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Cablegate: Banking Sector Prepares for a "Brave New World"

This record is a partial extract of the original cable. The full text of the original cable is not available.





E.O. 12958: N/A

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.

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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

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.

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