Foreign banks may be turning to the exit as Turkey tightens grip on sector

Foreign banks operating in Turkey and their local counterparts may retrench or consolidate after government pressure on them to increase lending intensified and state-run banks boosted their market share.

Shareholders of private banks in Turkey are likely to reject capital increases and battles for market share, tightening Ankara’s control over the finance industry and accelerating an exit of foreign investors, Reuters reported on Wednesday, citing nine executives, advisers and analysts.  

The Turkish government, hobbled financially by the coronavirus pandemic, is now more likely to intervene in the industry and hamper the ability of private banks to service their foreign debts, according to credit ratings agency Fitch.

“In the medium term, the difficult economic situation will make the case for consolidation more appealing,” said Filippo Alloatti, a senior analyst at Hermes Investment Management, according to Reuters.

Responding to a slump in economic activity after reporting the first case of COVID-19 in mid-March, the Turkish authorities introduced new rules forcing banks to lend to cash-strapped companies and buy more government bonds.

Meanwhile, the sovereign wealth fund, overseen by President Recep Tayyip Erdoğan, injected 21 billion liras ($3.1 billion) into state-run banks, taking over almost one third of the shares of one of them, the publicly listed Vakıfbank, as part of the deal.

Over the past six months, Italy’s UniCredit has already reduced its stake in private bank Yapı Kredi and Britain’s HSBC has said it is considering pulling out of the country.

Reuters said private banks will soon have to choose whether to extend more loans and raise capital or stand aside, citing one bank executive.

Shareholders will reject attempts by banks to raise their capital due to the risks of doing business in the country, a senior adviser to Turkish banks said.

“If an opportunity comes, private bank owners would consider rushing to the exit. But there is currently no way out,” the adviser said, referring to the impact of the COVID-19 pandemic, the difficulty in valuing assets and a lack of willing buyers.

Returns on equity in Turkey have dropped to 11.5 percent from almost 25 percent in 2007, when foreign banks were flooding into the country, Reuters said. In 2018, a currency crisis left private banks holding tens of billions of dollars of non-performing loans.

Meanwhile, net profit at state-run banks jumped 83 percent annually in the first quarter of this year. That compared with 9 percent and 4 percent for private and foreign banks, respectively, Reuters said.

Bankers are also struggling because of the rising cost of regulation. The most recent hurdles include new rules that tighten the authorities’ grip over foreign exchange markets.

“You can’t have changes in the regulatory framework every week,” one senior bank executive told Reuters. “This has become too common and has to settle down. Those that fare better may buy the stakes of banks that can’t manage these costs.”

A consolidation of the sector may happen, but not as quickly as some might think, said Francis Malige, managing director for financial institutions at the European Bank for Reconstruction and Development.

“I would not be surprised if there’s consolidation but I wouldn’t expect it to be immediate” because it typically happens after the acute phase of financial crises, Malige said.