Turkey's finance sector finds profit in participation

Published: 29 September 2008

Foreign interest spurs growth in Islamic finance

International interest may attract welcome investment to emerging markets, but it also brings with it the hazards of competition.

In Turkey, economic growth and financial reform have attracted a growing number of foreign banks to the market, threatening the survival of many small, local banks.

To thrive in the increasingly competitive financial environment, Turkey's banks have begun to forge strong global partnerships while retaining their unique local strengths.

One such strength is the small, but growing market for Islamic finance.

The Islamic finance sector offers great potential, both as a complement and an alternative to conventional financial services, as it provides Muslims with an opportunity to invest in a way that conforms to the principles of their faith.

In July 2007, HSBC helped Turkiye Finans Katilim Bankasi, one of Turkey's leading Islamic banks, to sell a 60 per cent stake in its business to Saudi Arabia's National Commercial Bank (NCB). The billion US dollar investment reflected a trend of consolidation among Turkish financial services firms, thanks in part to an influx of foreign direct investment in the local banking sector.

NCB paid USD1.08 billion for the controlling stake in Turkiye Finans, valuing the bank at USD1.8 million. NCB is the largest Islamic commercial bank in Saudi Arabia, with a market share of 20.1 per cent in balance sheet size and it is the largest bank in the Gulf Cooperation Council with total assets of around USD41.5 billion. The deal was their first overseas transaction.

The stake was sold by two Turkish conglomerates - Boydak Holdings, a company with interests in the furniture, textiles, logistics, and cable sectors and Ulker Group, a food and beverage manufacturer. Turkiye Finans was formed by the merger of the banking arms of Boydak and Ulker in 2005, each of which retains a 20 per cent stake.

In common with other Islamic, or participation banks, Turkiye Finans does not charge or pay interest on loans or deposits but offers clients participation in its profits. Islamic banking is gaining popularity in Turkey, which is 95 per cent Muslim.

The bank has 160 branches and assets of USD5.2 billion. It was also Turkey's largest Islamic bank in terms of loans, while its deposit volumes comprise 30 per cent of total Islamic loans, deposits and assets.

Achieving record-breaking valuation

The price paid by NCB set a multiple of 5.8 times price-to-book value, setting a milestone in the Turkish banking sector by achieving the highest price-to-book value multiple ever.

Source: HSBC Turkey
Turkiye Finans, Oyakbank announced in 2007, Garantibank, Disbank, TEB in 2004/2005 and others in 2006

The high valuation reflected the growth potential of the Islamic banking sector in Turkey. Around 95 per cent of the 70 million population is Muslim, but at the time of the deal, Islamic banking comprised just four per cent of the Turkish banking sector.

Recognising that growth potential, HSBC agreed to advise Turkiye Finans' shareholders in the landmark deal. With the help of the Advisory and the Financial Institutions Group (FIG) teams in London, HSBC Turkey originated the transaction and saw it through to completion. Ahmet Okcular, Head of Corporate Finance for HSBC Turkey described the deal as a group effort by different teams of the bank. "This was a truly joined up effort by different teams, taking on specific roles," Mr Okcular said.

HSBC's Global Banking teams began the process by approaching Turkiye Finans shareholders to gain the mandate to sell a stake in the bank. "It was a difficult task but we leveraged on the excellent relationship HSBC Turkey had with Boydak and the Ulker Group and our credential from another landmark transaction in the Turkish banking M&A transactions."

Widening the base for participation banking

Banking was not a core business for either Boydak or Ulker and the two companies realised that if Turkiye Finans bank was to maintain its growth in an increasingly competitive banking sector, they would have to increase their investment in the bank.

With the mandate in hand, HSBC began to look for parties interested in acquiring Turkiye Finans. "We knew that since Turkiye Finans was a participation bank, it was likely that interested parties would come from the Middle East and other Islamic banks," Mr Okcular said. HSBC utilised the excellent relationships of the London financial institutions team to attract as many potential bidders as possible.

"At the outset we had committed to finalise the deal in four months. This was achievable since we were already experienced and that we were using the same team which was involved with the Tekfenbank deal which was a similar transaction," said Mr Okcular. "Four months was a short period of time for a deal of this magnitude but we all knew our roles and we had adapted an efficient and effective sales process."