US embassy cable - 04ANKARA6075

UNCLAS SECTION 01 OF 03 ANKARA 006075 
 
SIPDIS 
 
STATE FOR EUR/SE AND EB/IFD 
TREASURY FOR INTERNATIONAL AFFAIRS - RADKINS AND MMILLS 
NSC FOR BRYZA AND MCKIBBEN 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EFIN, ECON, TU 
SUBJECT: TWO VIEWS ON STATE BANKS 
 
REF: A) ANKARA 6026; B)ANKARA 5999 
 
This cable was coordinated with Congen Istanbul. 
 
1. (Sbu) Summary: In separate meetings, a World Bank expert 
and a state-owned bank executive provided contrasting views 
on state bank privatization issues.  The World Bank expert 
is taking a fresh, somewhat skeptical look at the Bank's 
privatization strategy, and seemed to share some of the USG 
concerns.  Meanwhile, a Ziraat Bank executive defended her 
bank's policies on consumer lending, arguing that the Bank 
needed to develop a profitable loan business to prepare for 
privatization, and that Ziraat's fast-growing consumer loan 
portfolio was manageable and needed to be put in context. 
End Summary. 
 
World Bank Expert's Fresh Look at State Bank Privatization: 
--------------------------------------------- - 
2.(Sbu) Econoffs met October 20 with a World Bank banking 
sector expert based in Washington, who recently took the 
lead on banking sector issues in Turkey.  He took a fresh 
and somewhat skeptical look at state bank issues, 
understanding USG concerns that the Programmatic Financial 
and Public Sector Adjustment Loan (PFPSAL3)--under which the 
state bank privatization process is a key area of 
conditionality--runs the risk of disbursing a lot of money 
for very little tangible result. 
 
3. (Sbu) The expert said he and his IFI colleagues had held 
a series of  "unhappy" discussions with the three state- 
owned banks: Vakif, Halk and Ziraat.  He said that Vakif's 
management does not even consider the bank to be a state 
bank.  Note: Vakif is majority-controlled by the General 
Directorate of Foundations, a governmental body which is 
among the eclectic responsibilities of State Minister Mehmet 
Ali Sahin, along with youth and sports and collective 
bargaining with public sector unions. This structure has 
repeatedly stalled IFI efforts to move the bank towards 
privatization.  End Note.  In general, the World Bank expert 
did not feel that the Turkish Treasury, as the other state 
banks' shareholder, was putting sufficient pressure on the 
management of state banks to prepare for privatization. 
 
4. (Sbu) The expert believes that a 2004 World Bank-financed 
study by McKinsey that provided the GOT with a road map for 
privatization was not bad but was incomplete.  He said 
McKinsey should have also done studies of the state banks' 
market positions, which might have led to alternative 
strategies or at least steps that would help move the banks 
towards privatization.  For example, the expert thought 
there might be scope to hive off Ziraat or Halk's big-city 
branch networks, for which there might be potential 
purchasers.  He added that Ziraat and Halk's rural branches 
are the most profitable, since private competitors are 
largely absent from the rural market, especially in Eastern 
Turkey.  The expert said Bank staff are working on an aide- 
memoire to the GOT on banking sector issues, and are likely 
to partially reopen some of the privatization issues. 
 
5. (Sbu) The expert also expressed sympathy to the US 
Treasury idea that the GOT consider making tradeable the non- 
tradeable government securities held by the state banks. 
Note: The state banks outsized holdings of government 
securities, which are too large to be absorbed by the market 
(at least for now) are widely considered to be the single 
biggest impediment to the banks' privatization. End Note. 
 
6. (Sbu) BRSA officials and other bankers (see below) have 
downplayed concerns that state banks might not have the 
credit skills to avoid running up non-performing loans 
through these banks' aggressive marketing of consumer loans 
and credit cards.  They argue that the return on risk for 
this asset class is better than for other loans, both 
because of consumer loans' profitability and because of the 
diversification inherent to a consumer loan portfolio.  The 
World Bank expert, however, wondered whether Ziraat had the 
expertise to manage its explosive consumer loan growth 
properly. 
 
7. (Sbu) He had a somewhat more favorable view of Halk 
Bank's management than of Ziraat or Vakif management. 
Halk's management is currently consumed with integrating 
Pamuk Bank, but then will begin benchmarking changes needed 
to prepare for an eventual IPO.  Though it is too late to 
change the decision, the World Bank expert questioned the 
wisdom of having merged SDIF-intervened Pamuk into Halk, 
rather than simply closing down Pamuk, which was deeply 
insolvent.  He said 25 percent of Pamuk's staff-probably 
including their best people-had left the bank during the 
long wait for its absorption into Halk. 
 
8. (Sbu) More broadly, the World Bank expert worried that he 
had yet to uncover a natural constituency or champion for 
state bank privatization in Turkey, which he has found to be 
the key to meaningful progress in other countries.  Until 
such a local champion can be found, he believes the emphasis 
should be on increasing transparency. 
 
Ziraat Bank Executive Defends the Bank's Strategy: 
--------------------------------------------- ---- 
9. (Sbu) Econoff also met with Ayse Goltar, Deputy General 
Manager of Ziraat Bank.  Goltar, a former Deloitte CPA, was 
brought in three years ago by the reformist team headed by 
then State Bank Board Chairman Vural Akisik.  She readily 
admitted Ziraat was not trying to shrink, but denied the 
Bank was being "aggressive" in pushing consumer credit. 
While admitting Ziraat's consumer loan rates were lower than 
other banks', she claimed that Ziraat charged higher 
commissions than other lenders, such that the all-in cost 
was equivalent.  She agreed that the bank was trying to 
increase its market share in consumer lending, but pointed 
out that Ziraat was starting from a minuscule base and still 
had a much smaller market share in consumer lending than 
might be expected from a bank with such an extensive branch 
network, and which has a much larger market share in other 
products and services. 
 
10. (Sbu) She said that as of December 31, 2002, Ziraat had 
only 500 trillion TL (USD 337 million) in retail loans. This 
portfolio had grown to 1 Quadrillion TL  (USD 676 million) 
at the end of 2003 and 2.5 Quadrillion ((USD 1.689 billion) 
as of September 30, 2004. The rate of growth was obviously 
very high, but Goltar pointed out it was still not a big 
number in relation to Ziraat's capital or total 
assets-respectively 6 Quadrillion TL (USD 4 billion) and 
46.5 Quadrillion TL (USD 31.4 billion) as of December 31, 
2003. 
 
11. (Sbu) Nor did Goltar see a significant risk of increased 
non-performing loans(NPL's).  She said the bank had only 15 
trillion TL (USD 10 million) in NPL's as of September 30 and 
most of these were left over from Ziraat's assumption of the 
failed Emlak Bank a few years ago.  She said consumer loans 
had a maturity of only 8 or 9 months, such that if there 
were credit problems arising from the rapid growth they 
should already be showing up.   The credit risk of these 
loans is also mitigated by the fact that most of the loans 
are to existing Ziraat customers who receive payment of 
their salaries into accounts at Ziraat-accounts that could 
be garnished if the borrowers failed to pay.  Goltar said 
management had imposed regional lending ceilings for its 
branches' consumer loans.  As branches reached these limits, 
the growth of consumer lending was likely to slow.  The 
slowdown seems to have already started: Goltar said auto 
loans totaled 4 Quadrillion TL in August and had only grown 
slightly, to 4.16 Quadrillion TL in October.  Finally, she 
emphasized Ziraat's relatively small share of the consumer 
loan market.  In auto loans, for example, she said Ziraat's 
market share was only 7 percent, up from only 3 percent a 
few years ago. 
 
12. (Sbu) On the deposit side, Goltar confirmed that in 
recent months Ziraat was offering lower rates than its 
private competitors.  As a consequence, she said Ziraat's 
share of total Turkish Lira deposits had fallen since March 
from 32 to 29 percent.  In the foreign exchange deposit 
market, where Ziraat is a less important player, she said 
the bank's market share had increased slightly, from 12 to 
13 percent. 
 
13. (Sbu) More broadly, Goltar defended management's 
strategy of preparing for eventual privatization by trying 
to build up profitable, traditional banking business to 
replace reliance on government securities.  Ziraat's year- 
end 2003 financial statement shows government securities 
totaling 26.7 Quadrillion TL (USD 18 billion), or 59 percent 
of total assets.   With such a high proportion of assets in 
government securities, and current capital-adequacy rules 
assigning a zero risk weight to government securities, 
Goltar said Ziraat's capital-adequacy ratio as of September 
30, 2004 was 50 percent.  If the government securities were 
assigned a 20 percent risk weighting, the ratio would be 30 
percent. 
14. (Sbu) The bank continues to be quite profitable in 2004. 
Goltar said net income for the first nine months reached 1 
Quadrillion TL (USD 676 million), and would likely hit 1.4 
Quadrillion (USD 946 million) for the full year.  Goltar 
said the profits stem from a combination of increased loan 
business, more profitable deposits as the bank kept deposit 
rates low, and continued profitability from government 
securities.  At the end of the year, Goltar said she expects 
the profits to be returned to Treasury as a dividend. Goltar 
agreed with the World Bank expert's comment that rural 
branches tended to be the most profitable from a return-on- 
assets or return-on-equity standpoint. Ziraat derives the 
bulk of its profits, however, from its urban branches, 
according to Goltar. 
 
15. (Sbu) Comment: The World Bank expert's new look at some 
of the difficult state bank issues is refreshing and could 
lead to the IFI's demanding more tangible restructuring 
actions at these banks in order to better prepare them for 
eventual privatization.  Indeed, state bank privatization 
issues are among the difficult items preventing conclusion 
of negotiations on a new Standby agreement with the IMF. 
Goltar's arguments, while not disspelling concerns about the 
GOT's slow-motion approach to state bank privatization, help 
put the growth of consumer loans at Ziraat into perspective.