Cablegate: Two Views On State Banks

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

261442Z Oct 04





E.O. 12958: N/A

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

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,

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
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.

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