Turkish banks move into Gulf as trade takes off

Turkish businesses have been turning away from Europe towards the markets of the Middle East and Asia. Banks have followed suit, taking advantage of growing trade, particularly with Iran, Iraq, the UAE and Saudi Arabia. Published in Gulf States News, 25 October 2012

One of the many striking outcomes of the Arab Spring has been the renewed prominence of Turkey in regional diplomacy. But long before the first stirrings of revolt in Tunisia, Turkish businesses had started turning east, part of a wider shift in trade relations which has seen Turkey move away from its reliance on Europe.

While diplomacy has focused on the Levant and North Africa, it is in the Gulf that business ties are burgeoning fastest. Turkish exports to Europe fell from 57% in 2002 to 40% between January and May 2012, according to a speech made by finance minister Mehmet Simsek on 10 July. Exports to the Middle East and North Africa (Mena) grew from 12% to 30% in the same period (as the ministry pointed out on a slide titled ‘Mena: life saver?’), an increase due in large part to a rise in trade with the Gulf.

A decade ago, no Gulf country featured among the top ten export markets for Turkey. But in the first eight months of 2012, Iran was the second biggest export market (behind Germany), accounting for $8.6bn, or 8.6% of total exports, according to Turkish government statistics. Iraq was the third largest export market, worth $6.8bn, with the UAE fifth ($4.6bn) and Saudi Arabia tenth ($2.7bn). Taken together, the six Gulf Co-operation Council (GCC) countries, plus Iran, Iraq and Yemen, accounted for $23.7bn worth of exports, just under 24% of Turkey’s total. Banks on trade’s tail

Where trade goes, banks tend to follow. Turkey’s banks have been more than eyeing the Gulf in recent years, and the strength of their domestic operations makes them potentially formidable competitors. International bankers in Istanbul say the banks are strong in terms of asset quality, capital adequacy ratios and liquidity. They are also relatively advanced in their use of IT, and the sector has been well regulated by the Banking Regulation and Supervision Agency and the central bank since a crash in 2001.

There have been previous waves of expansion into the Gulf: in the late 1990s and early 2000s, a raft of Turkish banks set up shop in Bahrain, including Industrial Development Bank of Turkey, Kuveyt Turk, Yapi Kredi Bank, Isbank, Vakifbank and Halkbank. But this time, the emphasis is clearly on taking advantage of growing trade, particularly with Iran, Iraq, the UAE and Saudi Arabia. “Our main attention is to markets with high growth potential, young and dynamic demographics and strong trade relations with our home country,” said Zekeriya Ozturk, head of international business development at Garanti Bank, Turkey’s third largest.

In November 2009,Turkey’s fourth largest bank, Akbank, was granted a licence to open a representative office at the Dubai International Financial Centre (DIFC), becoming the first Turkish bank at the centre. Akbank chief executive Hakan Binbasgil now admits it was not the best time to open, but told GSN having a foothold in Dubai still made sense. “It was the crisis time in Dubai,” he said. “However, we planned our expansion strategy with a longer horizon and saw the significant potential in the region. We haven’t focused solely on Dubai, but rather saw our expansion there as a gateway to the Gulf region.”

A month after Akbank got its licence, Istanbul-based Kuveyt Turk, which is 62% owned by Kuwait Finance House, received a licence to operate in the DIFC, in its case to offer Islamic banking services. Whether others choose to follow these two into the DIFC or opt for other financial centres remains to be seen, but all the major Turkish banks are now openly talking about tapping into the changing patterns of Turkey’s international trade.

In recent years, Iraq has perhaps been the most important regional hub (GSN 932/12). Erdal Aral, deputy chief executive of Isbank, Turkey’s largest by assets, said its strategy is “continuous and healthy expansion of its overseas network” and to “follow our customers and serve them not only in Turkey but also in global markets”. Isbank, which has had a branch in Bahrain since April 2001, opened a branch in Erbil in February 2011, and is setting up a branch in Baghdad. The largest government owned bank in Turkey, Ziraat Bank, opened branches in Baghdad and Erbil in 2011, and both Vakifbank and Albaraka Turk opened Erbil branches that same year.

In contrast, some Gulf countries such as Saudi Arabia and Qatar have been largely overlooked. Ziraat Bank opened a branch in Jeddah in 2011, but it is the only Turkish bank licensed by the Saudi Arabian Monetary Agency, and there are no Turkish banks in Doha. Halkbank also has a representative office in Tehran, as does Ziraat Bank, making them among the few international banks still willing to operate there despite sanctions.

Two-way street

Traffic between Turkey and Gulf banking sectors is not all one way. In April, Kuwait’s Burgan Bank announced it was buying 99% of Eurobank Tekfen from Eurobank EFG for TRY641m ($354m) and acquiring an additional portfolio of Turkish loans from EFG worth €214m ($276m). Other Gulf Co-operation Council (GCC) investors already have a foothold in the country. Albaraka Turk is majority owned by Bahrain’s Albaraka Group and TAIB Yatirim is a subsidiary of Bahrain’s TAIB bank.

Nor is the choice for Turkish banks to expand always straightforward. Turkey’s domestic market remains strong and some banks prefer to focus efforts at home, not least because of the regulator’s efforts to constrain over-exuberance. “Turkish banks are being asked to keep large amounts of capital and this doesn’t leave much room to expand elsewhere, so their abilities might be limited,” one banking analyst said.

On the other hand, some domestic factors could encourage banks to look abroad. “The profitability margin [for banks] is narrowing in the Turkish market and, following the economic crisis in Europe, Turkish exports to the Eurozone have declined and trade has shifted to alternative emerging markets,” Aral said. “Our focus is now on the neighbouring regions. We are interested in neighbouring geographies such as the Middle East, the Balkans and Caucasia.”