YAPI KREDI END GAME NEARS

UNCLAS SECTION 01 OF 02 ISTANBUL 000097

SIPDIS

SENSITIVE

STATE FOR EUR/SE AND EB/IFD
TREASURY FOR INTERNATIONAL AFFAIRS - RADKINS AND MMILLS
NSC FOR BRYZA AND MCKIBBEN

E.O. 12958: N/A
TAGS: EFIN EINV ECON TU
SUBJECT: YAPI KREDI END GAME NEARS

REF: A. 2004 ANKARA 1437


B. 2004 ISTANBUL 1558


1. (SBU) Summary: In a move that marked the first official
step forward towards realization of its long-rumored desire
to buy Yapi Kredi Bank, Unicredito-Koc Holding on January 17
announced that it had signed an agreement with the bank's
dominant shareholder, the controversial Cukurova Group, for
exclusive negotiating rights. The statement stressed that
the agreement was for the start of negotiations, rather than
their conclusion, implying that agreement on price will
likely await conclusion of the partnership's due diligence on
Yapi Kredi. That process may take time, as in addition to
the 2 billion USD debt owed by the Cukurova Group to the
bank, the bank's balance sheet includes other assets that
many believe will need to be revalued. Overall, however,
markets and Istanbul analysts have reacted positively in the
hope that the long-standing uncertainty surrounding one of
Turkey's flagship banks can be brought to closure quickly.
End Summary.


2. (SBU) After a weekend in which rumors (stemming in part
from government sources) were rife that the Unicredito-Koc
Holding financial services partnership had reached agreement
to buy Cukurova Holding's 45 percent stake in Yapi Kredi Bank
for 900 million USD, clarification came on Monday with
announcement by both principals that agreement had been
reached on an exclusivity agreement allowing for the start of
negotiations between the two parties. Both sides stressed
that this was the start rather than the end of the process,
and said that due diligence on the bank would begin
immediately.


3. (SBU) Though apparently premature, the 900 million USD
figure may end up not being far off the mark, as it implies a
2 billion USD valuation for the bank, close to the target
valuation assigned it by most Istanbul brokerages. It is,
however, below the bank's current market capitalization,
which has increased 40 percent since the end of October 2004
to 2.5 billion USD, as foreigners in particular have made
Yapi Kredi one of the most traded stocks on the Istanbul
Stock Exchange (ISE). Key complicating factors for the
bank's valuation are the outstanding 2 billion USD receivable
owed it by the Cukurova Group, as well as overvaluation of a
number of other assets on the bank's books. These include
400 million USD the bank has booked as receivables from a
disputed hazelnut tax collection (few expect it to see any
where near this amount),and a half share in A-Tel
telecommunications, which the bank also generously values at
400 million USD, but which analysts doubt is worth more than
a tenth of that. With the stock market's rise over the past
two years increasing the value of the Turkcell shares held by
Yapi Kredi as collateral for the Cukurova loan to nearly 1.7
billion USD, the rumored 900 million USD sale price would
appear to show that at least some preliminary discussion has
taken place about how to compensate for these "holes" in the
bank's balance sheet.


4. (SBU) Pressure has been increasing in recent months on
the Cukurova Group, following the well-publicized failure at
the end of the year of the revised payment plan that would
have permitted it to settle its debt to Yapi Kredi and to the
Savings Deposit Insurance Fund (to which it also owes 2
billion USD for the takeover of the group's second bank--
Pamukbank). That deal would have ensured that the group
retained control of its other prize asset of Turkey's largest
mobile phone operator, Turkcell. The failure of the group to
come through with promised financing severely damaged its
credibility. Just last week, Bank Regulatory Agency (BRSA)
Chairman Tevfik Bilgin warned that the Cukurova Group was
"walking on a thin layer of ice," and that while the agency
would try to help it get across, "if the ice cracks, it is
the group that will get wet." The January 17 announcement
precedes by two weeks the group's deadline to sell the bank
by itself, under its agreement with regulators. After
January 31, the group and BRSA will jointly seek a buyer, and
if that effort is unsuccessful by October 31, then BRSA
assumes sole responsibility for the sale. The agreement with
regulators' built-in pressure on Cukurova to find a buyer has
apparently worked, and probably explains the joint
announcement with Koc-Unicredito.


5. (SBU) Given Yapi Kredi's size and role as a pioneering
consumer bank in Turkey, the uncertainty surrounding it has
cast a pall over the entire banking sector for some time.
Nonetheless, bank management has worked intensely over the
past two years to preserve the franchise, and while there has
been some slippage in the bank's share of the loan market,
recent statistics reflect the bank's staying power. In the
third quarter of 2004 (the latest period for which figures
are available),while the bank's net profit fell far below
market expectations because of an adjustment in deferred tax
assets, bottom line figures for interest income and net fees
and commission were in line with market predictions. The
bank's asset size increased 4.9 percent over the previous
quarter (7.4 percent from a year earlier),with increases in
desposits making up a third of that total. Though its share
has stagnated, Yapi Kredi, Turkey's oldest private bank,
remains the market leader in credit cards, and booked
continued growth in loan volumes (up to 6.5 billion USD in
September from 5.8 billion USD at the end of 2003).


6. (SBU) Notwithstanding this success, bank insiders have
told us frequently in recent months that the continued
uncertainty is hurting their efforts to maintain the bank's
market position. Especially, since last March, when the BRSA
replaced the bank's board with its own candidates, they
describe a culture that has grown increasingly cautious and
risk averse. The resultant unwillingness to undertake major
promotions or campaigns ultimately led the bank's CEO Naci
Sigin to tender his resignation in September. Former Bank
Chairman Rona Yircali described this to us as a serious
mistake by bank management, though he conceded that the
damage was minimized by the new board's decision to select
the acting CEO from inside the bank (Vice President for
Financial Analysis and Credit Risk Management Rena Yolalan).
Despite a news campaign to the contrary, bank executives note
that increasing numbers of personnel have left in recent
months, and that those who remain are having difficulty
maintaining their motivation. The risk, one senior executive
told us, is that if the sale takes a year or two, there may
not be a franchise remaining to be sold.


7. (SBU) Comment: Monday's announcement holds out the promise
that this extended bloodletting can be avoided and that
instead Yapi Kredi may find itself moving swiftly into the
hands of one of the bluest of Turkey's blue chips. If so,
the outcome may turn out to be a win for all concerned: for
Koc and Unicredito, which have openly aspired to raise their
modest profile in the financial world in Turkey (Kocbank,
which will likely remain a separate franchise, is less than a
third the size of Yapi, with only a small share of Turkey's
consumer market),for the BRSA, which has sought to avoid a
protracted struggle with the Cukurova Group while still
ensuring that the bank leaves their control, and for the
Cukurova Group as well, which appears to have accepted the
fact that it cannot preserve all of its current assets, and
is now focused on trying to maintain its hold on Turkcell.
The Unicredito-Koc gambit, following the recent deal between
BNP Paribas and TEB, and rumored talks between other small
Turkish banks and international partners, also marks another
step towards increased international presence in Turkish
banking, giving credence to BRSA chief Bilgin's prediction
that foreign ownership in the sector may increase from 3 to
15 percent by the end of the year. End comment.
ARNETT