely held view. This is particularly so as European banks have swept into the EU accession states as they neared or achieved candidate status. Today foreign banks comprise just 3% of the Turkish banking sector while across eastern Europe the rate is between 70% and 90%.
“I share in the positive assessment,” says Yavuz Canevi, chairman of Turkiye Ekonomi Bankasi (TEB) and a former central bank governor and treasury chief. “One, the emergence of this negotiation shows confidence that the turbulence in the banking system is past. Two, it’s a sign that real banking is beginning in Turkey and this will force further consolidation.”
That is not to say the deal could not go sour, just as a similarly announced marriage of the two banks failed in 2001.
In recent years, as the banking sector has recovered from the severe crisis of 2001, which wiped out more than a quarter of the sector’s assets and closed 21 banks, rumours of foreign suitors have been frequent. Citigroup was said to be interested in TEB and also Ottoman Bank before it was absorbed by Garanti. Deutsche Bank was looking at Akbank, controlled by the industrial Sabanci family. BNP Paribas was said to be eyeing Finansbank. And much speculation has centred on France’s Société Générale ever since the French treasury posted a permanent envoy to Ankara almost a year ago – allegedly to scout for the country’s leading banks.
Against that backdrop there have been repeated efforts by the government to ready the sprawling state-owned Halkbank for privatization. Despite government pledges to the IMF to do so, almost no-one seriously contemplates the bank’s near-term sale.
“We’ve heard this all before. The two big players [HSBC and Citigroup] are already here and there’s not all that much that could follow the Garanti-Intesa thing in a big way,” says a senior banker in Turkey. “I don’t see this as all that big a deal.”
That opinion is not widely shared. In fact if the Garanti-Intesa deal succeeds, it should soon be followed by the sale of Turkey’s fourth-biggest private bank, Yapi Kredi, Turkish bankers say. That’s because the two lead among the big four in the ratio of loans to assets – the measure in many ways at the heart of the sector’s problems today. The two banks, which also have respectable capital adequacy ratios of about 17%, stand out in terms of international marriage eligibility for the loan portfolios in the dowry. Garanti’s proportion of credits to assets is about 30% while Yapi Kredi’s is closer to 38%.
Many complex problems remain in the sector despite the shakeout, reforms and much stricter scrutiny now in place. Total free equity in the system was just $16.4 billion at the end of 2003. Risk management is immature. State sector banks still dominate much of the economy.
But the chief woe is the ratio behind Canevi’s phrase “real banking”, a term on every economist’s lips. It refers to the fact that Turkey’s banking sector’s assets fail at the basic task of intermediation, or providing a motor for economic growth. The sector’s assets are more than 60% dominated by government paper.
That has made for high profitability for banks surviving the 2001 crisis, as historically low interest on US treasury notes has driven investors into emerging-market bonds and high inflation and domestic debt service requirements have made Turkish T-bills one of the best deals in the world – offering 198% annualized interest at one point. Now, though, real interest rates are closer to 10% and inflation has dropped to similar levels that are the lowest in 30 years.
Compounding the spread compression is the expectation that the US Federal Reserve might soon begin to inch interest rates up. “Couple that with the pressure to meet new Basle II capital adequacy standards, and the entire sector is suddenly faced with the urgent need to rapidly reinvent itself,” says Gazi Ercel, a former central bank governor who resigned in March 2001 as the banking crisis neared bottom. “The need to rapidly expand credit also means more risk and Turks can do neither without the liquidity and risk management skills of foreign banking partners.”
The stakes are high for much more than the banking sector. The sustainability of economic recovery now driven by 5% growth is vulnerable because the fragile industrial sector is starved of credit. Turkey’s aggregate loans add up to 20% of GDP, up from 14% a few years ago but still one of the lowest rates in the world. The average loan maturity was just three months last year – a one-year maturity on a commercial loan is considered a good deal, and the longest existing maturity of five years is almost unheard of.
Poor industrial productivity Add to that the fact that with a few exceptions such as parts of the automotive sector, Turkey’s industrial productivity is only about 40% of western levels and is operating at about 75% of capacity. Tame labour and widespread tax evasion alone hardly make for the competitiveness necessary to engage the EU. Hence the consensus that salvation lies in foreign capital, and not just banking capital but also foreign direct investment, which Turkey has also been notoriously poor in attracting.
“The Turkish banking system suffers deeply from the insufficiency of capital,” says Gunduz Findikcioglu, chief economist at the Turkish Industrial Development Bank, the country’s only investment bank. “Other emerging markets in similar situations, from Thailand to Mexico to Argentina, have remedied that with foreign help and we hope that process is starting here with the Garanti-Intesa deal,” he adds.
If realized, new banking investment would be the first major foreign incursion into Turkey since 2001. That year HSBC, already in Turkey in a modest way since 1991, bought the failed Demirbank from the government regulator for $350 million. At the end of 2001, Italy’s UniCredito announced plans to buy 50% of privately owned bank Kocbank, a deal ultimately concluded for $240 million. HSBC’s purchase and subsequent infusion of $200 million catapulted it to the front of the foreign pack in Turkey and it now has a network of 156 branches. Since then the only new entry has been Bank Europa, which opened shop in 2003 but now has only a tiny share of the market and a handful of branches in Istanbul.
HSBC is frequently cited as an example of how foreign banking can bring in international expertise, modern practices and sophisticated risk management. Although it has less than 2.5% of the Turkish market it intermediates 6% of the total exports. It has 6% of the mutual fund market, and 25% of the market for such tricky instruments as forward hedges against currency fluctuation. It is the only commercial bank in Turkey offering Islamic banking services, placing $260 million in deals in 2003. HSBC also has a loan to asset ratio in excess of 50%, the highest in the country.
This is the style analysts hope a Garanti-Intesa tie-up will imitate. It would marry Italy’s largest bank with assets of almost $330 billion and Turkey’s number three with assets of about $16 billion and shareholder equity of $1.75 billion.
Documents made public on the deal talks outline the takeover of a controlling stake in Garanti as part of Intesa’s 2003-05 business plan to strengthen its presence in both central and eastern Europe and the Mediterranean. One company report argues that the acquisition would reinforce Intesa’s mid- and long-term growth and value creation without significantly increasing its risk profile. It notes that the risk-weighted assets of Garanti would be only 3% of those of the combined entities. It also hints at the issue of a deal structured to convert the bank’s position of negative free equity. It suggests Garanti’s asset profitability would rise if the deal could be concluded in such a way as to require the sale of non-financial Dogus holdings.
“The low cost of funding that will be supplied by Intesa to Garanti and/or the long-term foreign borrowings that Garanti will have access to by means of Intesa will strengthen Garanti’s market share in consumer loans, especially housing loans,” the report said.
Attention is soon to turn towards the other banks, particularly Yapi Kredi, which has to find a foreign buyer by the end of the year. It has many desirable qualities including what many regard as the best IT infrastructure in the country, enviable shares in such markets as credit cards and well-regarded management. But at the start of the banking crisis the troubled industrial conglomerate Cukurova held 42% of its shares. The bank escaped being taken over by regulators with a $2 billion restructuring and a deal to reduce the Cukurova share to less than 10% by 2005. So far, that hasn’t happened and the regulator has retained an agreement to appoint an international investment bank to find a buyer if Yapi Kredi can’t do so on its own.
“Without a foreign partner taking over Yapi Kredi this year, Cukurova can’t survive,” says a competing bank CEO.
With so much riding on international credibility and economic stability, including the hope that in December Turkey will finally get a date to begin formal EU entry negotiations, many would make a similar argument for Turkey in general: without foreign banking partners, the country’s economic recovery cannot be sustained.
