Deleveraging is forcing global banks to think the unthinkable about their positions in one of the world’s most attractive banking markets.
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.
This 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 cheap way into the Turkish market, where banking licences are hard to obtain. Sources said the deal could be worth up to US$6bn. Bank of America Merrill Lynch is advising Dexia on its options for Denizbank and Qatar National Bank is thought to be the preferred bidder, although the process is taking longer than initially expected and conditions are improving all the time.
“Dexia is desperate to hang on to Denizbank. Market conditions have improved since it put Denizbank up for sale and it will either want a higher price or pull the sale altogether,” said a source.
The other big asset sparking bid interest is the 20% stake in Finansbank that was bought by National Bank of Greece in 2007. NBG appeared to be a distressed seller last year, but since the restructuring of Greece’s debt via last month’s exchange, the lender has – like Dexia – started to play hard ball. One banker said: “This is part of the standard auction process. If everyone knows the asset is for sale, then the price will be much lower.”
Cash-rich bidders from the Middle East and Asia are circling at a particularly uncomfortable time for western banks, which are at a crossroads with regards to their Turkish strategy. Many are eager to participate in the consolidation of an attractive banking industry but run the risk of any acquisition being blocked by shareholders or their own national regulators at a time when reducing risk-weighted assets is meant to be the order of the day.
Last year it appeared that UniCredit, which has a large presence in Turkey as co-owner of the country’s fourth-biggest traded lender Yapı Kredi Bank, would be one of those international firms which may be forced to retrench, but the bank’s successful rights issue and the liquidity injection provided to the sector by the European Central Bank have emboldened the Italian bank to adopt a position of apparent strength. Last month UniCredit’s chief executive Federico Ghizzoni said he might look at buying Turkey’s Denizbank.
Standing still not an option
The jeopardy is all the greater for the fact that if international banks want to succeed in Turkey, then they need scale and that means further acquisitions.
“The banking sector is relatively fragmented and there are some of the larger players that are looking to be endgame winners. It’s all about scale,” said the head of CEEMEA M&A at one US bank.
The country’s seven biggest banks boast a market share of more than 7%. Another six have market share of between 1% and 4%, including ING, which paid €2bn for Oyak Bank in June 2007, and HSBC.
The conundrum is that if a bank is not selling out of Turkey then it needs to buy. Standing still is not an option.
ING is maintaining its commitment to Turkey against a backdrop of asset sales elsewhere. In March, the bank said it was selling its Asian business.
There is no doubt about HSBC’s position. In November the bank threw its hat into the ring as a potential bidder for Finansbank, while it has gone head-to-head with QNB by making a US$4.7bn offer for Denizbank last year. Just to underline the point, HSBC has said publicly that it regards Turkey as a priority.