Identifier
Created
Classification
Origin
05ISTANBUL1492
2005-08-26 15:19:00
UNCLASSIFIED//FOR OFFICIAL USE ONLY
Consulate Istanbul
Cable title:  

GE CAPITAL ENTERS TURKISH BANKING SECTOR AS TURKS

Tags:  EINV ECON EFIN BEXP TU 
pdf how-to read a cable
This record is a partial extract of the original cable. The full text of the original cable is not available.
UNCLAS SECTION 01 OF 02 ISTANBUL 001492 

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: EINV ECON EFIN BEXP TU
SUBJECT: GE CAPITAL ENTERS TURKISH BANKING SECTOR AS TURKS
DEBATE FOREIGN OWNERSHIP

This message is sensitive but unclassified-- not for internet
distribution. This message was coordinated with Embassy
Ankara.

UNCLAS SECTION 01 OF 02 ISTANBUL 001492

SIPDIS

SENSITIVE

E.O. 12958: N/A
TAGS: EINV ECON EFIN BEXP TU
SUBJECT: GE CAPITAL ENTERS TURKISH BANKING SECTOR AS TURKS
DEBATE FOREIGN OWNERSHIP

This message is sensitive but unclassified-- not for internet
distribution. This message was coordinated with Embassy
Ankara.


1. (SBU) Summary: The August 24 announcement that GE Capital
will acquire 25.5 percent of the shares of Garanti Bank, one
of Turkey's four leading private banking institutions, is a
welcome indication of U.S. interest in the Turkish financial
sector, following a wave of European acquisitions over the
past year. It will also likely intensify the ongoing debate
over whether foreign investment in the sector should be
limited, however, as two of Turkey's four largest private
banks will henceforth have significant foreign participation.
With the purchase, foreign participation in Turkish banking
will rise to 18 percent, still modest in comparison to
Eastern European levels, but a dramatic increase from its
anemic 3 percent level last year. The purchase is the fifth
announced over the last year, and even before it materialized
there was a vigorous national debate and calls from some in
government and opposition to limit foreigners' share in the
sector to 30 percent. While the debate will continue, the
deal also highlights increasing international interest in
Turkish assets, as the price a major international financial
institution was willing to pay for Garanti rose three-fold in
a little over a year. End Summary.


2. (SBU) Garanti's Coup: Garanti was courted extensively in
recent years by Italy's Intesa Bank, and even initialed an
agreement last year. The deal ultimately foundered over
pricing and other issues. Since that time, the bank has
explored other options, flirting briefly with HSBC Bank and
most recently with General Electric's consumer lending unit.
The August 24 announcement that GE would purchase a 25.5
percent stake was thus not a surprise, but it did prove that
sometimes at least, all things come to those who wait. In
place of the 800 million USD that Intesa offered for 40
percent of Garanti's shares, the Dogus group will receive
1.556 billion USD for 25.5 percent of the shares, and retain
five of the nine seats on the bank board. Dogus owner Ferit
Sahenk will remain as Chairman and Dogus and GE will operate

on the basis of an "equal partnership". Dogus will also
acquire 700 million USD of Garanti's non-core assets over two
years. Closure of the deal is contingent only on transfer of
the bank's pension fund to the state (President Sezer earlier
vetoed legislation providing for such transfer but the GOT is
expected to pass it over his veto early this fall.)


3. (SBU) Onward and Upward: Analysts welcomed the deal both
as an indication of U.S. interest in the sector, as well as
for the increasing valuation for Turkish assets that it
represents. Indeed, the bank's valuation has now increased
three-fold, from 2 billion USD in the Intesa deal to 6.6
billion USD, a level that some Istanbul analysts characterize
as "rich." This has led some leading brokerages to advise
minority shareholders to sell into the tender call that GE
plans on conclusion of the deal. Analysts also believe the
deal bodes well for Garanti's future operations. As analyst
Figen Cevik at Oyak Securities notes, beyond the benefits of
partnership with GE, the transfer of non-core assets back to
Dogus will "clean up the balance sheet and boost
profitability in line with an improved cash equity base."


4. (SBU) Going, going gone: The GE deal is the latest in a
string of acquisitions in the banking sector that have
prompted national debate over what the appropriate level of
foreign involvement should be. Over the past year, the
sector has successively witnessed foreigners acquire in whole
or in part a small bank (the Turkish Economy Bank-- TEB),a
medium-sized bank (the Dogan Group's Disbank),a major
franchise (the Cukurova Group's troubled Yapi Kredi Bank),
and now a second major bank, Garanti. In total, the deals
have increased the level of foreign participation in the
sector from 3 to 18 percent, well on the way to BDDK Chief
Bilgin's prediction last year that in the near future foreign
ownership could reach a third of the sector. Only one deal
has been for outright control by a foreign partner (Belguim's
Fortis Bank's acquisition of Disbank). Others have involved
equal partnerships-- BNP-Paribas in TEB, and now GE in
Garanti. Koc-Unicredito's acquisition of Yapi Kredi stands
as a hybrid case of a joint Turkish-Foreign partnership
acquiring overall control of the market leader in commercial
lending and credit cards. Further deals may be on the
horizon, as there have been rumors of courtship between
market leader Akbank and Citibank. In public comments this
week, however, Akbank board member Susan Sabanci Dincer
stressed that the Sabanci group is not interested in selling
off control of the bank, but only in acquiring a foreign
"partner."


5. (SBU) Nationalist Backlash: The trend initially sparked an
outcry in nationalist circles, with opponents of foreign
investment such as Radikal's Yigit Bulut leading the charge.
The issue was swiftly picked up by both government and
opposition politicians. A recent report by the Republican
People's Party (CHP) suggested capping foreign participation
in the banking sector at 30 percent. This level is similar
to that advocated by Deputy Prime Minister Sener earlier in
the summer, though he stressed he was expressing his
"personal" view. EFG Brokerage Chief Economist Baturalp
Candemir observes that AK party contacts have frequently
questioned him about whether it would not damage Turkey's
national interests if foreign banks took over their Turkish
counterparts. His AK interlocutors, he notes, have been
particularly concerned about whether in a crisis foreign
banks might refuse to lend to the Turkish Treasury, and
whether the supply of credit to Turkish businesses wouldn't
dry up. Candemir has dismissed such concerns, noting that in
moments of international tension, all banks tend to have
hesitation, but at the end of the day the profit-maximizing
incentives are the same for foreign as for domestic banks.
Candemir believes most in AK have come to accept this view,
though the fact that dissension continues is evident in the
continuing dialogue between Sener and BDDK Chief Bilgin over
the percentage limit idea.


6. (SBU) Business Concern: National concerns are not totally
absent even from the ranks of progressive business circles.
One of our most thoughtful business contacts, Istanbul
Chamber of Industry President Tanil Kucuk, notes that he
personally opposes restrictions on foreign investment in any
but strategic sectors, but that he concurs that it is
important that two or three large banks remain Turkish to
ensure that there is healthy competition between foreign and
domestic participants in the sector. Overwhelming foreign
predominence in banking, he suggested, might harm business as
such foreign banks may not fully appreciate Turkish
realities. Isbank CEO Ersin Ozince, head of the Turkish
Banking Association, himself has frequently intimated that
foreign ownership in the sector should be limited, saying
most recently that "national capital accumulation" should be
the sector's main aim, and that this should be supported by
the government. Other business contacts remind us that the
concern about the sale of leading Turkish banks largely
reflects profound ambivalence about foreigners taking over
flagship Turkish institutions, rather than opposition to new
job-creating foreign investment. In this, they argue,
Turkish opponents of such sales are not so different from
Americans who opposed the sale of Unocal to CNCC.


7. (SBU) Comment: Whatever the basis of the critique,
advocates of foreign direct investment, who up until earlier
this year spent their time rueing its absence from Turkey,
now must spend their time defending the necessity of such
capital for Turkey's economic development. Increasingly,
they recognize that the best defense is a good offense, and
have spilled ink and taken to the airwaves to stress that
Turkish capital alone is insufficient to bring Turkey the
level of economic growth it needs both to raise standards of
living and absorb new entrants to the labor market. Turkey's
trade imbalance is another justification they have seized on.
As Erdal Saglam, a prominent economic commentator in
Turkey's leading paper "Hurriyet" wrote recently about the
country's looming trade deficit, "a country with this large a
trade imbalance cannot be against foreign investment." At
the very least, however, recent sales have answered one past
criticisim of such acquisitions in that foreigners are not
profiting from Turkish "firesales," but instead are paying
healthy premiums to take a stake in what they perceive will
be a growing and profitable market. End Comment.
JONES