Banking on Turkey

National Interest, The, Winter, 2004 by H. Kaan Nazli

The banks are by no means out of the woods. They remain vulnerable to a potential crisis that may change the macroeconomic environment, as the share of government bond portfolios in overall assets (for example, Akbank, Turkey's largest, has 50 percent of assets invested in bonds) exposes the banks to potential interest rate fluctuations and exchange rate volatility. The scarcity of free equity remains a critical concern for the long-term profitability of Turkish banks in a low-inflation environment. The analysis of the first-quarter 2004 sector data shows that while Turkish banking assets have reached $195 billion, 49 percent of the sector's equity has been locked up in property investments and shares in other companies (for example, Yapi Kredi's participation in cellular operator Turkcell).

The possibility of a smooth consolidation process through injection of the existing shareholders' sizeable capital into the Turkish banks or voluntary mergers among the existing players looks remote, however. The possible opening of EU accession negotiations in 2005, in this sense, may increase appetite among international banks to buy market share in Turkish banking and may facilitate fresh equity injection through mergers and acquisitions. Among the local banks, only Akbank seems fit to be a potential acquirer given that the size of its free equity exceeds $3 billion, indicating the critical importance of foreign interest for the sector to maintain sustainable growth and reduce its vulnerability to interest and exchange rate fluctuations.

So far, there has been an increased appetite from international giants to enter Turkish banking, but no large-scale deals have gone through. The investments of the early entrants such as British HSBC, which acquired Demirbank, and Italian Unicredito, which signed a 50-50 partnership with Kocbank, have remained relatively small, with market shares in total banking assets at 1 percent and 3 percent, respectively. The recent failure of Italian Banca Intesa and Dogus Group negotiations for the sale of the majority stake in Garanti Bank (due to disagreements on the share purchase agreement) eliminated hopes that such a large-scale deal would encourage further interest in the banking sector. There are indications, however, that international interest will increase in the next few years.

Regardless, Garanti Bank will maintain its place as one of the top acquisition targets for a potential entrant to the Turkish market, although the break-up of the Banca Intesa talks may have delayed its strategic sale prospects. Meanwhile, the state-owned Vakifbank, which yielded a $159 million net profit in 2003, awaits privatization in 2005. TEB, a mid-sized Turkish bank, is officially in partnership negotiations with France-based BNP Paribas. Yapi Kredi Bank, which is to be sold by the end of October 2005, should also attract international interest, although whether Cukurova Group, the bank's former majority owner, repays a $2 billion debt to the bank will be critical for the bank's financial health.