Too good to let go

IFR Emerging Europe and Turkey Special Report 2014
9 min read

While many banks have spent the last few years retrenching at home, there has been little sign of waning interest in Turkey, where upheaval has failed to tarnish growing potential.

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Despite political and social upheaval in Turkey, most view it as strategically vital, with huge long-term growth potential. Since the financial crisis, Western banks have been busily selling off non-core businesses to focus on their core markets. This phenomenon has been evident around the world, especially in emerging markets.

“International banks are under pressure to optimise returns as capital remains a scarce commodity,” said Guy Stevens, managing director in the EMEA financial institutions group at UBS. “In many international markets where institutions do not possess critical mass or have a niche business model, they are struggling to do this.”

It is not just a commercial decision. “We have seen European banks that have been recipients of state aid being forced to divest by the European Commission,” said Stevens. “The problem in those situations is that it is difficult to achieve the value you are looking for.”

Yet relatively few banks have divested their Turkish assets. One exception was Dexia selling DenizBank to Sberbank in 2012. But that was less a strategic decision than part of the dismantling of a failed institution. Examples of banks taking a strategic decision to exit Turkey to focus on other businesses are hard to come by.

There may soon be a few more examples to choose from. Rumours have been circulating that the National Bank of Greece, which has a large stake in Finansbank, may be considering divesting its asset. The bank had been found wanting in a stress test but, unlike three of its Greek peers, it indicated it would not be raising money in the capital markets. That has triggered speculation about other ways it might strengthen its capital base, with stake sales in foreign banks seen as one viable option.

Yet there has been no concrete indication from NBG’s management that it is planning such a sale, and there is a general suspicion that NBG’s management would hate to lose Finansbank.

Elsewhere, some have speculated that ING might not be committed to its Turkish business. With a mere 1.9% of banking sector assets at the end of 2012, the business is not seen as particularly profitable. If it cannot generate a better return on equity from its Turkish business, the argument runs, perhaps it would be better off exiting the business. But a spokesperson for ING, while declining to comment on rumours, pointed to comments by its CEO to analysts in March that identified Turkey as a growth market for the bank. Whatever the truth of all the speculation, on the whole Western banks clearly see Turkey, along with Poland, as important growth markets. Those that have a foothold in the country are therefore likely to hold on to those assets, whether that is through a direct stake in a local banks, such as BBVA’s stake in Garanti, or through joint ventures, such as UniCredit’s JV with Koc Group, Yapi Kredi.

“While we saw massive deleveraging across CEE after the financial crisis, we saw it less in Turkey,” said Abbas Ameli-Renani, emerging markets analyst at RBS. “Turkey is a very big market with favourable demographics; it can’t be ignored,” he said. “It is profitable and has better growth dynamics than most countries in the region, with credit growth coming from a relatively low level.”

Scope for growth

Far from scaling back, there is, if anything, the prospect of greater foreign participation in the Turkish banking sector. By regional standards, foreign bank ownership in Turkey is relatively modest, with most of the big Turkish banks domestically owned. In Hungary, by contrast, 90% of the bank sector is in foreign hands.

“Turkey is in the rather unique situation of seeing interest from both the West and the East, in most markets you see interest predominantly coming from one side or the other,” said Stevens.

In Russia, Renaissance Capital has been beefing up its Turkey coverage in recent weeks, in particular with the appointment of a new country head. “We’ve made some significant investments in Turkey in the past six months, to support our already strong team on the ground in Istanbul,” said Benjamin Samuels, head of equities of RenCap.

Elsewhere, Commercial Bank of Qatar recently acquired a major stake in Alternatif Bank, while it has been widely rumoured that Chinese banks are interested in acquiring Tekstilbank.

The Turkish government will further shake up the landscape when it dispenses with its shares in up to three local banks, probably through initialpublic offerings. The biggest of these prospective sales is Ziraat Bank, the second-largest banking group in Turkey in terms of retail distribution network, but it is thought that work needs to be done to maximise investor appeal before an IPO is attempted.

VakifBank and Halkbank are listed but while further selldowns are expected for both, the government will probably wait for more favourable conditions before it cashes in, meaning nothing is expected before 2015 at the earliest.

Istanbulls and Istanbears

The appetite for Turkish assets has proved more resilient among banks than some other market participants. For global investors, sentiment is being pulled in opposing directions by the forces of risk-aversion on one hand and the desire for yield on the other.

Civil unrest in Turkey and a troubling environment across all emerging markets as a result of the Fed QE tapering contributed to generate significant outflows of foreign money from the Turkish capital markets in 2013.

“Trouble spots are surfacing in a growing number of countries in which investors have rediscovered political risk and, above all, macro vulnerability to external deficit and fiscal profligacy,” said Giordano Lombardo, chief investment officer at Pioneer Investments, specifically citing Turkey as a case in point.

However, the tightening of monetary policy by the central bank has since stabilised the situation, and Turkish securities have looked quite resilient in the face of more recent troubles in Ukraine.

“Turkish assets had already seen a sharp adjustment in December 2013 and January 2014, so many investors were already underweight,” said Abbas Ameli-Renani, emerging markets analyst at RBS. That sell-off at the turn of the year created a buying opportunity and since February money has flowed back into the Turkish local bond and equities markets.

There is less foreign participation in the Turkish market than in many others in CEE. Both Hungary and Poland, for example, have about 45%–50% foreign ownership of local bonds, compared with about 30% in Turkey.

In the medium and longer term there remains considerable uncertainty around the political situation in Turkey. “It is a concern for FDI investors, the significant weakening we have seen of Turkish institutions, of the police, the judiciary and the democratic process,” said Ameli-Renani.

This may have undermined the credibility of the central bank and of the independence of its monetary policy, when the central bank appeared to bow to government pressure to keep interest rates low when the market was concerned about rising inflation. However, even the recent tightening of rates could create problems further down the road.

“Some countries, with current account deficits, have no other choice than to raise their interest rates to stop capital flight from triggering excessive currency depreciation,” said Didier Saint-Georges, a member of the investment committee at Carmignac. “By definition, this ‘necessary’ monetary policy tightening affects the most fragile economies, which could see their recovery delayed even further. This is the case for Turkey, South Africa and even Brazil.”

Morgan Stanley predicts a negative adjustment that will be most pronounced in “the double-deficit club – a collection of EM economies with current account and budget deficits that raise concerns about macro instability – including Brazil, South Africa, Turkey and Ukraine”.

“In the short term the indicators don’t look too bad. External vulnerability is likely to become more manageable as the current account deficit tightens, with credit growth of 25%–30% gradually declining towards the central bank’s reference point of 15%,” said Ameli-Renani. “But in the longer term there are concerns about the political situation. Markets will be calmed by what I expect to be an all-round AKP victory in upcoming elections. But an ever-increasing consolidation of political power is likely to raise concern among longer-term investors.”