Unrivalled among the large-cap companies on the Istanbul Stock Exchange, Akbank draws both enthusiasm and scrutiny from investors. Can the bank's already impressive profits keep up with its break-neck growth? Amid a competitive field of mixed results and low profits after a tough year, Akbank's 2006 net income of TL1.6bn ($1.2m) and return on equity of 24.4% indicate that the company is more than up to the challenge.
Taking into account its vast size, Akbank had to carefully weigh a partnership strategy to supercharge growth and keep up with the industry, which has seen hectic buying by foreign investors over the past three years. Nearing the end of this merger and acquisition (M&A) phase, Akbank completed an agreement whereby Citigroup would acquire a 20% equity stake in the company for $3.1bn in January 2007.
The bank's market capitalisation exceeded $15bn in 2006 and should continue to top the market as a result of capital increases. The best known of these came through Citigroup's investment, of which 11.67% was in shares purchased from Sabancý Holding and Sabancý family members, and 8.33% was a capital increase that
brought total equity to about TL9bn ($6.7bn).
Analysts were surprised at the TL9.5bn ($7.1bn) Citigroup paid for its Akbank shares at a price-to-book value ratio of 3.59, an unusually high amount. While the M&A environment may be responsible for inflating prices, management believes the price was a sign of the uniqueness of the partnership opportunity.
"Considering Citigroup's size and prestige going into the Turkish market, as well as Akbank's presence, the price is well justified," said Suzan Sabancý Dinçer, managing director of Akbank.
"It is very difficult for banks in Turkey to grow organically. Banking is exceptionally competitive in terms of technology, human resources and distribution networks. Akbank was the right partner, given its extensive distribution network."
It is unlikely in the short term that Citigroup will increase its stake. The partnership agreement limits Citigroup to purchasing shares solely from Sabancý Holding and not Sabancý family members, who still control approximately 14% of the company's shares. With strong deposit growth and new capital from Citigroup, Akbank must now decide how to reinvest.
Analysts believe a logical path would be for the bank to compete on price to expand its loan-to-asset ratio, up from 43% in 2005 to 50% in 2006. The market has anticipated that the bank will move to acquire a smaller peer, consolidating the domestic industry along the lines of the Koç Bank and Yapý Kredi Bank merger.
Swift and aggressive acquisitions by foreign banks in 2005 and 2006 have left very few attractive targets for such a large bank.
"For us to go ahead and buy an entity that does not have the same organic growth does not make a lot of sense," Sabancý said. "It has to really give us an additional market share. Acquisitions take a lot of time in terms of IT and human resources. They take a lot of management attention."
It is this calculated attitude that has put Akbank at the forefront of banks rumoured to be interested in buying Halkbank, which is nearing the end of a tortuous privatisation process with a 25% initial public offering (IPO) planned for the second half of 2007, to be followed by a sale of the remaining 75% at a later date.
Unlike critics of privatisation, Sabancý concentrates on the positive impact of the IPO, which she said could forecast a rational price for the controlling balance of the company. She remains uncertain that the benefit of Halkbank's significant market share actually outweigh its institutional legacy as a state-owned bank.
"50% of the bank's assets are government bonds and the remainder are loans. We are after a banking business, not a government bond business," Sabancý said. "Halkbank has nearly 11,000 employees. That is a great social responsibility for the taker. Taking on Halkbank is very complicated and could be potentially damaging."
As for the rest of the sector, the best focus going forward may simply be to increase the number of branches to boost client contact in the retail segment, which promises the best margins in the medium term.
