Banking on the Future

With a good new crop of statistics in this week on the state of the nation's economy, there was also some focusing on the state of the nation's banks. This came in on the back of news of an important merger, and of some more worrying news from a previously welcomed share bid.



First the statistics. Released end of March by the State Statistics Institute (DIE), these showed a higher-than-expected 5.9% growth in GNP for 2003, with GDP rising 5.8%. This was just under a percentage point higher than many had forecast, while broken down into quarters, it showed some strong surging as the year drew to a close. In the 4Q04, GNP was up 7.2%, with GDP up 6.1%, y-o-y.



One of the big factors in this strong showing was a better-than-expected performance in private consumption. With exports showing sustained growth, slumping domestic demand had long been a problem. This appears to be also changing, as inflation has continued to fall - partly as exchange rates have strengthened, making imports cheaper. Private consumption grew 10.3% y-o-y in the final quarter of the year.



Many had assumed that the strengthening exchange rate would slow economic growth, yet there seems to have been little evidence of this. Instead, many brokerage houses are revising their estimates for 2004 growth upwards on the expectation of the YE05 figures still being around the 5% mark.



This is also good news for the government, in a week of good news following the local elections on March 28. These saw the ruling Justice and Development Party (AKP) sweep the board, with 41.9% of the national vote. Its nearest rival, and main parliamentary opposition party, the Republican People's Party (CHP) suffered a major defeat, with their share of the ballot falling from the November 2002 general election result. The CHP recorded just 17.9%, with CHP leader Deniz Baykal's home province of Antalya falling to the AKP.



Sufficiently strengthened, the market generally expects further stability in economic management, a factor which was long absent form Turkish politics and is widely welcomed, even by those who do not naturally support the AKP.



Such stability should also increase the chances of the government being able to continue to carry out economic reform. One sector in which this is widely seen as long overdue is banking, with the end of the month also seeing some encouraging signs on this front.



On March 26, the announcement came that an agreement had been reached on the merger of state-owned Halkbank and Pamukbank.



Since June 2002, Pamukbank - a private bank owned by the Cukurova Group - has been managed by the state Safety Deposit Insurance Fund (TMSF), which runs some 20 banks taken into receivership after their financial difficulties threatened the sector as a whole. Pamukbank had been found to have a $2.5bn capital deficit.



Meanwhile, Halkbank, the state bank established to extend loans to small tradesmen and artisans, is currently the country's sixth-largest bank in terms of assets and has long been slated for privatisation under the IMF economic programme. After the merger, the new Halkbank will be Turkey's fourth-largest bank.



The move comes after a series of failures to sell off Pamukbank on its own. Halkbank's interest in it reportedly comes thanks to its modern infrastructure and a staff trained in private-sector operations. Both have wide networks of branches, with many of Halkbank's older 528 branches expected to close and be replaced by Pamukbank's better-equipped 172.



There was more troubling news in terms of takeovers elsewhere in the sector though this week. One of Turkey's foremost private banks, Garanti Bank, saw its shares slide after it was announced that a bid for a controlling interest in the bank from Italy's Intesa had been below expectations.



Intesa is Italy's largest bank in terms of assets, and had made a preliminary agreement to pay $800m plus a proportion of profits for a 40% share.



This stood in stark contrast to market evaluations of Garanti being worth around $2.2bn, with an MCAP of $3.6bn at the close of business before the news broke backing up such a valuation.



The low bid accepted, naturally enough caused a panic. Garanti shares tumbled 15% on March 30 when news hit the market.



However, Garanti management defended the deal, saying that the experience and status of Intesa would add immeasurably to Garanti's own standing. Meanwhile, Dogus Holding, which owns Garanti, also announced that as part of the deal it would be purchasing from the bank some non-banking assets by the end of this year and that this would improve the bank's cash equity significantly.



The deal will also improve Garanti's access to international financing, which potentially places it ahead of many others in the pursuit of cheaper costs. With mortgage lending the next big development widely forecast within the industry, such low rate availability of financing would therefore stand the bank in good stead.



As a result, Garanti seems likely to weather any storm over Intesa's low bid. The issue also re-opens what had for some time been an issue kept locked away in the sector's deep freeze - that of foreign banks entering the Turkish market in a big way. Intesa first became interested in Garanti before the 2001 financial crisis, with that jolt followed by global downturns after the US began its "war on terror", the idea was shelved. Some sector analysts are now wondering who next might decide to revive an old, banking flame.