The mysterious rise of China’s ICBC in Turkey

The Turkish unit of the International Commercial Bank of China, the world's largest bank by assets, is the best performing share on the Istanbul exchange, surging a whopping 232 percent over the past year. But the reasons for this meteoric rise remain largely clouded in mystery.

A company’s outperformance can be explained by one or more factors, such as profitability, expectation of future business, speculation and insider trading (the Istanbul exchange, like many markets, is rife with such practices). Or, as one analyst put it, there could be some kind of financial “churn” between the bank and the Turkish wealth fund, Turkiye Wealth Fund Management.

On the basis of profitability, it is difficult to argue a case for investment. Aside from a low ratio of bad debt to total loans – around 2 percent of total -- ICBC Turkey has lagged behind peers in the country, making it an unattractive investment based on the numbers.

While the bank’s profit more than doubled to 13.7 million lira ($3.5 million) in the second quarter from a year earlier, its price-to-equity ratio -- the amount an investor pays for $1 of profit -- is now a whopping 44.9 compared with 7.6 for Garanti, Turkey’s leading non-government bank. Furthermore, earnings per share, another key indicator of profitability, are just 0.12. Garanti offers prospective investors a ratio of 1.39.

“The question is, with fundamentals like this, why are people investing in this stock?” the analyst, who asked not to be identified, asked last week. “It looks like a Pandora’s box situation and we just don’t know what will pop out.”

ICBC Turkey, 1-year price graph (Google Finance)
ICBC Turkey, 1-year price graph (Google Finance)

ICBC Turkey’s parent, which is China’s largest bank, could become one of the biggest lenders to Turkish wealth fund, established in August last year to raise financing for Turkish infrastructure projects and other investments. In October, Bloomberg reported that the wealth fund had approached the company for a $5 billion loan over 10 years. Yiğit Bulut, board member and a senior adviser to President Recep Tayyip Erdoğan, met ICBC Turkey Chairman Xu Keen in Istanbul on Oct. 4, Bloomberg said.

Unlike funds in countries such as Qatar and the UAE, the Turkish wealth fund needs cash from banks such as ICBC because it cannot invest excess revenue from oil and gas – the country does not have any. Instead, it will act as an off-budget agency for government borrowing and spending, backed by state-owned shares in firms such as Turkish Airlines, which already have their own debts.

The government plans to raise capital via the fund and use it for supporting lending to the economy. Analysts say Erdoğan is in a hurry to find funds because of stresses on the budget ahead of presidential elections, due in 2019, at the latest.   

Hikmet Karadağ, acting chief of Turkey's wealth fund (TWFM)
Hikmet Karadağ, acting chief of Turkey's wealth fund (TWFM)

ICBC, which uses its unit in Turkey as a conduit for such lending, has already developed a track record of investing in Turkish infrastructure, having participated in syndicated lending for an $840 million public hospital in Izmir, the country’s third-largest city. It also wants to be a major partner to infrastructure projects including energy power plants, railways, highways and others, Keen has said.

ICBC is also lending to Hayat Varlik, the country’s biggest buyer of non-performing loans. In March, the European Bank for Reconstruction and Development (EBRD) characterised a 120-million lira loan to Hayat, made in partnership with ICBC, as a means to “facilitate new lending within the economy and help financially challenged companies to become economically active,” a goal that Erdoğan promotes almost weekly as he seeks to boost the economy ahead of the elections.

ICBC Turkey also arranges loans for Turkey’s banks, offers consumer loans and collects deposits via 44 branches inherited from Tekstilbank, which it bought in May 2015. In March, it coordinated a $250 million, three-year loan for state-run Vakifbank from ICBC Dubai. Last month it co-coordinated a $1.35 billion loan for private bank Yapi Kredi.

The presence of Hilmi Güler, a political ally of Erdoğan who was energy minister between 2002 and 2009, on the bank’s executive board will do ICBC no harm when it comes to access to government officials and members of the wealth fund. ICBC hired Güler two years ago as an independent board member to oversea corporate governance.