Gulf financial firms target Turkey

 
The large and rapidly growing Turkish banking and financial sector remains an important expansion target for Gulf banks and investors. A number of Gulf institutions have already entered the market and many others have identified the country as part of their growth plans.

The secular Muslim country offers huge long-term potential, reflecting its large (73 million) and young population, its low level of financial intermediation, a more stabilised interest and inflation rate environment, its link to Europe and central Asia, and good economic growth. There is also a noted trade relationship between Turkey and the Gulf. On the structural side, political stability has improved somewhat over the years.

As the GCC market is relatively small in terms of potential asset growth long-term, banks are focusing on extending their geographical reach to diversify revenue streams.  The targeting of international expansion is growing apace as Gulf markets become more mature. Moreover, domestic Gulf markets are now competitive, putting some pressure on margins and making it more difficult to grow market share in their domestic sectors.  In addition, banks which want to remain independent, see organic growth as one defence against a possible takeover approach.

For investment in Turkey, Gulf banks have taken both majority and minority stakes in their acquisition strategies. Gulf banks aim to exploit their own expertise for the new market, initially concentrating on trade finance, corporate activities and high-end retail business. The growing market for Islamic financing, or participation financing as it is labelled in Turkey, is also a big plus. Going forward, banks will likely target the growing retail and consumer market once the necessary infrastructure is in place.

The Turkish banking sector is quite solid now after some years of improving financial profiles. This followed a very long period of a boom-bust cycle, precipitated by weak fiscal and monetary positions.

GOOD PROVISIONING

The banking sector achieved a return on equity in 2007 of 24.9 per cent. Margins are still wide at over five per cent, despite downward pressure. The banks are well capitalised with a low level of bad loans and good provisioning in place. Non-interest income is relatively low and offers significant potential. Total assets of the sector to GNP is 90 per cent. 

This remains low as it compares against an average of 279 per cent for EU countries.   Banks continue to grow their loan books, which comprise an increased 47 per cent of total assets, thus still giving significant room for growth.

Loans to GDP are still quite low at 37 per cent. The Turkish market remains largely under-penetrated, particularly in respect to consumer banking. Mortgages in particular offer a substantial opportunity. Other areas including SME loans, mutual funds and insurance offer good prospects. 

Turkey has been utilising Islamic finance techniques for some time through financial institutions known as “special finance houses”, which became the “participation banks”. There are currently four participation banks operating in Turkey. Participation banks are authorised by the Banking Act to collect deposit funds from the public under the “profit-and-loss participation accounts” and the “special current accounts”. Participation banks mainly offer two types of financing.

The first is Murabaha. The other is financial leasing, with terms similar to those offered by other leasing companies.

Apart from the institutionalised Islamic finance activities described above, a large number of syndicated loans in the form of Murabaha were made available to major Turkish companies such as Turkcell, Petrol Ofisi and Vestel in recent years. Under these transactions, the firms were provided with syndicated loans in the Murabaha form made available by credit consortiums consisting of financial institutions from the Gulf.

 

MARKET SHARE

Deals between Gulf financial institutions and Turkish banks include Saudi Arabia’s National Commercial Bank, the largest bank by equity and second largest by assets in the GCC, purchasing 60 per cent of Turkiye Finans – a relatively small but fast-growing Turkish financial institution. National Commercial Bank paid $1.08 billion (Dh3.9bn) for the 60 per cent stake.

In 2007, National Bank of Kuwait, acquired a 40 per cent in Turkish Bank in a $160m deal. NBK saw this as a significant milestone in the bank’s regional expansion strategy and also reflected NBK’s increasing interest in the growing Turkish banking sector. NBK believes the Turkish economy will continue its strong growth over the long term on the back of continued economic reforms, political stability and favourable demographic trends. Turkish Bank will work closely with NBK in growing its franchise in retail banking across Turkey as well as enhancing its market share through an expanded branch network. Established in 1982, Turkish Bank has been rated as one of the fastest-growing banks in Europe.

NBK has set up its first real estate fund that operates in accordance with the Islamic principles in Turkey. The fund will provide opportunities to invest in household, business office, leasing and warehouses as well as on the development of commercial zones. 

NBK recently said it had ruled out trying to acquire Turkey’s second-largest state lender Halkbank. NBK had looked before at Halkbank, which was partly listed on the stock market in 2007, and which is expected to be further privatised this year. It stated it preferred focusing on smaller banks and wants to grow Turkish Bank.

The sale of the government’s remaining 75 per cent stake in Halkbank, which specialises in lending to small and medium-sized businesses, is due to happen this year.

Some view the bank as attractive to Gulf investors who want to invest in growth sectors and many believe Gulf investors are looking at it. However, the sale will be more difficult due to the current turmoil in global credit markets.

 

CAPITAL FLOW

Turkey itself views capital flow from the Gulf as important, particularly in the current market climate. While global financial fluctuations triggered by the sub-prime mortgage crisis in the US continue, Turkey’s top fiscal team gathered to discuss how to handle the problem, including a focus on Gulf capital inflow. Increasing liquidity accumulation in the oil-rich Gulf countries following the climb in oil prices over the last five years has seen an increasing amount of Gulf capital flowing into Turkey. Bankers in Turkey believe that this will only increase, providing stability is maintained. The further growth of Shariah-compliant activities should also help attract further petrodollars from the Gulf countries. Unlike some countries, Turkey is also largely welcoming to sovereign wealth funds.

Turkey sold $40 bn worth of assets to international investors from 2004 to 2007, five times the amount from 1985 to 2002. Foreign direct investment (FDI) in Turkey has increased significantly since 2006, with international investors pouring $42bn into the country over the past two years alone. Gulf investors are already an important source of FDI, accounting for around 27 per cent of the total.

Among the recent deals include Saudi Arabian food company Savola’s $71m acquisition of edible oil firm Yudum Foods and Kuwait Investment Authority (KIA) buying a 50 per cent stake in Cevahir Shopping Centre for $750m in 2007. Istanbul’s Ciragan Palace Hotel is now owned by Abu Dhabi Investment Authority. Several GCC investment firms have also set up operations in Turkey.

The KIA also showed keen interest in Halkbank shares. Halkbank offered a quarter of its shares to the public and Kuwait acquired 20 per cent of the offered amount.

Kuwait’s private sector is all ready involved in the banking sector in Turkey through Kuwait-Turk Bank. Kuwait Turk will increase the number of its branches to 100 before June this year. It currently has 90 branches. Kuwaitis own 70 per cent of the bank and 30 per cent is in Turkish hands.

The authorities are also looking to foreign investors to help it meet the escalating demand for residential housing. Dubai’s Emaar Properties made its latest investment in Turkey in February when it bought $400m  worth of prime land in Istanbul. The Riyadh-based Islamic Development Bank and Kuwait’s Global Investment House both have stakes in TAV Airport Holding Company.

Shuaa Capital is active in Turkish company listings and looks into private equity opportunities from its Istanbul office, as does Dubai’s Abraaj Capital and NBK Capital.

POLITICAL ISSUES 

Turkey may sign an accord with the IMF that would make loans available should the country need them. This and other political issues are creating some uncertainty. This is raising investor concerns that the political conflict will deflect government attention from an IMF-backed economic programme to contain inflation and restrict public spending that’s helped attract record foreign investment. IMF officials are in talks on releasing a final $3.6bn loan under Turkey’s current agreement. The IMF’s $10bn loan agreement with Turkey, which expires in May, has been an anchor for Turkey’s economy.

Authorities believe Turkey does not need a stand-by agreement. Instead it is considering either post-programme monitoring or the use of a precautionary stand-by agreement.  Turkey has borrowed $2bn out of an expected $5.5bn from international capital markets this year so far. The country could, if need be, go without external financing for two years if market conditions did not improve.

The GCC is viewed by the Turkish Government as critical and believes there are noted synergies as Turkey provides avenues for diversification with its industrial base. The troubles in the global financing and credit market are placing some pressure on Turkey, particularly in regard to its high current account deficit.

This is one reason why Turkey welcomes funds from the Gulf. Growth may not be as buoyant this year but the country has a habit of recovering quickly. However, Gulf institutions recognise the long-term potential of the market and more investment deals are likely over the next couple of years.