US embassy cable - 03ISTANBUL1803

UNCLAS SECTION 01 OF 02 ISTANBUL 001803 
 
SIPDIS 
 
 
SENSITIVE 
 
 
STATE FOR E, EUR AND EB 
TREASURY FOR OASIA - JLEICHTER, MMILLS AND GRAO 
NSC FOR MBRYZA AND TMCKIBBEN 
 
 
E.O. 12958: N/A 
TAGS: ECON, EFIN, PREL, TU, Istanbul 
SUBJECT: BANKING SECTOR PREPARES FOR A "BRAVE NEW WORLD" 
 
 
1. (SBU)  Summary: The strong profits reported by Turkish 
banks in 2003's third quarter show that the sector is 
gradually recovering from the effects of the 2001 crisis, 
according to industry analysts in Istanbul.  They note, 
however, that much of the recent good news is the result of 
the windfall profits that banks have enjoyed as a result of 
declining interest rates, which have raised the value of 
their Treasury securities.  Banks, they warn, have yet to 
show that they will be able to prosper in the new environment 
that will result if Turkey is able to stay the course and 
achieve its goal of sustainable low inflation and interest 
rates.  Analysts forsee a further wave of consolidation in 
the sector, arguing that banking restructuring is only "half 
complete."  End Summary. 
 
 
2. (SBU) A positive quarter:  Most major Turkish banks easily 
beat analysts' expectations in their recently announced 
third-quarter results.  Industry leader Akbank led the way 
with third quarter earnings of USD 376 million, bringing its 
nine month profit to USD 722 million, well above the market 
consensus of USD 572 million.  Two of Turkey's other big four 
banks, Garanti and Yapi Kredi, also exceeded expectations, 
though more modestly, while Isbank slightly undershot 
analysts' expectations, largely due to higher loss provisions 
than analysts had expected. 
 
 
3. (SBU) Treasury windfall: Closer examination of bank 
balance sheets, however, shows that  the bulk of the profits 
stemmed from windfall profits on the banks' holdings of 
Treasury bonds, which comprise from one-third to one-half of 
major banks' assets.  Akbank, for example, holds nearly USD 
9.5 billion in government securities, composed of nearly 5.5 
billion in trading securities, 3.5 billion in securities 
available for sale, and only USD 450 million in securities 
held to maturity.  The latter figure is down significantly 
from its 2001 level of nearly USD 4.5 billion, reflecting the 
shift banks have made from holding securities to actively 
trading them in the secondary market.  The trend is evident 
at other banks as well, though less dramatically, given that 
Akbank leads the industry with 50 percent of its assets in 
government paper.  Garanti, for instance, has Treasury 
holdings of USD 5.8 billion (out of total assets of 14.2 
billion), but most of these are earmarked to be held to 
maturity, and a smaller percentage (28 percent) are 
denominated in Turkish lira.  The continuing bias of Turkish 
banks towards government paper was evident in recently 
published comments by the General Manager of Vakifbank. 
Asked to predict the bank's year-end profits, he said they 
would depend on future Central bank rate cuts, given that 
bank profitability stems from its government securities 
portfolio. 
 
 
4. (SBU) Loan expansion: Industry experts like Huseyin Imece 
at Yapi Kredi and Kubilay Cinemre at Garanti Bank stress that 
the banks' strong performance in the first part of the year 
is deceiving, in that the industry as a whole is not yet at a 
point where it achieves a sustainable operation from its core 
operations.  Of Turkey's big four, only Yapi Kredi currently 
has a loan portfolio that eclipses its security portfolio. 
Other banks are seeking to expand market share, however. 
Akbank's market share in retail loans and SME's almost 
doubled in the first nine months of 2003, but the bank's 
total loan portfolio is still only half the size of its 
security portfolio, at USD 4.85 billion.  Garanti's market 
share in retail loans increased from 18 to 25 percent, while 
the bank's overall loan portfolio expanded by 6 percent to 
USD 4.4 billion, or 31 percent of assets.  Cinemre stressed, 
however, that banks cannot be profitable simply on the basis 
of these products alone: new instruments are needed, such as 
a long-term mortgage system. 
 
 
5. (SBU) Restructuring: Ercan Kumcu, who in addition to 
writing regularly on economic topics in "Hurriyet" newspaper, 
also heads Tekfenbank, one of the industry's smallest 
players, told us recently that while important progress has 
been registered in recent years in restructuring the sector, 
the process is still only half complete.  Beyond the issue of 
weak banks in the system that may have to be taken over, 
there are also structural problems, stemming both from high 
intermediation costs as a result of excessive government 
taxes, and banks' own propensity to "overbranch."  (Note: The 
IMF and World Bank are working with the GOT to find ways to 
bring down intermediation costs, and the GOT has agreed to a 
modest reduction in taxation on bank transactions beginning 
in 2004.  But the GOT is constrained by the need for revenue 
to meet its fiscal targets.  End Note.)  According to Kumcu, 
further consolidation in the sector is essential, as is 
additional foreign investment.  With foreign banks currently 
only holding a small fraction of the market, there is 
significant room for them to expand. 
 
 
6. (SBU) Other clouds: Kubilay warned of additional clouds on 
the horizon, however, as a result of the new draft banking 
law currently being debated in parliament.  As a reaction to 
the wave of bank failures in the 2001 crisis and the recent 
IMAR bank scandal (newspaper headlines recently trumpeted 
Justice Minister Celik's outrage at finding himself sharing a 
VIP waiting lounge with the former head of a failed Turkish 
bank, which had required the injection of hundreds of 
millions of dollars of government funds), the draft provides 
stiff penalties for bankers in the event of bankruptcy as a 
result of high losses.  The law, Kubilay noted, would permit 
seizure of the personal assets of bankers and their families 
in such instances.  Inevitably, he argued, such regulations 
would have a chilling effect on the sector and dissuade 
bankers from assuming any risk.  The Banker's Association has 
reportedly been urging the GOT not to make this feature of 
the law quite so draconian.  IMF staff reportedly agree that 
it is too draconian, but attach greater priority to the 
portions of the draft legislation relating to the bank 
regulatory and deposit insurance agencies. 
ARNETT