Ironic appeal

Strong fundamentals and a favourable regulatory environment have attracted an influx of foreign investment in Turkey’s banking sector, but opinion is split on whether a slowdown in growth will dampen investor appetite.

With weakening economic growth, a record depreciation of its currency, and elections looming in June, Turkey could logically be assumed to be of only mediocre interest to investors in 2015. Yet the country’s banking sector appears to be as attractive as ever, and continuing investment by foreign banks suggests the long-term outlook may be more positive.

Seventeen of the 45 banks operating in Turkey are classified by regulators as being foreign-owned, according to data from the Banks Association of Turkey (TBB), although that doesn’t include those firms only partially owned by foreign entities. As of March 2014, those 17 foreign-owned banks controlled 16.2% of assets, 16.4% of loans and 15.6% of deposits, accounting for a sizeable chunk of the sector, according to the TBB.

“Turkey has not been immune from the volatility across emerging markets over the past year, but while the return on equity for Turkish banks may have fallen, they still have a very attractive profile for foreign banks looking to deploy capital. The country has healthy population growth and expansion of domestic disposable income, as well as rising purchasing power,” said Yunus Yucehan, managing director, M&A, CEEMEA at Barclays.

Among the foreign banks that own stakes in Turkish banks are China’s ICBC, Commercial Bank of Qatar, National Bank of Greece and, perhaps most significantly, Spain’s BBVA, which in November paid €2bn to increase its stake in Garanti Bank from 25% to nearly 40%.

Garanti, Turkey’s third-largest bank by assets, had been part-owned by BBVA since 2010, but the increase in its stake highlights Turkey’s continuing value in the eyes of major foreign banks. When it announced the deal last year, BBVA predicted that GDP growth in Turkey would average 4.6% between 2013 and 2023, supported by a strong population of more than 75m, at least half of whom are below the age of 30.

Growth potential

“Turkey is a very attractive market with one of the youngest populations in Europe and strong growth potential. It has been outgrowing the eurozone and emerging markets in Europe for over a decade, and it has weathered complex environments along the way. Its growth potential for the next decade is outstanding, with a lot of room to develop banking services,” said a spokesperson for BBVA.

One factor that is seen to be particularly positive is the regulatory environment in Turkey, and the progress the sector has made in implementing Basel Committee capital and liquidity reforms. In a progress report on the adoption of Basel requirements published in October 2014, Turkey was among the more advanced countries, having already consulted and issued final regulations on risk-based capital, liquidity and leverage ratios.

That puts Turkey ahead of other emerging economies including Argentina, Indonesia, South Korea and Russia, giving foreign investors confidence that the country’s banks should be well on their way to meeting stringent new capital requirements and therefore be better prepared for the future.

Turkey’s Banking Regulation and Supervision Agency (BRSA) is given much of the credit for the resilience and capital adequacy of the country’s banks. Having suffered its own banking crisis in the late 1990s, the Turkish government sought to reform the sector with the creation of the BRSA in 2000.

Replacing a fragmented system of regulation that had been split between the government and the central bank, the BRSA brought Turkey’s banks into a more tightly regulated framework and steered them through the financial crisis in better shape than banks in many other countries.

“As the independent regulator, the BRSA has been a very strong steward of the sector. When the global banking system came under pressure in 2008, Turkish banks were well funded and their capital adequacy ratios were much higher than elsewhere. The BRSA has continued to protect the interests of the sector to make sure it is not unduly weakened by any pressures facing foreign banks,” said Yucehan.

“Turkey is still a growth story, which is positive, but several key indicators in the Turkish banking sector are trending down – economic growth is slowing, the onus of regulation is increasing, and the currency is volatile”

Meanwhile, the crisis in Russia and Ukraine over the past 18 months has also played to Turkey’s strengths, making its robust and well-regulated banking sector a more stable and attractive alternative to its peers in Eastern Europe.

“Among European emerging markets that have not been affected by geopolitical tension, Turkey is one of the few countries that is advanced in the implementation of Basel III, with healthy growth in the economy, so the prospects for the continued growth of the banking sector are very good,” said Kathleen Middlemiss, head of emerging EMEA and LatAm credit research at UBS.

But not everyone is quite so bullish on the prospects for Turkish banks. A closer look at economic fundamentals suggests that while the outlook for the country might be better than for other parts of Europe, it is not as rosy as it was a few years ago.

Annual GDP growth in Turkey slowed from 9.2% in 2010 to 4.1% in 2013, according to data from the World Bank, while the lira has suffered alongside other emerging market currencies over the past year as the US dollar has soared. Having traded at 2.14 at the start of 2014, USD/TRY reached a record high of 2.73 on April 23 2015, according to data from Thomson Reuters.

“Turkey is still a growth story, which is positive, but several key indicators in the Turkish banking sector are trending down – economic growth is slowing, the onus of regulation is increasing, and the currency is volatile. A few years ago we would have said the sector was robust or even outstanding, but now we would call it only sound,” said Janine Dow, senior director at Fitch Ratings.

Dow also played down the significance of foreign ownership of Turkey’s banks. Garanti may be a significant name in the sector, but the fact that BBVA already owned a stake in the bank suggests last year’s increase may have been more of a long-term strategic objective rather than a reaction to favourable market conditions. And while the proportion of banks with foreign ownership is significant, the majority are of a much smaller size and scale than Garanti.

Entities such as Alternatif Bank, Tekstilbank and BankPozitif, which are part-owned by banks in Qatar, China and Israel respectively, are all comparatively small players in the Turkish banking sector. On the basis of their total assets, they ranked as the 18th, 26th and 33rd largest banks in Turkey last year, according to TBB data.

“There are a number of Turkish banks that are either part or wholly owned by foreign banks, but by assets the level of foreign ownership in the sector is relatively small. Turkey is certainly not like some other Central and Eastern European countries where the banking sector is effectively dominated by foreign owners,” said Dow.

Others agree that the extent of foreign ownership and interest in the Turkish banking sector has limits, and is likely to be significantly less than it was a few years ago given the decline in the level of returns available.

“The period leading up to the crisis was very much one of supercharged return on equity and growth for Turkish banks, with international financial institutions flocking to grab a part of that growth, but that was curtailed by the crisis. The recent flurry of activity might suggest a new cycle, but it is driven mainly by the strategic agenda of particular players that want to get a foothold in Turkey and benefit from its relatively high growth profile,” said Yucehan at Barclays.

And while some banks might still be looking for an entry point into Turkey, others are looking to get out. Citigroup announced in March that it had sold its 9.9% stake in Akbank, Turkey’s fourth-largest bank by asset size, for US$1.15bn. Before that, Dexia sold its stake in DenizBank in 2012, and Greece’s EFG Eurobank sold its Turkish operations to Kuwait’s Burgan Bank in the same year.

Meanwhile, National Bank of Greece (NBG), which has held a majority stake in Turkey’s Finansbank since 2006, has been looking to divest some of the holding for some time. Most recently a planned offering of Finansbank shares on the Borsa Istanbul was postponed on March 20 with a view to relaunching the transaction before mid-year, depending on equity capital market conditions. But given the challenges Greece has faced over the past five years, Finansbank has been a strong-performing asset for NBG.

“Finansbank has been a real cash cow for the NBG and it highlights the general strength of Turkish banks as an asset for international banks. Turkish banks are generally profitable and incredibly competitive, which makes them very attractive assets to own,” said Middlemiss.

“Turkey is still under-banked and many of the banks are clustered close together in terms of their market share and activities, so there isn’t much differentiation between them. That means there are still significant opportunities for foreign investors,” she added.