CLOSURE OF YAPI KREDI DEAL HIGHLIGHTS FOREIGN

UNCLAS SECTION 01 OF 02 ISTANBUL 000758

SIPDIS

SENSITIVE

STATE FOR EUR/SE AND EB/IFD
TREASURY FOR INTERNATIONAL AFFAIRS - CPLANTIER AND MMILLS
DEPT PASS EXIM AND OPIC
NSC FOR BRYZA AND MCKIBBEN

E.O. 12958: N/A
TAGS: EFIN ECON EINV BEXP TU
SUBJECT: CLOSURE OF YAPI KREDI DEAL HIGHLIGHTS FOREIGN
INTEREST IN TURKISH BANKS

REF: A. ISTANBUL 218


B. ISTANBUL 97

C. 2004 ANKARA 1437

D. 2004 ISTANBUL 1558

Sensitive but unclassified. Not for internet distribution.
This message was coordinated with Embassy Ankara.


1. (SBU) Summary: The announcement on Monday, May 9 that
Koc Financial Services and the Cukurova Group had reached
final agreement by which Koc and its Italian partner
Unicredito will purchase Yapi Kredi Bank vaults Koc into the
banking big leagues and removes the largest remaining cloud
hanging over the banking sector after the 2001 crisis.
Together with the planned sale of much of his Turkcell stake
to Nordic Telia Sonera, it will also permit Cukurova owner
Mehmet Karamehmet to climb out from under his USD 4 billion
debt to Yapi Kredi and the Savings Deposit Insurance Fund
(TMSF). When coupled with other recent international
transactions, the deal also highlights the fact that foreign
investors are looking first to the financial sector as they
consider making direct investments in the Turkish economy.
End Summary.


2. (SBU) At last a deal: Koc and Cukurova reached
preliminary agreement on sale of the bank at the end of
January (ref A),but concern had grown in recent weeks over
the amount of time negotiations and due diligence were
taking. Some speculated that Karamehmet was unhappy with the
sale price, given recent more lucrative deals for other
banks. (Mid-sized Disbank was sold in April to Belgium's
Fortis Bank at 1.9 times book value, whereas the Koc deal
effectively was at book value itself.) Speculation grew more
heated last week that rival Sabanci Group's Akbank might make
a late bid, as competition in other sectors between the two
giants intensified. The delay prompted a warning on May 7
from Banking Regulatory and Supervisory Agency (BDDK) Chief
Tevfik Bilgin that the process was taking too long. With
that encouragement, agreement was initialed a short three
days later.


3. (SBU) A new start: For both Koc and Yapi, the deal
represents the opportunity to make a new start. By bringing
together Yapi with its own smaller Kocbank, Koc will be among
the sector leaders, with an 11.4 percent market share and 567
branches, roughly equal to the rival Sabanci group's Akbank,
but with a larger presence in retail banking and credit
cards. Yapi staff have been anxious for some time for the
deal to be finalized. Under the board appointed by the BDDK
last year, they have complained that Yapi has essentially
been taken over by the state and has lost its earlier
dynamism and market leadership. That problem is evident in
recent sectoral statistics, which shows banks ranging from
market leader Akbank to small players like TEB and Denizbank
gaining market share in loans at Yapi's expense. The current
board, an observer told us, is more preoccupied with
investigating the past than developing new business, as is
reflected in the number of court cases opened against former
directors and management for deals that went sour. The
practice has poisoned attitudes at the bank and led to
inactivity. Koc has promised to end the practice.


4. (SBU) Foreign Interest: With the deal, foreign ownership
in the sector, which had already risen from 3 percent at
end-2004 to 8 percent, will rise further to 15 percent.
Other foreign players making moves in the Turkish market
include BNP-Paribas, which purchased the small TEB Bank,
Belgium's Fortis, which purchased 89.3 percent of the shares
in mid-size Disbank for 1.28 billion USD, and now Yapi.
Still on the block are Garanti Bank (with rumors that HSBC or
Deutsche Bank may be interested),Finansbank, and Denizbank.
Despite problems with the Turkish investment climate, the
banking sector is one in which foreign investors seem to be
able to operate without major problems (e.g. Citigroup and
HSBC). Now that Turkey has a date to begin EU accession
negotiations, and Turkey's macro situation seems to be
stabilizing, foreign (especially European) banks seem to be
betting on the huge growth potential here. Turkey's very low
ratio of credit to GNP and its young population are in marked
contrast to the mature, slow-growing home markets of the
investing banks. BDDK Chief Bilgin earlier predicted that
foreign participation in the sector could reach 30 percent.
The potential private deals, as well as recent rumors (viewed
skeptically by Istanbul analysts) that foreign banks may also
be interested in Turkish state banks, could make that a
reality. Already, however, concerns are being expressed
about how high the foreign share should go, with Deputy Prime
Minister Sener contradicting Bilgin and suggesting that the
government may soon introduce a measure to limit foreign
ownership in the sector.

5. (SBU) Details: Much remains unknown about the deal, but
what is known is that Koc will purchase 57.4 percent of
Yapi's shares for EUR 1.16 billion, giving the bank an
overall value of EUR 2.02 billion or USD 2.6 billion. Koc
will also issue a market call for minority shareholders,
though this is unlikely to win much favor, as the bank's
market capitalization is 13 percent higher-- valuing each
share at 5.2 YTL, versus the deal price of 4.8 YTL. Much of
the purchase price will be returned to the bank to cover the
Cukurova Group's USD 2 billion in receivables to Yapi, though
some portion will be directed to the TMSF to cover group
debts to it as a result of Pamukbank's failure.
Significantly, Koc will renew Cukurova's option to purchase
the 13.1 percent of Turkcell shares that are held as
collateral against the debt-- Cukurova plans to exercise that
option and then package the shares in its Turkcell sale to
Telia Sonera. All told, from the two deals Cukurova will
generate some USD 3.5 billion, that should enable it to cover
the lion's share of its obligations. TMSF officials thus
have privately been ecstatic about the development, viewing
it and another USD 433 million deal to sell Medya Holding
(owned by Dinc Bilgin, owner of the failed Etibank) to
another media company as its largest triumphs to date in
securing significant repayment of debts stemming from the
banking crisis.


6. (SBU) Pension Prerequisite: There is one prerequisite for
the deal, however, which worries some market analysts, but
which bank insiders predict will be finalized without
difficulty. That is the required transfer of the bank's
pension fund to the state. Like that of many other banks and
other companies, that fund is significantly underfunded.
(Note: Turkish "Ekonomist" Magazine estimated last month that
economy-wide, there is a potential USD 5 billion gap that the
government may have to cover. End Note.) Koc has apparently
agreed to make up part of the shortfall, but some remainder
must be assumed by the government. Bank officials believe
that this and other problems in the bank's balance sheet were
the reason that the deal remained at the low January
valuation, despite the higher multiples in other deals in the
sector and the bank's market valuation of USD 3.4 billion.
In addition to the pension problem, Yapi Kredi had other
overvalued assets, including its Fiskobirlik receivable
(which apparently will be handled in the same manner it was
by the government for other banks-- Yapi had earlier sought a
more generous settlement),real estate holdings, and others.
One bank official estimated that after due diligence, Koc had
written the bank's book down by half, from USD 3.4 to 1.8
billion USD. With the coming cash inflow that will follow
the deal to pay the Cukurova Group's debt, he believes the
bank will have no problems either regarding liquidity or
capital adequacy. Some USD 2.5 billion should come in, he
predicted, much of it for items (the non-performing Cukurova
loans, for instance) that were 100 percent risk on the bank's
books.


7. (SBU) Comment: The Koc deal, together with the parallel
Turkcell sale, promises resolution of the problems of the
Cukurova Group-- one of the largest remaining from the 2001
crisis. Thanks largely to improvements in Turkcell's
valuation, Cukurova should be able to fully pay off its debts
and retain assets valued at up to USD 2 billion. Istanbul
observers thus expect him to remain a major player in Turkish
markets, and do not discount his taking an active role in the
upcoming privatization of either Tupras, the National Lottery
or Turk Telecom. The banking sector too emerges from a
cloud, and should face a period of increased competition, as
the country's two largest conglomerates, Koc and Sabanci, for
the first time take each other on in the financial sector on
a roughly equal footing. All in all, the multiple
Cukurova-related deals constitute a win-win-win for Turkey:
removing a cloud (by the name of Cukurova) from one of
Turkey's top banks, confirming a substantial inflow of FDI,
and facilitating large repayments to the TMSF. End Comment.
ARNETT