Citigroup Akbank Retreat Offset by Russian Bid

Citigroup Inc. is selling a stake in Akbank TAS, Turkey’s second-largest lender, at a time when Russian and Arab banks are seeking a foothold, helping improve confidence in the financial industry.

Citigroup sold 10.1 percent of Akbank to a group of investment funds it didn’t identify, according to May 24 statement. The same day, Moscow-based OAO Sberbank entered talks to buy Denizbank AS in Istanbul from Dexia SA, the Franco- Belgian lender said. Qatar National Bank SAQ had been lining up a rival bid, according to people familiar with the process.

Yields on Akbank’s dollar bonds due in 2015 tumbled to 74 basis points below the average for developing nation banks on May 25, the biggest discount in more than a year, according to data compiled by Bloomberg and JPMorgan Chase & Co. Four months ago, Akbank’s yield was as much as 63 basis points higher than the average for JPMorgan’s emerging-market banking index.

“What we may see in Turkey is increasing rotation as west European names exit and Russian and Middle East names look to join the fray,” Tim Ash, chief emerging-market economist at Royal Bank of Scotland Group Plc in London, said in e-mailed comments on May 25. “The impact on broader confidence and signal to the market over the health and longer-term outlook for the banking sector and economy more generally is significant.”

Turkish banks increased lending by as much as 40 percent last year as the economy grew 8.5 percent, lagging behind only China and Argentina. While central bank Governor Erdem Basci began raising borrowing costs in October to slow loan expansion to 30 percent by year-end, Prime Minister Recep Tayyip Erdogan urged banks last week to step up lending, saying in a speech to business executives in Istanbul that a reluctance to do so was “unacceptable.”

Five of Turkey’s 16 listed banks are fully or partly owned by European lenders. Turkiye Garanti Bankasi AS, the nation’s largest bank by market value, is 25 percent owned by Bilbao- based Banco Bilbao Vizcaya Argentaria while Milan-based UniCredit SpA holds 40 percent of Yapi & Kredi Bankasi AS, the fifth biggest bank by market value. BNP Paribas SA, based in Paris, owns 40 percent of Turk Ekonomi Bankasi AS, the eighth- biggest lender, and National Bank of Greece owns about 95 percent of Finansbank AS.

Lenders from Russia and the Middle East are showing interest in Turkey after the average stock valuation for the 16 banks dropped to 1.2 times book value at the end of 2011 from a ratio 1.9 two years earlier, according to data compiled by Bloomberg. Sberbank may agree to pay as much as 1.5 times Denizbank’s book value, putting the maximum price at about $4 billion, according to one person close to the deal, who declined to be identified as the process is private. Denizbank had a book value of about $2.7 billion at the end of the first quarter, data compiled by Bloomberg show.

“If Citi could make a sale of about $1.2 billion in an accelerated book-building in a single day, that means foreign investors aren’t very pessimistic about Turkey,” said Emre Balkeser, head of institutional sales at Garanti Investment in Istanbul. “The valuations may be quite low, but there’s still investor interest and confidence.”

Citigroup said it was reducing its stake in Akbank to comply with capital requirements after Chief Executive Officer Vikram Pandit’s asset disposal plan was rejected by the Federal Reserve in March. Citigroup will make $1.15 billion on the Akbank share sale and will retain its 9.9 percent stake in the bank for three years, according to a statement from the New York-based lender on May 25. “Citi remains committed to Turkey,” the statement said.

While the lira has weakened 4.3 percent against the dollar this month, the decline is the least among emerging-market currencies in Europe, the Middle East and Africa behind Israel. The lira strengthened 0.8 percent to 1.8355 per dollar at 8:10 a.m. in Istanbul.

Turkish two-year government bond yields rose one basis point, or 0.01 percentage point, to 9.53 percent on May 25.

Credit-default swaps on Turkey, rated BB, the second- highest non-investment-grade ranking at Standard & Poor’s, climbed five basis points to 280, according to data compiled by Bloomberg. The cost was 253 for Russia’s government and 162 for Brazil. The contracts would pay the buyer face value in exchange for the underlying securities or cash.

Turkish credit-default swaps cost 53 basis points less than the average for countries in central and eastern Europe, the Middle East and Africa included in the Markit iTraxx SovX CEEMEA Index.

“Clearly Russian and some significant Middle Eastern funds have been moved to Turkey, but this is more a vote of no confidence in their own regimes rather than saying Turkey is attractive in its own terms,” Michael Shaoul, chairman of Marketfield Asset Management in New York, said in a May 25 phone interview. “I would not confuse ’flight capital’ with confidence.”

Lenders in the U.S. and European Union are able to find buyers for their Turkish bank assets because the fundamentals are relatively attractive, according to Gavin Redknap, an emerging market strategist at Nikko Asset Management in London.

“The Turkish banking sector is relatively unconnected to the European malaise, and Turkish corporates and households are relatively under-leveraged,” Redknap said in e-mailed comments on May 25. “There may be something at the margin about demand from Russia and the Mideast, but I think the domestic story has more to do with it.”

Corporate loan growth in Russia accelerated to 23.3 percent in the first quarter from 14.3 percent a year earlier and household credit growth jumped to 38.8 percent from 16.7 percent, according to central bank data on April 27. Lending in Russia is starting to stagnate because of a shortage of bank funds, Sergei Moiseyev, deputy head of the central bank’s financial stability department, was quoted as saying in a May 17 report on Interfax.

“These purchases are a strong positive for the country as we need to see a pick-up in foreign direct investment,” Simon Quijano-Evans, the head of emerging market research for Europe, the Middle East and Africa at ING Groep NV, said in e-mailed comments. “Officials have been working hard to attract flows in recent years, particularly from the Middle East.”

Source: Bloomberg