Renewed foreign interest in Turkey's once moribund financial sector has raised hopes that the country's EU bid and economic recovery may end years of failed efforts to tempt overseas investment. Fortis, the Dutch-Belgian banking group, in mid-April offered to pay $1.3 billion for an 89.3% stake in the mid-sized Disbank and make a public offer for the remaining 10.7% in shares.
It became the second foreign bank to enter Turkey since Ankara got the green light for accession talks with the European Union last December, following France's BNP Paribas, which paid $217 million in February for a stake in TEB bank.
Deutsche Bank, meanwhile, also announced last month that it would acquire the remaining 60% of Bender Securities to become the sole owner of the leading Istanbul brokerage.
"All the major international players are in the process of looking at acquiring stakes in Turkish banks," says Tolga Egeman, executive vice president at Garanti bank. "Competition from foreign banks will be very healthy and helpful for the future of Turkey's banking sector."
Garanti was itself the subject of a failed acquisition bid last year from Italy's Banca Intesa, which cited unspecified "differences over the share price agreement" for the deal's collapse. Garanti's parent, Dogus Group, hired Morgan Stanley in March to look into strategic partnerships of sale possibilities for the bank. Its strong retail business has long made Garanti a target for acquisition.
Analysts expect several other sales, among them deals involving Italy's Unicredito and the Dutch Rabobank, to be finalized in the next few months. The foreign share in the sector stands at 5.8%, although the country's banking regulatory board estimates that it will reach up to 20% by the end of the year.
Concerns
Yet some observers are casting doubt on the depth of the country's financial sector reform. "The government doesn't have a strategy or vision for foreign investment in banking," says Gazi Ercel, chairman of Ercel Advisory, a consulting firm, and a former governor of Turkey's central bank. "We need to decide what model to follow – German, French, British? For example what will be the maximum level of foreign ownership? We don't have a vision yet."
"It should be a government priority, but nobody has really thought about it," he adds.
Moreover, Ercel worries about the extent to which Turkish banks are capable of dealing with the new environment of low inflation, with rates having dropped to 8% after decades in the double-digits. "Turkish banks have gone through several stages and only know do they understand what credit risk is," he says. "Now they're approaching Basel II, and gearing up for better risk management. But the question is do they know how to operate in this new low-inflation environment, especially if they start financing the corporate sector."
Bad loans had proved to be a burden for the Turkish economy, creating an inherently unstable banking sector that depended on high interest rates and virtually unlimited government borrowing to stay liquid, althgou
The other major concern at present is growing maturity mismatches on bank balance sheets. The bulk of bank deposits are less than one year, whereas average maturity of government debt issuance has grown over the last year. Ercel points out that such mismatch could be problematic in times of trouble and could constrain long term private sector lending.
But Turkish bankers remain generally optimistic these days. "It won't be an easy process to adapt [to low inflation] but we will manage it," says Aykut Demiray, deputy CEO of Isbank.
"You have to have a very effective credit risk methodology" says Hayri Culhaci, executive vice president in charge of strategic planning at Akbank, Turkey's largest bank, and also one of its best positioned.
"The banking sector is self sufficient without foreign participation,"he adds. "But foreign entry is inevitable," especially since there are too many banks chasing too few clients. Nevertheless he believes that foreign banks are "a plus, not a minus" in the long run.
Prospects
The country's financial system has undergone painful overhaul since 1999, when turmoil in the banking system spiraled into a full-blown economic crisis two years later, plunging the country into one of its worst recessions. The ensuing reforms, backed by multi-billion-dollar IMF loans, stabilized the sector, with the authorities seizing about 20 troubled banks that were either dissolved or rehabilitated and sold off, at an estimated cost of some $50 billion.
The economy has also rebounded, recording 9.9% growth in 2004 - one of the fastest rates in the world and about four times higher than the average of the 25 EU-member countries. An expanding economy and decreasing borrowing costs have fuelled consumer and company demand for loans, boosting bank profits. But according to analysts this has also made banks more expensive. For example, when Intesa was looking to buy Garanti last year, the price tag was $2.5 billion; now, it's roughly $6.5 billion.
There appears to be no lack of acquisition candidates. The real issue for foreign banks, according to Istanbul bankers, is whether the sector can ever be profitable enough to justify such ventures.