The Test of the Turkish Banking Sector
*Source: Hürriyet Daily News ©
The Test of the Turkish Banking Sector
The status of İşbank has caused some confusion over the years due to the pervasive belief that it is state owned. This confusion is likely due to the connection of the bank with the Republican People’s Party (CHP); however the bank’s major shareholder is actually its pension fund with a share of 40.15 percent. Another 31.76 percent of the shares are in free float and 60 percent of this portion is held by foreign investors. The remaining 28.09 percent of the bank is owned by the CHP, the major opposition party in Turkey.
Although as a shareholder, the CHP has voting rights, dividend payments to the shares are only made to the Turkish Historical Society and Turkish Language Association, two institutions founded by Mustafa Kemal Atatürk in early 1930s. As such it appears that the CHP does not have any direct financial benefits from İşbank in support of its political activities.
The relationship between the CHP and İşbank has attracted serious criticism, at least from the government and its supporters. President Erdoğan’s adviser Yiğit Bulut made a highly controversial comment, saying that the link between the bank and CHP must be broken and that the bank should be returned to people.
This was not the first time such a call has been made. In late February, the government whistleblower Fuat Avni posted tweets about the possible takeover of İşbank by the government, as was the case with Bank Asya in May last year. The stock price fell by 3 percent after Avni’s predictions, and following Bulut’s comments, it dropped by another 5 percent.
The Turkish banking sector has been monitored closely by the Banking Regulation and Supervision Agency (BRSA) since 2000. In fact, Turkey managed to avoid the 2008-2009 global financial crisis due its simplistic structure and BRSA regulations.
İşbank is listed on the Istanbul Stock Exchange and as such, it is an entity with obligations to disclose its financial statements and make special case announcements, in accordance with the Capital Market Board’s (CMB) corresponding communiqué and any other material events and casesrequired to be publicly disclosed according to CMB and the Borsa İstanbul regulations.
Any illegal action taken by İşbank would as such be closely watched and bound to be held accountable by an ‘independent’ legal body.
According to the banking regulations and political parties law, the CHP is strictly forbidden from making any money from the shares it holds. If either İşbank or the CHP fails to adhere to these legal regulations than the party or both parties involved in the offense would be legally accountable.
Although there have been allegations against İşbank or fuel smuggling – these allegations have yet to be substantiated and appears to be simply rumor. As such we are potentially entering a scenario where neither the CHP nor İşbank have violated any legal regulations on the sector, and yet the bank may still be seized by government-controlled BRSA. The issues are as follows:
Firstly, discrediting a publicly traded company is a serious global financial crime.
Secondly, seizing a bank the size of İşbank could initiate a bank run. To explain, in the late 1990s, the savings deposits of banks were insured by the government. Despite this guarantee, the depositors of Demirbank simultaneously withdrew their deposits from the struggling bank, and thus accelerated the collapse of the bank. Later, alongside economic reforms, deposit insurance was limited to a small portion of the total deposits and this remains the current practice. As such, although it is a small chance, seizing İşbank could be highly risky for the banking sector as a whole.
Finally, especially since the early 2000s, Turkey was not known for offering a high savings rate. The economy depended upon construction and private consumption. Since the global financial crisis in 2008, major central banks decreased their policy rates to 0%, even entering negative rates in some cases, increasing their money supplies by asset purchases.
Simultaneously, the borrowing cost came down sharply for most developing countries, including Turkey. Cheap and abundant funds spurred private consumption. According to World Bank data, Turkey’s savings ratio was 15% in 2014, a rate that is even lower than the US, where 18 cents of every $1 income is saved.
The US is able to maintain that level of consumption thanks to its huge capital markets. The Turkish capital market however is nowhere near the size of its US counterpart, and an average Turkish citizen saves even less than an average American citizen. In order to maintain its consumption habit, Turkey needs the savings of other countries, therefore a healthy capital market.
In that sense İşbank is in a very critical position. The Bank Asya takeover did not backfire per se, however İşbank is totally a different case. The bank is publicly traded and 60% of the stocks traded in the stock exchange are owned by foreign investors, including Lazard Asset Management, Blackrock Fund Advisors and JP Morgan Asset Management according to FT data.
The takeover of the bank can negatively affect the perception of Turkey abroad. It would be very unlikely for financial researchers Standard & Poor’s to make a similar announcement as they did for Bank Asya case: “We view this as an isolated incident and not a harbinger of systematic distress in the banking sector or a determined politicization of Turkey’s regulatory institutions.”
Thus, although the takeover of İşbank is theoretically possible, even based on fair grounds – the seizure may have detrimental effects. If the allegations regarding fuel smuggling prove to be valid then there certainly needs to be legal action, however if they are false then the takeover is a gamble with a next to zero probability of winning.
In the scenario where the Bank’s connection with the CHP is the only grounds for a takeover, then risking the whole country’s banking system, its reputation and its financial survival is surely a misadventure.
Altun, Gurur, “The Test of the Turkish Banking Sector”, Independent Turkey, 21 April 2016, London: Centre for Policy and Research on Turkey (Research Turkey). Original link: http://researchturkey.org/?p=11419