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Thursday, 7 February 2008

Turk Islamic banks see stellar growth, more deals

ISTANBUL, Feb 6 (Reuters) - Poor markets forced Islamic bank Kuveyt Turk to pull its IPO in Turkey this month, but prospects for Sharia-compliant banks remain bright as growth is set to outstrip conventional rivals.
Turkey's Islamic banks, which do not charge or pay interest but reward depositors with a share of their profits, saw assets grow 27 percent in the first nine months of last year, albeit from a low base.
By comparison Turkey's top conventional lenders Akbank and Isbank increased their assets by 13 and 2 percent respectively.
Islamic banks only control 3 percent of Turkey's overall banking assets, but this is expected to more than treble, according to Mustafa Boydak, deputy head of the company which sold Islamic lender Turkiye Finans for a record price last year.
"We want it to reach 10 percent, of course that's possible. As a first target we want to reach 5 and then 10 percent," Boydak told Reuters. He expects the sector's assets to grow more than 2.5 times in the next five or six years.
This year, Boydak said he expects Turkiye Finans, whose 60-percent sale to Saudi National Commercial Bank (NCB) is awaiting watchdog approval, to see asset growth at least match last year's 36 percent.
Among other restrictions, Islam bans the receipt of interest, equating it with usury, and instead requires banks to invest with its customers, sharing the risk.
For instance, rather than lend money to a customer to buy a car, the bank buys the car and rents it back to the customer until the cost -- and a profit for the bank -- is paid.
Boydak Holding and industrial group Ulker set a record in Turkish banking when they sold their stake in Turkiye Finans to NCB at 5.8 times book value after strong interest from Gulf and Asian institutions.
Analysts and bankers reckon another buyer could come into the sector and No.1 lender Bank Asya could be a target, although its fragmented shareholding made up of textile manufacturers and industrialists would make negotiation tricky. Hostile bids are rare in Turkey and its free float is some 40 percent.
The conventional banking sector has also seen a string of foreign purchases as investors seek exposure to Turkey's economic growth story and young, fast-expanding population. Meanwhile, the government has courted potential Gulf investors.
"I would think if a commercial bank was interested in acquiring, for example Bank Asya, I would not be surprised," said Huseyin Ozkaya, deputy head of HSBC in Turkey. HSBC advised Turkiye Finans on its sale and was lead manager with Finans Invest for the postponed Kuveyt Turk IPO.
Bank Asya is more expensive than listed rival Albaraka Turk , trading at a price to book ratio of 3.0 versus Albaraka's 2.2 times, which Finans Invest analyst Sadrettin Bagci said reflected its status as a target. It is also the only non-interest bank to offer credit cards, giving it an edge.
A Bank Asya official said no offers were being discussed.
Albaraka Turk is owned by Bahrain-based Albaraka Banking Group and Kuveyt Turk is controlled by Kuwait Finance House.
The boom in Islamic banking comes as Turkey's strong economic growth has increased wealth in the mainly Muslim but secular country and provincial businessmen have become successful but held onto conservative religious values.
The centre-right, pro-business AK Party government, which has roots in political Islam, has also helped the lenders by giving them fully-fledged banking status in 2006. Islamic banking sector executives deny receiving any special treatment.
The other plus is that as these banks pay depositors a share of their profits instead of interest, it protects them from the maturity mismatches which have hit mainstream banks hard in Turkey's volatile interest rate environment.
"The major advantage is there's less competition, it's a relatively untapped market and ... they are to a certain extent shielded from interest rate variation," said TEB analyst Volkan Kurt.
Boydak says while other banks were relying on high-yielding Treasury bonds to make money until the early 2000s, non-interest banks were chasing clients because they had no option.
The banks have at least 10 years of strong growth ahead, but the risk is that it will eventually hit a limit. TEB's Kurt expects growth to be 60 to 70 percent above growth in the regular banking sector for the next five to 10 years. But he says the slice of the population likely to prefer Islamic banking is only 10 to 15 percent.
Before the growth spurt slows, some bankers and analysts expect at least one conventional bank to push into the sector by acquiring an Islamic banking licence.
"I'm expecting one or two conversions," said one banker, who declined to be named.


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