Turkish banks seem to be dressing themselves up for sale. That is certainly one explanation for the hurry to expand balance sheets even at a high cost in terms of funding. Finansbank and Deniz Bank appointed advisers, JPMorgan in the case of Deniz Bank, and in early April National Bank of Greece announced it was buying a stake in Finansbank.
There is also speculation that some of the bigger banks could also see at least partial sales. When Akbank sold out of its participation in development bank TSKB in late February, analysts saw it as part of a policy of tidying up the larger bank's holdings ahead of a partial sale.
The main acquirers of Turkish banking assets are foreign banks keen to establish themselves in what is seen as an underbanked market with huge potential, particularly in retail banking. Over the past few years there have been several such deals.
Most notably, in 2005, GE Consumer Finance took a 25.5% stake in Garanti Bank, making it the largest shareholder alongside the Dogus group. Under the terms of the agreement, GECF acquired from Dogus 25.5% of Garanti Bank’s ordinary shares for a cash consideration of US$1.556bn, valuing 100% of the bank's ordinary share capital at US$6.1bn. In addition GECF purchased 49.2% of Garanti Bank’s founders’ shares for US$250m.
Last year Fortis bought Dis Bank for around €900m, and while Rabobank pulled out of its planned acquisition of Seker Bank, it is now understood to be looking at Tekstil Bank. Spanish banks are reported to be looking around the sector, interested in the parallels between Spain's own evolution and Turkey's prospective development. In addition, there is interest in Turkish banks from elsewhere in the region. Dubai Islamic Bank has agreed to buy MNG Bank for a reported US$160m.
With 47 banks in Turkey, there is still ample scope for consolidation. In fact, along with privatisation of state assets in areas like electricity generation, the banking sector is seen as offering the most M&A opportunities in 2006.
While the private sector looks for partners or acquirers, the government is working to sort out the public sector banks, put their operations on a similar basis as the private sector, and to sell out over time. The government has issued an RFP to banks for the privatisation of Halkbank. Responses were due by the end of March. Halkbank is the seventh largest bank in Turkey, and is focused on savings. It has a 9% share of deposits and 4% of loans.
Ziraat Bank, with its background in agricultural lending, is a tougher proposition for sale, not least given its size. The bank has US$50bn of assets, but the general opinion is that the government is also keen to sell Ziraat when it can.
The reason for all this interest is a combination of confidence in Turkey's convergence with the EU (even if that process stops short of full membership); the drastically improved political and economic environment over the past four years; and, as a result of economic normalisation, the development of ordinary banking from a relatively low base in areas such as retail lending.
Lending certainly continues to expand. At Is Bank, one of the main players, the latest target is for lending to be 35% of the balance sheet by the end of 2006 (at the end of 2005 it was 33%). At the same time the percentage accounted for by Treasury bills and bonds should fall to around 26%; three years ago, it was 38%.
At rival bank Garanti, executive vice president Tolga Egemen says that his bank is aiming for growth in lending in 2006 mainly from consumer loans and lending to SMEs.
Foreign banks that are established in the market also see potential to grow their lending books. Citigroup is focusing on two fronts, according to Steve Bideshi, the bank's cluster head for Turkey and Israel. "One is re-establishing relationships that were impacted during the crisis of 2001, and the other is expanding our target market of corporates to which we can offer more than simple banking services."
Foreign banks are offering to lend to Turkish banks in lire, but it is questionable how many Turkish corporates want to borrow in their own currency, which has historically been expensive for them. More broadly, do Turkish corporates want all the money that banks are so keen to offer them?
"The top 100 companies have a national and often regional presence, are generally expanding, and need incremental capital, as well as capital for acquisitions. The second tier has fewer capital needs, which will vary according to growth in the domestic economy" said Bideshi.
Riza Kutlusoy, head of capital markets at Is Bank, thinks that from 2007 Turkish entrepreneurs could begin to run out of self-generated funds, opening the door for more corporate lending. With that same view in mind, foreign banks with a presence in Turkey are trying to expand in Turkey's larger provincial cities, tapping into both retail and SME demand.
However, for the moment, the focus for most lenders is on retail, particularly the huge perceived potential of the country's emerging mortgage market. Mortgage lending will grow by 40%-50% a year over the next five years.
That growth poses problems. The typical tenor for a mortgage loan is five to 10 years, and the banks have a significant asset-liability imbalance given that they are funding themselves with one-month deposits. And as banks lend more, they are finding it harder to fund themselves from deposits. As a result, rates on TL-denominated time deposits are around 17% for one to three months, while the rate on a mortgage is around 14% annually. In addition, banks are funding themselves through the TL-US$ swap market, although at a cost so high that, in the words of one banker: "they must be using this for SME loans, because otherwise I can't see how they can make any money."
Erdal Aral, treasurer of Is Bank, noted that another source of funding was post financing, whereby foreign banks discount letters credit in sufficient size that a Turkish bank can borrow, say US$70m at Libor plus 50bp. "It's cheap, and there is no need for reciprocity," he added.
On the cost side, with the race on to win retail customers, branches remain a key element in marketing. "They are the showroom not a service centre" said Is Bank's Aral.
With such explosive growth in lending, non-performing loans (NPLs) naturally become a point of focus. The most worrying area for NPLs is in the credit card sector, where the default rate is now around 8%. The government has reacted to spiralling credit card balances with a new law that came into effect on March 1 and allows card borrowers to pay off their outstanding loan in 18 instalments over 18 months at a rate of 18%.
That compares to normal APRs in the sector between 50% and 100%. Some analysts point out that this new scheme may mean that the banks recover more of their bad credit card debts, as such loans would otherwise have been irrecoverable. However, there is concern in the banking sector at the government's involvement in the issue – which came as a surprise to many – and the fear that this is establishing a moral hazard.
"What message does this send out to someone taking out their first mortgage?" asked one banker. "The implication is that if someone can't pay, or perhaps just doesn't want to pay the rate they have agreed, the government may come in with a similar scheme and bail them out."
"This approach will mean that borrowers who could pay their credit card bill, and were doing so, can now take advantage of a more favourable rate. Frankly, they would be stupid if they didn't," said another banker.
For the moment, though, the problems of NPLs are limited to credit cards. The NPL rate on consumer loans is still under 2%, and corporate lending is seeing few problems with defaults. "NPLs are not a critical issue. The value of assets is rising, and collections are not a problem," said Is Bank's Aral.