Slow but steady start

To view the digial version of this report, please <a href="http://edition.pagesuite-professional.co.uk/Launch.aspx?EID=3b0c1ac3-f95f-4158-b236-ed11c9a15400" onclick="window.open(this.href);return false;" onkeypress="window.open(this.href);return false;">click here</a>.To purchase printed copies or a PDF of this report, please email gloria.balbastro@thomsonreuters.comAs Turkey gets to grips with hefty economic policy challenges – and shrugs off the complications of living in a volatile region – it exudes a self-belief hard to find elsewhere.There are many reasons for that optimism. Growth could be 2.5% this year and up to 4.5% in 2013, and capital markets are shaking off the dust of 2011.Positive sentiment among foreign investors towards Turkey has been reflected in rising inflows of international funds into ISE-listed stocks, and ECM bankers say building blocks are now in place to put the equity market on a firm long-term footing.A privatisation programme – a potential source of activity in the new issue market – appears to be back on track and the government has reiterated its commitment to accelerating the sale of residual government holdings of companies such as Turkish Airlines, Turk Telecom, and a number of banks. Potential IPOs could add as much as US$5.2bn of new equity supply by the middle of 2013, and the utility sector may also emerge as a source of new issuance.Turkey was also able to relieve perceptions of funding pressure in January – amid nervousness surrounding upcoming maturities – with a 10-year offering via Barclays Capital, the sovereign’s largest deal in two years and the first US dollar deal in 2012 from a Central and Eastern Europe borrower. It is also thought to be mulling an Islamic bonds debut this year, tapping into a global sukuk market estimated to be worth more than US$100bn.Last year was not without its difficulties, though, with some observers characterising it as a pretty miserable year and focusing stubbornly on the ballooning current account deficit, inflation fears and the dangers posed by currency depreciation.Fiscal and monetary stimulus fired overheating and increased the volume of investor concerns as the year progressed. Rising investment flows unmatched by exports led to a soaring current account deficit, equivalent to about 10% of GDP. A tighter external financing environment and concern about the balance of payments pushed down the lira, contributing to sticky inflation above 10% and well north of targets. Instead of hiking rates to slow inflation, the Turkish central bank stood fast behind its unorthodox monetary policy, opting to leave borrowing costs low so as not to hamper growth. Many demanded a stronger and more orthodox response.Macro imbalances remain and nervousness in the markets, ratings agencies and the IMF had not entirely evaporated by the start of the year. Bankers point to formidable challenges: rising oil prices could further widen the deficit; Turkey is still far from being a saving nation and the informal economy ensures that considerable amounts bypass banks, suppressing retail demand for equities; the lira remains fragile, pushing up dollar refinancing costs for listed companies; corporate reporting standards and governance still leave much to be desiredHowever, signs of a slowdown in inflation in February and a decline in credit growth may have vindicated the central bank’s policy of managing inflation through currency market interventions and bank reserve requirements.As finance minister Mehmet Simsek says, it was an unorthodox policy, but it one that was effective and will continue to serve them well.Alongside Ankara’s determination to address macro challenges, another crucial, but oft understated, reason for the underlying optimism is the “p” word: politics, both domestic and regional.Domestically, investor sentiment is taking its cue from unprecedented political, and hence financial, stability consolidated by the enth

To view the digial version of this report, please click here.Despite an economic growth rate that most EU members would envy, Turkey finds itself at a crossroads. In 2010 its GDP grew by 9% with 2011 estimates from the World Bank at 6.1%. Compared with forecasts of as little as 1.9% for the eurozone in 2011, it’s not hard to imagine why the Turkish government might be experiencing a sliver of schadenfreude.But beneath the growth lie some inconvenient truths. The unemployment rate is at a stubborn 8.2%. The primary equity and bond markets are quiet and growth from the EU, its largest trading partner which receives almost 50% of Turkey’s exports, could be sluggish for years. Perhaps worst of all is its current account deficit which remains stuck at a worrying monthly US$6bn.As such, the country’s iPad-wielding Finance Minister Mehmet Simsek is anything but complacent. He is perfectly frank about the issues his country faces and succinctly answers questions about his plans for Turkey’s nascent financial industry and tackling the deficit. He is upbeat but realistic, and says Turkey still has every intention of joining the EU and its currency.“Our focus right now is on increasing savings in Turkey in general and also in making Istanbul a regional financial centre. In the first half of this year we plan to submit a draft bill to achieve these objectives.” he said in his office with sweeping views of Ankara, adorned by Turkish and EU flags and a photo of Prime Minister Recep Tayyip Erdogan. “We have a healthy and sound banking sector and reformed it during the last decade. It’s reasonably well regulated and supervised. We are encouraging Turkish companies to get listed on the stock exchange and increase investment options available to investors.”The focus on savings is connected to a push to get more Turks enrolled in private pensions, with the calculation that this will lead to more interest in equities and other longer-term savings products. Simsek explains that many Turks still have savings in gold or even keep their savings in vaults at home. Figures showing gross savings declining as a percentage of GDP worry him, and he believes that this is part of the reason why Turkey’s equities market has been so flat. Last year there were only three IPOs, and there have been none since May 2011. This represents a sharp drop off from 2010’s record 23 IPOs.New initiativeSimsek certainly wants to see improvement in the equity market, and highlights an initiative by the capital markets board and the Istanbul Stock Exchange to get more companies listed, particularly SMEs. The initiative will make it easier to list as traditionally Turkish firms, which are usually family controlled, have shied away. Furthermore a new commercial business code says firms have to be transparent and follow certain standards whether they are listed or not. “Our focus right now is on increasing savings in Turkey in general and also in making Istanbul a regional financial centre”“In the past companies didn’t see why they should get listed,” he said. “They had access to capital from banks. They didn’t have to come up with financial statements that were at par with international standards or have independent board members or things like that. The new code changes that, so I think there will be an incentive from companies to get listed.”However, he points out that the main problem in getting companies to list is a matter of demand, as the domestic investor base is narrow. Simsek sees foreign investors filling part of this gap, but returns to the drive to get more Turks enrolled into private pensions as a factor that would boost domestic interest in equities. He cites Poland as an example of where this happened.On the fixed income side, growth has been similarly sluggish, and the much-talked about push into Islamic issuance has stalled. There have been only two international sukuk deals from Turkey, partly, Simsek says, because much global issuance in that market is driven

To view the digial version of this report, please click here.The Republic of Turkey is usually the first sovereign out of the blocks from Eastern Europe, the Middle East and Africa, so when it did not immediately tap the market at the start of January, it appeared to be a sovereign under pressure.The main area of concern for investors was the sheer amount of debt that Turkey needed to raise. Despite being an established and sophisticated borrower well-known among the international investor community, Turkey has had its 2011 sovereign issuance programme severely affected by events. The huge global volatility caused by political upheaval in the Middle East, the natural disasters in Asia and the ongoing global financial situation have meant that it missed its funding target of US$5.5bn.Turkey’s domestic economy also spooked investors, with rising inflation and a high current account deficit exerting pressure at home, while the eurozone crisis and political upheaval across the Middle East triggered a more general flight from emerging market credit. With some upcoming maturities to refinance, the country had set itself a funding target of US$5.2bn for 2012, including the previous year’s shortfall. Added to its reputation as an early entrant into the bond markets, and there was a growing sense that this was a sovereign that needed to deliver.Opportunity knocksAfter sitting on the sidelines for the first two weeks in January, Turkey saw a window of opportunity as the European Central Bank’s provision of cheap loans through its three-year long-term refinancing operation acted as a buoyancy aid to the listing eurozone. On January 19 it tapped the dollar market with a US$1.5bn 10-year offering via Barclays Capital.“Turkey’s transaction in January relieved the perception of any funding pressure. They achieved size, with the US$1.5bn proving larger than any of their more recent transactions. They showed early in the year that they had significant market access, laying the framework for the subsequent reopening,” said Fabianna del Canto, director in the debt syndicate team at Barclays.This was the first US dollar deal in 2012 from a Central and Eastern Europe borrower and the largest deal from the sovereign in the past two years.With the deal pricing at 6.25%, representing a new issue premium of 20bp and attracting US$4.5bn in orders from 184 accounts, Turkey achieved its aim of starting the year with a bang. The largest portion of the new paper was allocated to US investors, which took 40%, followed by a 33% take-up by Turkish funds. Accounts in the UK bought 20% of the bonds and European investors took the rest. The deal tightened, enabling the sovereign to re-open the bond on February 9 with a US$1bn tap that attracted a further US$3.3bn in orders.Turkey benefited from the broader rally in emerging market credit – and credit in general – since the start of the year, and its reputation as first-mover puts it in the best position to swallow up the wall of investor cash that flowed into the asset class at the start of the year.Odilbek Isakov, associate director in debt capital markets at HSBC said: “There has been a 100bp tightening of Turkey US dollar September 2022 bonds since they were issued on January 19. There has been a tremendous strengthening of the cash bonds on the back of increased inflows to emerging markets bonds in general.Facing the challengesBankers also point out that after a miserable 2011, Turkey had become something of a whipping boy for investors, but has got to grips with its economic challenges. Investor concern about inflation and the current account worsened last year when Turkey’s economy expanded at the fastest pace after China among the G20 nations, spurring demand for imports that increased the current account deficit to a record US$78.6bn in October, equivalent to about 10% of GDP.The central bank responded by more than doubling the rate it charges for funds to lenders at the end of the year. Inflation slow

To view the digial version of this report, please click here.At first sight Turkey could be sitting at the eye of a storm, having to deal solely with the enviable problem of an economy prone to growing too fast as turbulence swirls all around.That is certainly how Turkish business figures and outside observers see it, dismissing the crisis in neighbouring Greece, nausea in the eurozone, the prospect of a bust-up with the EU over Cyprus, and growing regional tensions stoked by Syria, Iraq and Iran.It is hardly surprising that the president of the Turkish Exporters Assembly (TİM) Mehmet Büyükeksi recently portrayed 2012 as a “safe journey on a stormy sea”.However, despite unprecedented domestic stability buoying investor sentiment, this is set to be a defining year for Ankara’s foreign policy.Turkey’s location potentially allows investors to access multiple markets in Europe, MENA and the Caucasus. But in a climate of risk aversion its structural weaknesses – lack of savings and currency reserves and a reliance on foreign energy and trade – leave it exposed.Investors are trying to shake off last year’s frustrations at what they saw as fumbling by the central bank over the country’s deficit and currency policy, yet macro imbalances remain and questions persist about the sustainability of Turkish growth on the back of domestic credit.Eurozone benefits?While most observers believe that, far from being a loser from eurozone and Greek troubles, Turkey could be a significant beneficiary, Europe’s problems will not leave the banking system unscathed: more than 70% of of syndicated loans in the Turkish banking system are from European banks.Senem Başyurt, executive director of Transaction Advisory Services M&A Advisory at Ernst & Young said: “Any kind of slowdown in these economies has a direct impact on export growth. Moreover, the traditional source of FDI to Turkey has been the European countries. Given that the financing sources are limited, we can expect a slowdown in investments and/or capital injection from the eurozone.”Yet Basyurt believes that because the main trading partners of Turkey are stronger countries like Germany and France, the impact both on exports and FDI will be limited.Turkish trade is booming, up 18.5% in 2011 on the previous year and in February [2012] hit US$11.2bn, according to TİM. There are, nonetheless, signs that trade with the EU has slipped, with Europe’s share of the Turkish export market falling to 43.5% in January [2012] compared with 47.7% in January 2011 (see table).Potentially, Greece’s vast debt and long-term stagnation could further slow development in the region – but Turkey’s relationship with Greece remains limited and trade has not been hit dramatically: TİM and Eurostat figures suggest Greek imports from Turkey held up at €1.18bn in 2011 compared with €1.17bn in 2010.Ozgur Altug, chief economist research at BGC Partners, said that while the eurozone crisis definitely affected Turkey, Greece is a non-issue: “When we look at exports, imports, tourism and other macro data, Greece’s contribution to the Turkish economy is very limited.”About 480–500 Greek companies operate in the country, although banking and finance comprise more than 80% of Greek capital investment. Business figures say Greece’s drastic privatisation programme to 2017 represents an unmissable chance for Turkish investors: Athens has promised to sell €50bn of assets and put its state-owned gas company DEPA on sale last month. On March 22 Turkey’s Deputy Prime Minister Ali Babacan added to the momentum by reportedly telling a meeting in Istanbul that the only formula that will “save Greece’s future” is more trade and investment with Turkey.Investing in GreeceThe best method for Turks to invest in Greece will be through partnerships, and M&A experts have argued that hefty discounts will open doors.Basyurt said: “We know that some Turkish companies are considering investments in Greece and looking for opportunities wi

To view the digial version of this report, please click here.Many European banks are under increasing pressure from their governments to focus their attentions at home, but a number of Turkish banks are looking to take the domestic success they have enjoyed domestically and apply it in new markets.Take Isbank. Halfway through 2011, Isbank had the second-largest banking network in Turkey, with 1,153 domestic branches, plus 15 foreign branches, two representative offices and a bank subsidiary in Germany. It also has interests in non-banking corporates, predominantly in industrial and telecoms sectors.Isbank claims to have been the first Turkish bank with a foreign presence, its branches in Alexandria and Hamburg opening in 1932. It is now active in 12 different countries, with a presence in the UK, Bahrain, Iraq and Northern Cyprus, as well as a subsidiaries in Germany and Russia, and representative offices in Shanghai and Cairo.Its foreign business interests are driven by Turkish clients active abroad, as well as local players in those countries. International trade finance and international payments are cited as particularly important activities for the bank.“Apart from local corporates, there are large numbers of Turkish corporates operating in our target countries. We are seeking not only to serve local population through regular banking activities, but also to provide all kind of banking services required by Turkish entrepreneurs,” Isbank stated.“Isbank’s presence would encourage Turkish companies to invest more in these countries, having a positive effect on the economy and the financial sector of the country involved and enhancing co-operation between two countries in terms of trade, construction, project finance and many other areas,” the bank added.Garanti, too, has aspirations to grow as an international player. It boasts operations in Russia, the Netherlands and Romania through licensed banks, with representative offices in Germany, the UK and China and overseas branches in Luxembourg, Malta and Northern Cyprus.Like Isbank, its transition to international banking was smoothed by the presence of Turkish business interests abroad. Its Russian subsidiary, Garanti Bank Moscow (GBM), began operations in 1996 and holds a full-scale banking licence, though it describes its core businesses as corporate and commercial banking. GBM serves both Turkish companies active in Russia and Russian clients, but the latter has come to dominate the business, with 83% of its clientèle Russian resident companies.Its first representative office opened in London in 1985, with its first foreign subsidiary coming five years later when Garanti Bank International NV (GBI) was established in the Netherlands. GBI now has operations in Germany, Turkey, Switzerland and Ukraine via its branches and representative offices, offering trade finance, private banking, structured finance, and corporate and commercial banking. Each country is home to a different flavour of the bank with the balance of business reflecting the client mix it serves.Romania, then the worldBut it is the Romanian business that causes the most excitement among Garanti executives. In both the Netherlands and Russia, Garanti offers corporate and commercial banking services, but its Romanian subsidiary, which started life in 1998 before gaining a full banking licence in 2010, operates as a universal bank. It serves customer segments via a number of businesses: Garanti Bank SA, Garanti Leasing, Garanti Mortgage and Garanti Consumer Finance.“With 77 branches and 98% geographic coverage, we offer advanced and comprehensive banking services with the aim to become one of the top 10 banks in Romania,” said Ali Fuat Erbil, executive vice-president of corporate banking, financial institutions and cash management at Garanti.The two are not alone. Denizbank Financial Services Group comprises six consolidated financial-related subsidiaries, with two foreign subsidiaries in Austria and Russia. Akb

To view the digial version of this report, please click here.At the end of 2011 there were just 366 companies listed on the Istanbul Stock Exchange, according to figures published by Turkey’s Capital Markets Board. Total market capitalisation, meanwhile, fell from just over US$300bn in December 2010 to US$225.7bn by the end of the year.Those numbers are modest – and by all accounts frustrating – by emerging market standards.A comparison of Turkey’s stock market indicators with those of the BRICs, published last year by the IFC, makes unflattering reading for the Istanbul Stock Exchange.Market capitalisation in 2009 ranged from 70% of GDP in Russia to 90% in India and just over 100% in Shanghai. The comparable metric from Turkey was just 36.58%. By the end of 2011, Turkey’s market capitalisation to GDP had slipped to just over 30% of GDP.Pickings were certainly depressingly slim in the Turkish IPO market in 2011. There were promising, if very modestly sized, offerings early in the year with the exchange welcoming cash and carry firm Bizim and retail group Kiler Holding in January alone. Three months later Kiler was back listing property assets with Kiler REIT. Deals were oversubscribed and each attracted reasonable demand from overseas investors, with BlackRock a significant participant in the Kiler REIT transaction, buying more than 5% of the TL184.1m (US$121m) sale in April 2011.The following month saw a small IPO for Akfen, raising TL123.4m (US$80m) from a balanced mix of foreign and local investors, but the month was notable chiefly for the abandonment of a planned US$325m IPO from another REIT, Ronesans. That more or less brought the shutters down on the market for IPOs of any meaningful size, and it has yet to reopen.Last year was not, of course, a representative year for most emerging equity markets, especially for those as dependent on foreign investors as Turkey, which still own a sizeable – if declining – share of the market. According to the CMB data, foreign ownership accounted for 61.9% of the Turkish equity market at the end of 2011, down from 66.2% a year earlier.Long-term dynamicsNevertheless, Mert Yildiz, Turkey and emerging European market economist at Renaissance Capital, said there were longer-term dynamics in play, both from a demand and supply standpoint, than those arising from global sentiment towards emerging market equities.“The problem on the demand side is that Turkey isn’t a saving nation,” said Yildiz. “Turks prefer to buy gold or put money into one-month deposits than to invest in longer-term savings products such as equities.”That, he said, was largely a by-product of the size of the informal economy in Turkey, which ensures that extensive pools of cash bypass the banking system altogether.“That creates a savings deficit, which is one reason why there is so little retail demand for equities,” said Yildiz.The figures speak for themselves. According to Renaissance Capital, while consumption in Turkey rose by 10% between 2008 and 2011, savings fell over the same period. By the end of last year, gross savings amounted to an estimated 12.9% of GDP, compared with 17% in 2010.The size of the informal economy, said Yildiz, also acted as a drag on equity supply in Turkey. He explained that with some 40% of the country’s massive labour force working in the grey economy, reporting standards in the corporate sector inevitably leave much to be desired. The quality of reporting, Yildiz added, will only be dragged out of the dark ages by updated regulation, encompassing new commercial and tax codes.Others agreed that the broader issue of substandard corporate governance deters a large cross-section of family-owned companies in Turkey from embracing a public listing.“Turkey trades at a much lower emerging market discount than Russia, largely because almost 50% of the index is accounted for by banks which are very well-regulated, efficiently managed and transparent”“We worked on a number of IPOs last year that di

To view the digial version of this report, please click here.Three Turkish banks are poised to follow in Sekerbank’s footsteps by issuing SME-backed covered bonds, seeking to diversify their funding and lure international investors to the country.According to Wasif Kazi, structured finance director at UniCredit, the country’s banks are all at different points in their preparation for issuance but are making steady progress.“Certain banks have already begun the transaction process and others are still at the planning stage,” he said. “But transactions like this take some time to prepare in terms of getting systems ready, and obviously banks need to assess whether or not this template is appropriate for their individual funding needs.”Turkey’s banks run huge asset-liability mismatches, as most of their funding comes from short-term deposits and most of their assets are longer-dated loans.For banks that focus on SMEs, such as state-owned VakifBank and Halk Bank and private sector Alternatifbank, the instrument will be a useful way of diversifying funding sources, while also ameliorating these mismatches.“We can do these deals for other domestic banks,” said Kaan Basaran, CEO of UniCredit Menkul Degerler, in Istanbul.In July last year Sekerbank sold the first covered bond out of Turkey, but it is also the first anywhere in the world to be backed by a pool of SME loans, a private placement of three series of bonds from a the first dual tranche of an inaugural TL800m (US$477m) programme.With its SME backing, the deal had strong support from the development bank community. Arranged by UniCredit, the first tranche of US$25m was sold to the IFC, while a second tranche of €25m went to Dutch development agency FMO. UniCredit’s London branch was the arranger of the deal and is buying a €50m portion.“From Sekerbank’s perspective they have been able to use this programme to basically to gain international IFI investors but with the same programme they can also access the local market with bonds in that space,” said Wasif.Almost a year after Sekerbank took the bold action to test out a covered bond format in Turkey; the bank has sold two additional tranches.And according to those who were involved in structuring the programme, it has given the issuer flexibility in terms of its funding and its success is driving other Turkish banks to look at similar structures when they would have been held back in the past. “Turkish banks tend to be quite concerned about market share so it is worth noting that the assets backing the covered bond are not transferred off balance sheet,” said Wasif.“In the past all the market share calculations had to deduct the assets sold to the SPV so there was some reluctance to do that type of transaction in addition to tax complications to do with selling the assets.”What’s in a name?Of course, there are certain market participants that question Turkey’s labelling of SME-backed securities that are kept on the issuing bank’s balance sheet as covered bonds.Indeed, the covered bond world can be extremely protective about anything that uses the covered bond label and does not adhere to the strict criteria set out by the European Covered Bond Council – and a Turkish deal backed by SME loans that resembles a structured finance transaction certainly does that.“An SME is not a covered bond and particularly not from Turkey,” said a covered bond syndicate official about Sekerbank. “Some of the buyers were international public agencies and were not real-money investors.”Another DCM banker echoed that sentiment, saying: “Sekerbank was co-financed through the IFC so it’s hard to really call it a covered bond.”There is also considerable scepticism as to whether dedicated covered bond buyers would look at the product. “At the moment there is so much to look at in the European market I think Turkish covered bonds would be more suited to emerging market investors,” said Marc Stacey, a covered bond specialist at asset manager BlueBay.Was

To view the digial version of this report, please click here.Although signed deal volume for 2012 only stands at just under US$1.8bn – versus US$5.8bn during the same period in 2011 – Turkey’s loan activity will pick up, said international lenders.Comparatively, loan volumes across the wider Central and Eastern European region – notably Russia – have been extremely slow this year, so the G20 member’s multi-billion worth of pending deal flow is taking centre stage.“Turkey’s economy is doing well, the country is in a good political position and it’s one of the growth markets of the region. That can’t be said about many places, so I think people are positive about the right transactions,” Simon Meldrum, director of Central and Eastern European, Middle East and Africa loan syndications for the Royal Bank of Scotland, said.Total syndicated loan volume in Turkey reached US$25.6bn in 2011, with activity peaking in March with eight deals totalling US$5.45bn. A similar volume pattern is expected in 2012, with a pick-up in issuances starting between March and May. Rising volumes are already evident, with the signing of Akbank’s US$1.2bn deal and telecoms group Turk Telekom’s US$600m loan in March, respectively.Pricing pressureInternational lenders watched closely the progress of loans for Akbank and Turk Telekom which not only represented the opening of the Turkish borrowing market in 2012, but also set crucial pricing benchmarks.Intensifying calls for prices hikes have been heard across the CEE markets since the eurozone crisis triggered a rapid reappraisal of international lenders’ balance sheets, and many European lenders grappling for US dollar funding.Turkish bank borrowers’ bi-annual refinancing round historically demands extremely competitive pricing, which lenders have long argued is not sustainable. Akbank, which always kicks off the country’s bank refinancing wave and sets the trend for subsequent deals, paid an all-in cost of 145bp on its March deal, up from 100bp for its previous deal agreed in August 2011.Lenders were heartened by the increase in pricing, but further price hikes are inevitable as many lenders – especially European banks – continue to negotiate financial mine fields. “Turkey’s economy is doing well, the country is in a good political position and it’s one of the growth markets of the region. That can’t be said about many places, so I think people are positive about the right transactions”As expected, Garanti Bank has matched Akbank’s 145bp all-in pricing as it kicks off its search for a new US$1.3bn refinancing deal.Meanwhile, Turk Telekom’s US$600m refinancing – split between a US$285.2m tranche and a €239.4m tranche – set an important benchmark for corporate borrowers’ pricing expectations in the ever-changing lending landscape.“It is not as easy pricing these deals as it was in the past,” a second banker said.Pricing of the three-year deal settled at 350bp all-in and was well received by many lenders, though the company’s national prominence and the inclusion of a euro tranche – currency flexibility was key in garnering European lenders’ support – were both considered essential in getting the deal successfully signed. Islamic interestUp to US$350m-equivalent worth of syndicated Islamic financings are circulating the Turkish market, with Turkiye Finans Katilim Bankasi’s search for a US$150m loan and Bank Asya’s US$200m deal.Turkiye Finans Katilim Bankasi’s loan is being done with initial mandated lead arrangers and bookrunners ABC Islamic Bank, HSBC Amanah Finance, Noor Islamic Bank and Standard Chartered.Meanwhile, initial mandated lead arrangers and bookrunners ABC Islamic Bank, Emirates NBD, National Bank of Abu Dhabi, Noor Islamic Bank and Standard Chartered are working on Bank Asya’s refinancing. The one-year Murabaha financings, which are scheduled to close in early April, include US dollars and euros and carry a 200bp margin.The need to diversify debt funding as banks battle with unpredictable ba

To view the digial version of this report, please click here.Turkey has been a popular destination for foreign banks seeking growth but the sovereign crisis of 2011 and the need for banks to cut risk-weighted assets have triggered a retrenchment by some players.“Banks are deleveraging and looking at their capital allocations but they have to balance the challenges they face in the short-term with the long-term potential of the Turkish banking market,” said one M&A banker focused on Turkey.The attractions of Turkey are clear. In 2011, the country enjoyed the second fastest level of GDP growth behind China, making it the most attractive country in the region for bank investment, while the International Monetary Fund’s forecast of 2.5% growth in 2012 is well above the 1.1% which it predicts for the eurozone.Combined with an open attitude to foreign investment, this makes Turkey one of the few hotspots for M&A in 2012. Most big western banking groups, from HSBC to Citigroup through BNP Paribas, BBVA, ING and UniCredit identified Turkey as a strategic priority in 2006–07 when they started building stakes or buying businesses. Others such as Dexia and National Bank of Greece now face the prospect of having to part with assets they have held for less than five years.That is creating the possibility of a real scrap for assets, which has M&A bankers rubbing their hands, as established western players try to protect their patch against a new wave of foreign suitors, making the country one of the few markets where there are genuine buyers of banking assets.“Turkey’s banking sector has long been of strategic interest to foreign investors as it is the bridge between East and West,” said Jean Lafontaine, head of banking for financial institutions in CEEMEA at Citigroup. “Interest is global, including from Europe, the Middle East, Asia as well as financial investors and sovereign wealth funds.”Middle East bidders such as Qatar National Bank are looking to snap up assets currently being sold by western banks, while Chinese and Russian banks are opening small representative offices on the ground in the first step towards building a big presence. Funding would not be an issue for any of them if they chose to participate in the burgeoning M&A market.Middle East unrest and debt crises in Europe and North America have made Turkish firms a natural target for Gulf investors, lured by the region’s growth prospects. A strong recovery from the global financial crisis of 2008–09 has persuaded many long-term investors to look at Turkey.Forced salesThis new wave of acquisitions is looking to exploit the weakness of western players who are being forced to reduce big illiquid holdings as part of their adherence to stricter capital requirements under Basel III. Earlier this month, Citigroup announced it was cutting in half its 20% stake in Akbank, which it purchased in 2007.Akbank said in a statement to the Istanbul Stock Exchange that “Citigroup made the decision to reduce its stake in our bank as a preparation for the Basel III rules. Citigroup’s decision is only due to Basel III rules and based on technical reasons of concern to Citigroup.”Sources close to the sale said that Citigroup regarded its Turkish business as “high growth and high potential”, and pointed out that the stake sale did not constitute a complete withdrawal from the Turkish market.Citigroup said in a statement that the current carrying value of equity method investment in Akbank is US$3.4bn. Citigroup said it expected to record an impairment charge related to the total investment in Akbank amounting to about US$1.1bn pre-tax.Other western banks are being forced to take more dramatic steps, with troubled Franco-Belgian lender Dexia in talks to sell its highly prized Turkish operation, Denizbank. Dexia bought into Denizbank in 2006 when paid US$2.4bn for a 75% stake, later lifting its ownership above 99%.Bankers say Denizbank was one of Dexia’s best assets and offers a che

To view the digial version of this report, please click here.Turkish investors have long sought protection from the vagaries of FX and inflation via the derivatives market, swapping local capital into US dollars. With strong historical trade ties to Europe, Turkey is no stranger to the risk posed by currency moves, and has long been comfortable with currency swaps.“In such an environment, the FX market becomes a dominant front in the financial system,” said Fatih Keresteci, local head of treasury sales, Turkey at HSBC. And as the market has increasingly opened up in recent years, the importance of the FX market and the structures used within it has grown.“Since currency substitution is very common and volatility in FX rates is sufficient to provide satisfactory rates of returns, the use of FX derivatives are very widespread among retail and individual investors,” said Keresteci.Dual Currency Deposits are the most commonly used securities, with volumes very high, at more than US$1bn traded per week, he said.Equity and commodity derivatives have taken much longer to gain traction. Such products have been permissible since 2008, according to the Capital Markets Board in Turkey, but only started to make a real impression as declining interest rates encouraged investors to consider alternative investments.A capital idea“A large proportion of derivatives bought by institutional Turkish clients are OTC options tailored for use in capital protected products,” said Chadi Semaan, responsible for financial institutions marketing at Commerzbank Corporates & Markets.These capital protection products are often very simple structures, for example a bond with a call or put option, depending on the investor’s view, typically short-dated, out of the money with a 90%–95% strike on an ISE 30 stock. “Capital guaranteed funds and notes were supplied by financial institutions in the previous years, but inconsistency in implied and actual volatilities, thanks to unanticipated events and unprecedented price moves, generally ended with zero return in six-month or a year tenor structures,” said Keresteci.In light of these trades where investors failed to see any return, the preferred approach for Turkish private banking and asset management institutions is to take the capital guaranteed idea and apply it to the major index. Demand has since increased.In all, the Turkish structured products market is believed to be worth about TL3bn (US$1.67bn). “The use of structured equity derivatives through the launch of local currency-based capital protected notes or funds has increased over the past couple of years,” added Alain Alev, head of equity derivatives sales for EMEA at HSBC.“Distributed by private banks and some retail distributors, these products are in general up to 2.5 years maturity, providing a simple or Asian type participation [average price over a pre-determined period] on an index, with a strong proportion of ISE 30 related products. Custom indices, including controlled equity volatility indices, have been quite fashionable with private banks over the past 18 months.”Relatively sophisticated structures are also picking up. For example, Asian options mentioned by HSBC’s Alev derive their strike price from an average market price over a given period of time, and look-back options where the strike is determined by the optimal price over a pre-determined period, address the problem investors have timing their market entry point. Yet the complexity is deliberately limited as investors get used to these products.“There always needs to be a balance with exotic structures, where a potentially interesting payoff has to be weighed against the ability of investors to understand it,” said Semaan.Regulatory dragThe CMB, which is responsible for regulating derivatives, is a well respected regulator, its inherent conservatism winning it much admiration in recent years as other markets wrestled with increasingly complex products.Capital protected funds have

To view the digial version of this report, please click here.Others remain to be convinced – especially among local bankers, who are feeling the pain. There are signs of progress but until it is rebalanced further the Turkish economy remains particularly vulnerable to external shocks.The new framework adopted by the central bank (TCMB) at the end of 2010 was intended both to tackle inflation and achieve financial stability by using a range of instruments. Currency market interventions and changes in reserve requirements were added to traditional repo auctions to give policymakers a more comprehensive toolkit.However, for many observers the numerous policy adjustments implemented over the past 16 months, with multiple rate moves and regular reserve requirement and foreign exchange interventions, have led to confusion over the TCMB’s priorities and doubts about its ability to plan ahead.“If you look at the number of policy changes that have come from the Turkish central bank over the last couple of years it runs to many pages,” said a banker in London. “One of the great frustrations of the banking community in Turkey is that it needs to monitor what the central bank is doing almost every day.”In the first six months of 2011 policymakers looked to reduce capital inflows and cut credit growth, which they believed had fuelled the record current account deficit of 2010. In the second half of the year, as the lira fell more than expected, they reversed that policy and encouraged the currency to appreciate to quell inflation.However, the lira failed to respond and continued to decline through the latter part of 2011, eventually falling 18% over the year even as most emerging market currencies strengthened. The unwelcome corollary of the weaker currency was inflation stuck above 10% – well above the central bank’s 5.5% target – and negative real interest rates.“By cutting rates and taking the other actions the central bank initially discouraged investment flows, which started to have the desired impact on the deficit, but also weakened the currency,” said Bartosz Pawlowski, head of CEEMEA strategy at BNP Paribas in London. “They trouble was they left the currency vulnerable to external shocks, and when the eurozone troubles got bad over the summer it got hit.”Banks feel the painTo counter shorting of the lira, new policy measures were introduced, allowing the TCMB to vary its repo rate at will. The result for banks was uncertainly over the cost of funding, which one day might be at the lower 5.75% level and the next at the overnight rate of 12.5%.“By controlling liquidity and pushing market rates towards the upper end of its corridor between the repo rate and the overnight rate, the central bank was making it very expensive to short the lira,” said Christian Keller, head of emerging markets research, EMEA at Barclays in London. “But at the same time, living with unpredictable funding costs was not an easy situation for the banks.”The central bank’s policies on rates and reserve requirements undermined bank earnings, and soured relations between policymakers and commercial lenders. The deterioration in that relationship was epitomised by the resignation in March last year of Ersin Özince, general manager of İşbank and chairman of the Turkish banking association.In a resignation statement, Özince said that State Minister and Deputy Prime Minister Ali Babacan had told him the government “does not wish to take police-type measures” against banks that do not limit loan growth.Turkish banking was set to lose nearly US$2.6bn in revenue last year as a result of the Turkish central bank’s policy of raising reserve requirements, Özince said.However, if Turkey’s bankers hope the central bank will protect their interests at the expense of rebalancing the economy they may be wishing for too much, some analysts say.“The banking system is sustaining short-term pain for long-term gain,” said Ala Kassay, an economist with French country risk consult