Best CEE companies in 2009: Garanti’s optimism shines through the gloom

“Turkey as a country works. It is able to do big things quickly” Afzal Modak, Garanti

ANALYSTS OUGHT TO dislike Garanti. It’s a bank at a time when the financial system is in crisis. It’s in a region struggling to come to terms with the credit crunch. And it is based in a country, Turkey, that is hampered by a great deal of political uncertainty. And yet the fact that Garanti was voted the best-managed company in central and eastern Europe in Euromoney’s 2009 poll of market analysts covering the region is no surprise. The bank has been rising up the ranks for a number of years; it came second in the poll for 2008.

To some extent, the analysts’ rationale is transparent. Last year Garanti enjoyed the best return on equity of any Turkish bank, while fourth-quarter results also gave it the highest net profits. Turkish banks have outperformed other banks in the EMEA region, benefiting from sound fundamental capital and funding positions.

However, the future is uncertain. Financial institutions in Turkey face the prospect of asset deterioration because of a dire economic outlook. Proposed but long-delayed IMF emergency funding will certainly be needed to plug the external gap for an economy that shrank some 6.2% in the fourth quarter and where unemployment rose to a record 15.5% in February.

Bank equity analysts are worried. Earnings of TL1.7 billion ($1.03 billion) at Garanti are forecast to fall to TL1.07 billion during 2009 according to Morgan Stanley – although this is one of the more bearish predictions.

Nevertheless, the mood in Istanbul, and at Garanti in particular, is not bleak. The appearance of US president Barack Obama, who ended his grand tour of Europe with an early April visit to Ankara and Istanbul, lifted spirits. His call for Turkey’s entry into the EU was well received. The Obama-brokered agreement with the G20 days earlier to provide an additional $1 trillion in total to the IMF boosted sentiment in emerging markets generally.

Turks appear relatively calm about the struggles they are about to face. They have successfully weathered other financial and economic troubles in recent years. So although the Turkish economy is highly vulnerable to a collapse in export demand and a withdrawal of international capital, it is important to note that the country has already dealt with one big crisis in 2001 and a lesser one in 2006.

Afzal Modak, chief financial officer and executive vice-president of Garanti, is sanguine. “I can tell you that, having lived in many countries including the US and having operated in many emerging markets, Turkey as a country works. It is able to do big things quickly,” he says.

Modak joined Garanti two years ago after working for GE for 22 years. GE Capital took a 25.5% stake in the bank in 2005 alongside Dogus – the two co-owners have 51% of the company. Garanti was also voted the most improved company in the CEE region in the Euromoney poll. The implication is that the involvement of this strategic shareholder has been meaningful. The mission statement is straightforward.

“Simply stated, Garanti is about customer-centric growth with a focus on asset quality and profitability,” says Modak. “We work with our customers and focus on risk management and being profitable. How do you execute such a statement?”

Almost every banker talks of being customer- or client-centric. But Modak places equal weight on six other factors: product innovation, IT, infrastructure, state-of-the-art risk management, high-quality human resources and the leadership skill of the management board.

“You literally have seven engines that are firing in an organized synchronized manner; you can’t help but create a great organization,” he says.

Modak argues that it is particularly the focus on product innovation and technology that provides such a substantial competitive advantage. The bank uses advanced customer relationship management techniques to make sure the right products are going to the right customers. Much of Garanti’s expansion has been led by generating fee income from high-margin retail and small and medium-sized enterprise clients. Dreaming up and getting the right products to clients is one thing – the bank has more than 300 on offer – but Modak highlights the action that takes place behind closed doors as crucial to the bank’s success with managing clients’ needs and risks.

“When it comes to risk management systems, decision engines and product management – the applications we use are the best. They are integrated into one technology programme, which is key. This is something the bank has done well, ensuring that products, processes and technology all work in harmony.”

Modak characterizes Garanti Technology as the bank’s hidden gem. Of the 54 million transactions last year, 98% were done centrally. This means that there is standardized information flow and a clear view of what is going on at branch level.

“The bank is very focused on re-engineering processes and applications. Some of the applications are purchased but they are purchased from the best providers,” says Modak.

This enables Garanti to give its SME client base the ability to track, in real time, cash positions and other treasury-oriented solutions.

“We also provide cash management services to large commercial customers that allow us to benefit from our technology network… clients such as supermarkets that need to move cash around,” says Modak. “If you have a manufacturer that is selling products to 30 distributors and you are able to own that relationship, you are able to do factoring, bill discounting, cashflows and sometimes you understand that supply or distribution chain better than the businesses themselves.”

The power of the technology service is not limited to benefiting risk management control, or having a comprehensive understanding of what is occurring at branch level – Modak maintains that the command centre can see when an ATM is out of action for more than 10 minutes. Innovation in products and providing services is a key part of the bank’s strategy, so its ATMs, in addition to the usual functionality, have coin dispensers so customers can pay utility bills in cash and get the change back. This also extends into the bank’s approach to internet banking, where it has a market-leading position.

“More than 1 million customers use the internet every month, carrying out more than 10 million transactions,” says Modak. “You can literally, other than withdrawing cash, do everything you can do in a branch on the internet very easily.”

Another example is the bank’s bonus card, which is a loyalty programme and credit card. It has become world recognized and an industry standard in Turkey, with more than 8 million customers using it. So successful has this scheme been that five other banks have joined it.

Garanti has performed above average, grown market share and achieved the best fee income during Turkey’s recent growth period. What is the strategy for coping with a different set of challenges? Modak is understandably wary about the present environment and sees the dangers as coming from deteriorating asset quality and liquidity.

“Our NPLs at the end of last year at 2.4% were lower than the industry average of 3.4%,” he says. “We have to obviously acknowledge that the real sector is slowing down, exports have slowed down. Therefore there is more unemployment and one cannot escape [the implication of] higher NPLs.”

Modak suggests that the same advanced technology that enables the bank to generate higher than average earnings from clients will also prove crucial to managing possible defaults.

Liquidity remains a problem for overextended financial institutions worldwide, but for Turkish banks it is less of an issue because there is minimal reliance on wholesale funding. Deposits exceed the total number of customer loans at Garanti, the loan-to-deposit ratio at year-end is 90%, and the position is improving during these tough times.

“We are gaining share from mid-sized banks and some of the foreign names because of our reach and reputation,” says Modak.

Wholesale or international borrowing is about $5 billion; of that only about $1.9 billion is to be rolled over this year. The bank is conservatively run; it has no foreign currency exposure. Garanti has to live with interest-rate exposure but has little exposure other than that. Even on the rate side it is extremely prudent, hedging out 90% of the mortgage book through swaps.

The bank already has a lower than average NPL ratio, a decent enough liquidity profile and has minimized interest-rate risk. The last line of defence is capital, and it is here – as with most Turkish banks – where Garanti’s position is firm.

Garanti’s capital adequacy ratios are 14.9%, very strong compared with the minimum 8% or the regulator’s recommended 12%. Given such a substantial capital buffer it is hardly surprising that Modak is optimistic about managing through the cycle. He thinks that at some time in 2010 things should start to look up. Will it seek acquisitions?

“We are not opposed to looking at opportunities but the organic engines are working fine,” says Modak. “The bank’s culture and operating model is very powerful. The management philosophy and the world-class management team mean that we can really take advantage of this crisis and sustain the reputation and the confidence that people have in us.”