BORYAD analyzed Pros&Cons of Foreign M&A’s in Banking

It is expected that over 40% share of foreigners in banking sector will reach 60% soon. In the debates centering on “right-wrong” the question overlooked is: Have Turkish banks found what they looked for in partnerships with foreigners?

Turkey has a special place among developing countries with its strategic geography, ever increasing population and its financial market which is in an upward trend. Foreign investors are also quite aware of the country’s potential. The sector on which foreign investors’ attention centers on is, banking. That is to say, Turkish banks are magnets for foreigners. 

Turkey has a special place among developing countries with its strategic geography, ever increasing population and its financial market which is in an upward trend. Foreign investors are also quite aware of the country’s potential. The sector on which foreign investors’ attention centers on is, banking. That is to say, Turkish banks are magnets for foreigners. 

Whereas, a very short time ago, in 1999, the share of foreigners in Turkish banking sector was only 1%. Nowadays it is over 40%. Expectations are that it will reach 60% soon. However, the debates generated by this great expectation are also great! There are both those who see the increase in the share of foreign banks as positive and also those who see it as threat. Comments like, “Is the interest of foreigners turning into an invasion, are ‘bankas’ becoming banks?” are voiced very often. As the number of foreign banks in Turkey increases, it seems these discussions are to further flame.  

Beginning with Demirbank…  

Sale of banks to foreigners began firstly with the signing of share transfer agreement of Demirbank, then within the TMSF (Savings Deposit Insurance Fund), with HSBC on 20 September 2001. Actual transfer took place on 30 October 2001. In this way, Demirbank, Turkey’s 6^th largest bank then, was integrated into HSBC Bank in exchange for 350 million dollars with its 163 branches, 3,500 employees, 1 million individual and 4 thousand commercial customers. HSBC, which has increased the number of branches considerably in the meantime, could not reach yet Demirbank’s market share before it was transferred to the fund in the last quarter of 2000. Market shares of the bank in credits and deposits have remained fixed after falling slightly.

In this period, while the share of the bank in credits varied in the 3.3%-3.5% interval, its share of deposits remained at some 2%. Although there is a 17% increase when the bank’s return on equity (ROE) is looked at, it should not be forgotten that this increase has been realized in such a long time as 6 years. News was negative in sale negotiations following the sale of Demirbank. When 2005 came, this time Türkiye Ekonomi Bankası (TEB) was in the spotlights. BNP Paribas of France bought 50% of TEB Mali Yatırımlar, which held 84.25% of Türk Ekonomi Bankası, for 216.8 million dollars. After the sale which took place on 10 February 2005, TEB has made much progress.

Its market value has increased 451% as compared to that at the time of sale. TEB has been one of the few banks which increased number of branches, rates of credits, deposits and equity capital to a great extent. The bank increased the market share in the number of branches 133% reaching 253 branches, while its market share in deposits grew 60% and around 33% in credits. Having achieved to get a bigger share in the market by using its resources effectively, TEB increased its return on equity 70% and reached 11% in the two-year period.   

Fortis, the Dutch-Belgian financial group which have operations in banking and insurance, followed BNP Paribas of France and acquired 89% of Dışbank for 985 million euros. Fortis, market value of which grew by 104% as of 2007, has increased also its capital and equity capital contrary to many banks. Although it increased the number of branches from 172 to 248, as compared with those at the time of sale it could not make much progress with respect to deposits and profit rates. While Fortis’ share in deposits fell by 13%, the fall in credits has reached a much dramatic rate; 26%. That great fall in the bank’s market share dimmed the return on equity which rose from 2% to 6%. When Fortis’ international investors and majority shareholders evaluate this performance at the general meeting, it is absolutely important which conclusion they come to. At this point, let us express that BORYAD will attend the general meeting as a stakeholder to make an evaluation.  

Giant Steps by Garanti Bankası  

Signing of the sale deal for Garanti Bankası, one of the big banks of Turkey, took place on 24 August 2005. The bank sold 26% of its shares for 1.55 billion dollars after the principal stockholder Doğuş Holding closed a deal with Consumer Finance; a subsidiary of global giant General Electric (GE). Although representatives of the foreign partner participated in bank’s management, there have not been great changes in administrative structure. When the performance of Garanti Bankası from mid 2005 till today is analyzed, we see that the bank increased the number of branches, and that there have been improvements in credits, deposits, equity and especially in profit ratios.

The bank’s market share in credits reached 13.6% with a 25% increase and its share in deposits reached 10% with a 16% increase. With that increase in the market share, market value has also increased around 11 billion YTL growing by 130%. While Garanti had a 14% return on equity before the partnership, it obtained 25% by now. This rate means an almost 76% increase…  A month after the sale of Garanti Bankası, Koçbank which is a fifty-fifty partnership of Koç Holding and the Italian Unicredito announced it would buy 57% of Yapı Kredi from Çukurova Group for 1.182 billion euros. Negative values of return on equity of the bank, which was within the TMSF during the acquisition, turned into positive values in the years following the sale and reached 10% with a 113% increase.

The bank which consolidated its capital strongly during the merger could not get the same success in market shares. While the bank’s share in deposits fell down to 6%, that in credits showed a 13% negative change further surpassing that fall. Despite that, market value of the bank which was 4.2 billion YTL at the time of sale reached 12 billion YTL. Koçbank’s share in this 189% increase should not be forgotten.  

Opening in 2006 by Finansbank  

Extensive bank sales of 2005 went on also in 2006 with equal speed. The first sale news of the year came from Finansbank. On 3 April 2006, Finansbank’s 46% was sold for 2.3 billion euros to National Bank, the biggest bank of Greece in terms of total assets. The bank which was sold at a very high value with respect to financial multipliers has made a considerable progress in terms of branch number in the last 1.5 years. Finansbank reached 378 branches while obtaining more than 50% increase in its market share in the number of branches.  Its market share in deposits increased 20%, while that in credits also increased 5%. Whereas, there occurred a 1% decline in the market value of the bank. In addition to the number of branches, another category in which a rise occurred was bank’s return on equity. Finansbank secured a nearly 15% profitability with the 64% increase it obtained in this category.  

The date of sale of Denizbank, which is one of the banks that should be evaluated at its general meeting by BORYAD paying attention to its pluses and minuses, was 30 May 2006. At that date, France-Belgium based Dexia acquired 75% shares of Denizbank held by Zorlu Holding for 2.44 billion dollars. When 2007 came, the bank did not resort to a considerable increase of capital although it slightly increased its share of the market with respect to credits. The number of branches grew by 10% and reached 299. While it received a market share of 2.38% in deposits and 3.1% in credits with a 2% increase, its market value decreased by 5%. The bank’s return on equity which was over 6% before the sale, passed beyond 9% together with a 40% increase.  On 22 June 2006, it was announced that 34% of Şekerbank was sold for 255 million dollars to Kazakhstan-based Bank Turan Alem.

Market value of the bank, which did not resort to an increase of capital in the one year period, rose by 183%. Although its market shares are still low, it is observed that Şekerbank has changed considerably in a year. While increasing the number of branches from 203 to 230, the bank obtained 34% rise in deposits and 88% rise in credits as compared with the previous market shares. Return on equity was 2.64% before the sale, but it also showed a huge increase and rose to 12.5% level.  Another bank which was talked about in business circles for days with its sale above the market value is, Akbank.

On 17 October 2006 Citigroup agreed to buy 20% of Akbank for 3.1 billion dollars. Although only a very short time passed since the sale, there occurred a 62% rise in the bank’s market value. While there were increases in deposits and branch numbers, there is not much difference in market shares of the bank. The fall in the market share in deposits is 0.5% but this rate is 2.7% for the number of branches. As for credits, there occurred an increase and the bank could obtain a nearly 2.5% bigger market share. The bank’s market share in terms of profitability is at a very high level with 19.5%. Subsequent performance of Akbank which broke a new ground in Turkey with its “strategic partnership” approach has a great importance also for the sector.  

The Preferred Model for Foreign Partnership: TEB and Garanti 

However, the current situation shows that while foreign partner brings growth in some banks it could not meet the expectations in others although there was improvement. That is to say, the strategy which sees foreign partners as the only rescue fails at that point. The question that should be asked to those saying, “Banks in which foreigners hold at most 50% of shares are not foreign banks” is; to whom management belongs. Because, foreigners become the side which has the last say in operational matters by increasing also their strategic shares with the help of shares they secure in management.  

At this point, the ‘TEB-Garanti’ model in which the domestic bank has the last say can be an example. Sales of these two banks show that these initiatives do not mean to be sale to foreigners but rather marriage with foreign capital. While the capital excluding the publicly-traded shares is divided in two equal parts, there is either equality in management or the dominance of the Turkish partner as it is in Garanti.   While Doğuş Group appoints 5 out of 9 board members, the other 4 are appointed by the foreign partner.

In addition to this, the bank’s chairman of the board is also from Doğuş Group. The dominance of the domestic partner despite equal distribution of shares between the foreign and domestic partners removes Garanti Bankası from the “foreign” category. This situation accelerates growth by receiving the power of the world’s second largest company while keeping bank ownership at the local level. Although some views hold that worries are pointless, the share of foreigners which reached 41% with the sale also of Oyakbank is very near the critical threshold… When shares of foreigners in banking sector of developed countries are looked at, the rate in Turkey is quite high. Consequently, when evaluated from this perspective the fifty-fifty transitory partnership in which the last say can belong to the domestic partner will be perhaps the best remedy for the mania for going foreign.