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All in the Akbank family

The Sabancis, father and daughter, have pushed Akbank to the forefront of Turkey's retail banks. But now their domain is threatened by foreign invaders: global banks.

Akbank owes its dominant position in Turkish banking to the conservatism of its chairman, Erol Sabanci. His prudent lending policies, including tight limits on loans to other Sabanci family-owned companies, have made the bank Turkey's most profitable for the past three decades and enabled it to ride out the country's banking crisis in 2001. But with Turkey's economy enjoying a period of unprecedented growth and foreign banks invading the market, it is not Sabanci who holds the key to the bank's future.

That honor, and responsibility, belongs to his dynamic daughter. Since taking over from her father as managing director in 1997, Suzan Sabanci Dinçer has transformed Akbank from Turkey's stodgiest lender into one of its most innovative. She has made the bank the market leader in such fast-growing sectors as consumer loans and loans to small and midsize businesses by overhauling its information technology systems and branch network and aggressively launching new products. At a time when many of Akbank's competitors are being snapped up by big global players like BNP Paribas and GE Consumer Finance, Sabanci Dinçer is confident that her bank can maintain its leading position and remain independent.

"I am prudent, like my father, but I am a younger, newer version, like a new car model, and you can see proof of that in the restructuring," she tells Institutional Investor in an interview in her office on the 27th floor of Akbank's octagonal glass-and-steel tower in the Levent business district of northern Istanbul. "After spending $350 million revamping the bank over the past four years, today we have the necessary management talent, information technology, know-how, branding and distribution to compete with foreign banks."

Turkey's newfound political and economic stability have also been a boon. Akbank and the country's often troubled banking sector have reaped the rewards of Prime Minister Recep Tayyip Erdogan's crackdown on corruption, profligate spending and inflation in his bid to bring the country into the European Union. The government's actions have helped the economy grow at an annual pace of more than 8 percent for the past three years. Political opposition in Europe clouds Turkey's prospects of joining the EU, even as negotiations begin this month, but the economic outlook appears brighter than it has in decades.

The boom has fueled a surge in lending, with domestic credit soaring 37 percent in the first nine months of this year, to 103 billion new Turkish lire ($76.4 billion), according to the Central Bank of Turkey. It also has attracted the attention of major international banks. Foreign players have invested a record $3.2 billion in Turkey over the past year, lured by the country's burgeoning economy and its expanding population of 70 million (see box).

Can Akbank keep up its red-hot growth pace -- its loan volume grew 21 percent more than the market average in the first half of 2005 -- while competing against rivals with deeper pockets? Some analysts have their doubts. The foreign institutions present in Turkey -- among them GE Consumer Finance of the U.S., which is taking a 25.5 percent stake in fourth-ranked Garanti Bank; Italy's UniCredito Italiano, which controls fifth-ranked Yapi Kredi Bank; and HSBC Holdings, which owns 13th-ranked HSBC Bank (formerly Demirbank) -- intend to invest heavily in new branches and products as well as technology systems that will allow them to price retail and commercial lending services more competitively. All of that will make life tougher for Akbank.

"In a repeat of what we saw in Eastern Europe, international banks are buying into this market and will come to dominate it as local banks sell to foreign partners who can bring them badly needed capital and sophisticated retail experience," says Mehmet Sami, executive board member in charge of mergers and acquisitions at Istanbul-based Ata Invest, one of Turkey's leading investment banks. "Like every other domestic player, Akbank will face enormous pressure over the next two years to find a foreign partner."

Don't tell that to the Sabancis. Papa Erol has effectively led Akbank since 1971, first as managing director and then as chairman for the past eight years, and he has no intention of ceding control over his empire. "Many other Turkish banks may get bought, but we won't, since we have no need to sell," the diminutive, 67-year-old says in an interview. "We are every bit as sophisticated as foreign banks, and we will thrive as never before in the new environment."

To maintain Akbank's dominance, Sabanci Dinçer says she is looking to make acquisitions of her own in the next 18 months. And with more than YTL4 billion in excess capital, she has the firepower to do a deal. "While we are perfectly prepared to grow organically, we want to keep this money on hand in case we want to buy something," she says.

The Sabanci family controls 68.5 percent of publicly traded Akbank, which is the flagship of their Haci Ömer Sabanci Holding, Turkey's second-largest conglomerate after Koç Holding. In a country of dynastic capitalism, where the pillars of the economy are family-run holding companies, the Sabancis are first among equals in the business establishment. Sabanci's nephew, Ömer, is chairman of the Turkish Industrialists' and Businessmen's Association, or Tüsíad, and a leading campaigner in Turkey's bid to join the EU. The family controls Vaksa, Turkey's largest family-funded charitable foundation, and established the respected, technology-oriented Sabanci University in 1999.

Akbank enjoys an enviable position at the top of Turkey's financial sector. With YTL44.7 billion in assets, the bank is the country's third largest behind state-owned Ziraat Bank and I¸sbank, which was established on the orders of Mustafa Kemal Atatürk, founder of the Turkish Republic. I¸sbank is controlled by his political heirs, the Republican People's Party, and the bank's pension fund. Akbank leads its peers in profitability by a wide margin, however, posting a 40 percent rise in net income in the first half of 2005, to YTL778 million, and a return on equity of 26.3 percent.

Still, the bank is feeling the intensifying competitive pressure. Many of its rivals are gaining greater financial resources, sophisticated technology and extensive retail expertise by teaming up with or selling out to foreign banks. These investors promise to modernize the industry and narrow margins just as they have done across much of Central and Eastern Europe over the past 15 years.

Turkey's new economic stability poses a threat to profitability even as it opens up new lending opportunities. The decline in inflation -- it fell to the single digits last year for the first time in more than a generation -- has caused interest rates, and margins, to tumble. Spreads on government Treasury bills, where banks have traditionally invested most of their money, have fallen to about 2 percentage points above time deposit rates, from some 20 percentage points only four years ago.

Akbank's net interest margin fell to 6.6 percent in the second quarter of this year, from 6.8 percent in the first three months. That was still the second-highest margin among Turkey's six largest private banks, which, including Akbank, posted an average margin of 6.2 percent. The only bank that beat Akbank was the much smaller Finansbank, which registered a net interest margin of 7.6 percent.

The challenge for Akbank is to offset the declining margins on government paper by expanding its lending to retail customers and small and medium-size businesses, where strong demand promises continued profitability. So far the bank is meeting that test better than most of its rivals.

Sabanci Dinçer's push into retail and small business lending, a project called New Horizons, helped fuel a 32.2 percent rise in lending in the first half of this year, to YTL17.1 billion. That handily beat the average growth rate of 26.6 percent for the country's six largest private banks. Revenues rose by a much more modest 3.5 percent, to YTL2.7 billion, while operating profit was up 6.9 percent, to YTL1.8 billion. Net income increased much more sharply because of the end this year of so-called inflation accounting, which had required banks to register paper losses to compensate for the eroding value of the lira.

In the first half of 2005, commercial lending generated more revenue than government paper -- 46 percent and 38 percent, respectively -- for the first time in the bank's 57-year history.

"While Akbank's revenue and operating profit growth does not seem like much, it is stellar performance at a time of falling rates in the government paper market," says Mark Mobius, a fund manager at Franklin Templeton Investments. His flagship London-listed £1.4 billion ($2.5 billion) Templeton Emerging Markets Investment Trust has a nearly 1 percent stake in Akbank, its largest holding in Turkey. "Given the Sabancis' knowledge of the local market and the restructuring they've been through, I think it will be difficult for foreign banks to compete as effectively as Akbank in Turkey," says Mobius.

Not everyone is as sanguine about the bank's ability to maintain its profitability. "It should not be forgotten that Akbank is getting into a wide range of businesses where they have relatively limited experience," says Burhan Karaçam, founder of Istanbul-based bank consulting firm BK Partnership and chairman of Yapi Kredi from 1987 to 1999. "Retail banking is a lot tougher than buying and selling Treasury bills, and only time will tell if Akbank is sufficiently sensitive to the new trends and risks to make a successful go of it."

AKBANK'S RISE MIRRORS THAT OF MODERN TURKEY. It was founded in 1948 by Sabanci's father, Haci Ömer Sabanci, a shrewd entrepreneur with no formal education who came from a poor farming family. In the space of a decade, Haci had gone from working as a porter at a cotton mill to being the owner of one of the country's largest cotton manufacturing groups.

To finance the expansion of his rapidly growing empire, Haci founded Akbank in Adana with four other merchant families, with some $2 million in capital and a single local branch. He bought the other families out in 1964 and asserted full control over the increasingly profitable bank, which by that time had grown to 66 branches across the country.

Erol Sabanci was a stellar student who graduated with honors from Istanbul's elite high school, Tarsus American College. Like many of Turkey's emerging elite, he went to the U.K. to study, at Manchester College of Commerce, obtaining a business degree in 1958. After two years of military service, he joined Akbank's board in 1960 as his father's representative. Four years later, when the Sabancis took full control of the bank, Erol became vice chairman.

He learned his trademark prudence from Ahmet Dalli, a former CEO of I¸sbank, who was appointed chairman of Akbank in 1962. "Dalli believed very strongly in the internal audit process as well as in exceptionally rigorous risk- and asset-liability management, priorities that he transmitted to me," Sabanci says. Over the next decade Sabanci gradually took over the running of the bank: His father died in 1966, and Dalli died six years later. Akbank grew rapidly throughout this period and by the early '70s was delivering a steady ROE of 25 percent­plus, the highest in Turkey. Those returns were largely the result of the bank's low nonperforming-loan ratio, which has averaged less than 2 percent of outstanding credits since 1972. The bank regularly made as much as 70 percent of its profits from the government T-bill market, with the remainder coming from blue-chip corporate loans and project finance credits. Lending to consumers and small business was virtually nonexistent. "With high inflation, normal retail banking and commercial banking never made sense in Turkey," explains Sabanci, who also maintained a strict limit on loans to other family companies, capping them at no more than 15 percent of the bank's overall loan portfolio. By the late '90s they amounted to less than 7 percent of outstanding loans; today they account for only 3 percent. By contrast, many other Turkish banks ran into trouble during the country's 2001 banking crisis because of heavy lending to related companies.

Akbank began offering consumer loans and credit cards to selected customers in the 1990s, but Sabanci's conservatism kept those retail efforts to a minimum. "Our competitors were introducing retail products, and so we had to offer them at least as a draw, even if we felt the market was not really suited to such products," says Akin Kozanoglu, who was head of the retail deposit network at the time and today serves as the bank's vice chairman. Akbank only began taking retail seriously after Sabanci passed the operational reins to his daughter.

Like her father, Sabanci Dinçer considers herself a born banker. "I grew up in a house where all the talk was about banking and where my father clearly loved the business. That enthusiasm was infectious and meant that I never wanted to be anything else but a banker."

After graduating in 1985 with a BA in marketing and finance from Richmond University in London, Sabanci Dinçer went to work the following year as a money markets and fixed-income trader in the Treasury department of BNP-Ak-Dresdner Bank, an Istanbul-based trade finance and corporate loan joint venture that Akbank took control of two years ago. She put her market experience to work when she was appointed head of Akbank's Treasury operations in late 1989, separating back-office clearing functions from trading operations, introducing a limit system for traders and beginning to market Treasury management services to Turkish corporations. In her spare time she attended business school at Boston University, where she earned an MBA in 1994. She also married Haluk Dinçer, who is president of food and retailing for the Sabanci holding company and with whom she has two children.

In 1997, Sabanci Dinçer took over as managing director from her father, who stepped up to the chairman's office, succeeding Naim Talu, a former central bank governor who had held the post since 1975. The transition put Sabanci Dinçer in a position to refocus the bank's strategy, working with retail head Kozanoglu and Zafer Kurtul, Akbank's CEO. Kurtul was formerly assistant general manager at Société Générale in Turkey and had worked alongside Sabanci Dinçer as a corporate loan account manager at BNP-Ak-Dresdner.

By the late '90s such rivals as Yapi Kredi and Garanti were beginning to develop expertise in credit cards and consumer loans and were stealing deposits from Akbank. The economic environment also began to favor retail banking: Inflation was dropping sharply and growth was reviving under the influence of an austerity plan devised by the International Monetary Fund.

Sabanci Dinçer, along with Kozanoglu and Kurtul, came up with a strategy of dividing the bank's customer base into five segments -- big corporates, midsize companies, small businesses, consumers and private banking clients -- and creating separate departments to specialize in each area.

"If we did not shift to a more retail-oriented approach at that point, it was clear to all of us -- including my father -- that we would not be able to remain competitive," Sabanci Dinçer recalls.

Sabanci approved the plan in 1999, but it was far from apparent that the strategy would work. Akbank was getting a late start in retail and trailed the other members of the Big Four private Turkish banks -- I¸sbank, Garanti and Yapi Kredi -- in consumer loans and credit cards. The playing field changed radically, however, with the onset of the country's economic crisis in November 2000. Gaping budget and current-account deficits set off a massive devaluation of the Turkish lira and sent overnight interest rates soaring as high as 1,700 percent. The economic collapse triggered a run on the country's banks, many of which had relied heavily on short-term and foreign currency funding.

The crisis also revealed deeper problems in the then­poorly regulated banking sector. Although Akbank had restricted loans to related family companies, most of its competitors had not. Yapi Kredi, for example, had extended more than one third of its loans to its parent, Çukurova Group, and in particular to the group's heavily indebted mobile phone subsidiary, Turkcell.

The state was forced to close 31 of Turkey's 80 banks over the next year and spend an estimated $47 billion to bail out insolvent institutions. Among the victims was Yapi Kredi, which had to be rescued by the state Banking Supervisory and Regulation Agency in 2001. A 57.4 percent stake in the bank was sold to Koç Financial Services, a joint venture between UniCredito and Turkey's Koç Holding, for $1.6 billion in January.

"I think Akbank would have clearly been marginalized by more-dynamic competitors if the economic crisis that began in late 2000 hadn't given them breathing room," says BK Partnership's Karaçam. "It takes years to build up expertise in retail banking and midsize and small-business loan activities."

The banking crisis also triggered a deep recession, with economic output falling by nearly 10 percent in 2001, and forced the country to turn to the IMF for a $23 billion bailout.

Akbank emerged largely unscathed from the crisis and with plenty of money to pursue its growth plans. Its NPL ratio peaked at just 2 percent in 2001, a testament to Sabanci's vaunted prudence and far below the whopping 25 percent industry average.

Under Sabanci Dinçer's New Horizons initiative, Akbank hired 200 new managers between 2001 and 2004, most of them cherry-picked from rivals that had more-advanced retail and commercial banking operations. The bank redesigned its 637 branches, establishing six that focus exclusively on blue-chip corporates and another 30 that target midsize companies.

Executives brought in consulting firms Fair Isaac Corp. and Dun & Bradstreet to develop credit-scoring systems for credit card applicants and small and medium-size businesses. Back-office operations were stripped out of branches and centralized, freeing up two thirds of branch staff to focus on selling retail products.

The bank also turned to consulting firm A.T. Kearny for a software system that would measure profitability by branch, product and customer, and integrated it with a new customer relationship management system developed by Peppers & Rogers Group. "Since last year we have the best system for analyzing up-to-the-minute profits in the entire industry, which is giving us a big advantage when it comes to pricing and helps explain our big market share gains recently," says Kurtul.

Thanks to those investments, Akbank passed I¸sbank to become the leader in total loans in Turkey this year. The bank ranks first in general consumer credits, car loans and mortgages; second in fund management and private banking, with roughly YTL4 billion in assets in each category; and third in credit cards.

Akbank's biggest problem today is excess capital. The bank has YTL4.37 billion in excess cash on its books, more than three times as much as its nearest competitor, I¸sbank.

As interest rate margins narrow, Akbank's free cash will become a significant drag on its ROE, leading some analysts to call for its return to shareholders. "To preserve profitability, the bank should increase dividend payments or consider a buyback," says Walid Khalfallah, an emerging-markets banking analyst at Morgan Stanley in London. Those are not options that Sabanci or his daughter are contemplating, however. Instead, they want to retain the firepower to make acquisitions.

"Up to now we have looked at several bank acquisition candidates here in Turkey, but we've always determined that overhauling them would be a burden rather than an opportunity for Akbank," says Sabanci Dinçer. "Nonetheless, I personally believe that restructuring in Turkish banking is far from over and that there will be a domestic acquisition opportunity for Akbank over the next 18 months."

Sabanci Dinçer has her eye on second-tier players, which are both easily assimilated and affordable. Foreigners, she contends, need to focus on bigger banks to gain a significant foothold in Turkey's concentrated banking industry, where the top seven players control 74 percent of assets. "That will give us less competition when it comes to scooping up smaller players at attractive prices," she says. Two banks that might fit the bill, analysts say, are ninth-ranked Finansbank, whose $5.1 billion in assets give it a 3 percent market share, and No. 11 Denizbank, with $4.1 billion in assets.

Although most of Akbank's foreign rivals are investing in Turkey as part of a broader strategy of expanding in Central and Eastern Europe, the Sabancis are content to stay focused on the home market. "Why should we go somewhere else," asks Sabanci Dinçer, "when there is still so much potential to exploit in Turkey?"


Turkish delight for foreign banks

The trickle of foreign investment in Turkey's banking sector has suddenly become a flood.

GE Consumer Finance became the latest -- and largest -- investor to enter the sector when it agreed in August to pay $1.8 billion for a 25.5 percent stake in Garanti Bank, the country's third-largest private bank. The purchase expanded GE's presence in the broadly defined emerging European market to seven countries. Reaching critical mass in underbanked countries like Turkey is a key priority for General Electric Co.'s consumer finance unit, which aims to maintain sustainable double-digit earnings growth. For Garanti, the deal promises to bring product expertise in new areas, including mortgages and consumer loans, as well as advanced credit-scoring and risk management systems. The Sahenk family, which controls the bank, will get a deep-pocketed partner to help finance expansion.

"What we primarily bring to the table is our experience managing a full range of retail products in a variety of fast-growing markets around the world with prudent and appropriate credit risk management," says Charles Alexander, president of GE Capital in Europe. "If there are attractive opportunities, we can also help Garanti expand domestically and regionally through acquisitions."

Three other foreign banks have made acquisitions in Turkey so far this year. Rabobank Group, the Dutch agricultural cooperative bank, agreed in July to buy at least 51 percent of ¸Sekerbank, a small, rural lender, for $130 million. The Belgian-Dutch banking and insurance firm Fortis Group struck a deal in April to acquire tenth-ranked Di¸sbank for $1.3 billion from Dogan Group, Turkey's leading media conglomerate. And in January, Koç Financial Services, a 50-50 venture between UniCredito Italiano and Turkey's Koç Holding, agreed to pay $1.6 billion for 57.4 percent of Yapi Kredi Bank, the country's fourth-largest private bank. UniCredito paid $240 million for a 50 percent stake in Koç Financial, which owns Koçbank, in 2002.

The partners will merge Koçbank into Yapi Kredi next year. The combined entity will leapfrog Garanti to become the country's third-largest private bank, with assets of $27.2 billion and 577 branches. "The aim is to expand aggressively across all areas of consumer finance, restoring Yapi to its precrisis position as the country's largest retail lender," says a person close to Koç Financial.

Including other purchases, such as BNP Paribas's acquisition of 50 percent of Turkish Economy Bank last year, foreign banks now control seven of Turkey's 19 banks, accounting for some 25 percent of the industry's assets. That share looks certain to grow. Nine other foreign institutions bid for Garanti, and most of them are still hunting for targets in Turkey, says Mehmet Sami, executive board member in charge of mergers and acquisitions at Ata Invest in Istanbul, which advised Garanti on the deal.

"The recent purchases are the beginning of a wave that could well bring a majority of Turkish banking assets under the control of foreigners over the next two to three years," says Sami. "This is the last big market converging with Western Europe where there is significant unexploited growth potential."

Disappointed suitors of Garanti still hunting for a Turkish operation include the Netherlands' ABN Amro; Germany's Deutsche Bank; France's Société Générale; and Temasek Holdings, an investment vehicle owned by the government of Singapore. Potential targets range from well-run midsize banks, such as ninth-ranked Finansbank and 11th-ranked Denizbank, to two behemoths of the state sector slated for privatization over the next two years: Ziraat Bank, the country's largest bank; and No. 6 Halk Bank. Prices are rising too. GE is paying 2.7 times book value for its stake in Garanti, compared with the one times book value that UniCredito and Koç Holding put up for Yapi Kredi at the beginning of the year. If Turkey's economic prospects continue to improve, future bidders will undoubtedly pay even more. - D.L.

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