Turkey Raising Specter of Bank Collapse as Asya Targeted

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By Isobel Finkel and Selcan Hacaoglu

Turkey faces the prospect of its first bank collapse in at least a decade as Bank Asya (ASYAB) struggles to maintain market confidence amid pressure from President Recep Tayyip Erdogan over its ties to exiled preacher Fethullah Gulen.

The Istanbul-based lender has lost 35 percent of its market value since trading resumed on Sept. 15 after a five-week suspension. Asya said yesterday it’s seeking 225 million liras ($102 million) of fresh capital from shareholders after the loss of deposits and government contracts depleted its finances.

Bank Asya is caught in a political battle after Erdogan accused Gulen of instigating a corruption probe against members of his government in December. The feud has spilled over into business, where companies with links to Gulen such as Asya and mining company Koza Altin Isletmeleri AS (KOZAL) say they’ve been subject to negative regulatory actions and news reports.

“Companies that are partnered with an entity that has strong connections to or is managed by the Gulen movement may risk disruptions to business and financial loss,” Anthony Skinner, head of analysis at U.K.-based risk forecasting company Maplecroft, said by e-mail. “Capital market investors with interests in Gulen-linked companies may also take a hit.”

Erdogan said the Turkish banking regulator should take a decision on Bank Asya or else it will be “responsible,” Hurriyet newspaper reported yesterday. The government hasn’t rescued a bank since the aftermath of the 2001 financial crisis, when more than 20 lenders went bust and the government spent 31 percent of gross domestic product bailing them out.

Bank Failure

“What entrepreneur would invest in a country where the President had caused a bank failure with his own hands” Sezgin Tanrikulu, a lawmaker with the opposition Republican People’s Party, wrote yesterday on his Twitter account.

Bank Asya Chief Executive Officer Ahmet Beyaz told Samanyolu Haber TV late yesterday that no satisfactory explanation was given for the suspension of trading last month. The bank was subject to an “intense audit” and passed “every test that could be imagined.” He said that the majority of the bank’s 1 million customers didn’t pay attention to what he called “the lies and blackmailing of politicians.”

Asya said Aug. 27 that it was facing a “systemic slander campaign” in the nation’s media. The lender filed more than 300 legal complaints against various media outlets and issued at least 93 denials to the press in recent months, Beyaz said last week.

Sukuk Debt

Asya’s sukuk debt has lost 29 percent this year, compared with an average 4.5 percent return for dollar-denominated sukuk globally, according to data compiled by Bloomberg. Calls to the regulator and Bank Asya weren’t returned.

Companies such as Turkish Airlines (THYAO), which is 49 percent state-owned, withdrew deposits from Asya this year amid the government’s criticism of the lender. Deposits at the bank shrank 25 percent to 13.6 billion liras in the second quarter versus the same period in 2013.

Erdogan characterized December’s corruption probe as a coup attempt. In addition to the bank’s accusations of negative media coverage, Asya says it was barred from selling 140 million liras of Islamic bonds by the regulator and had its ability to collect taxes on behalf of the government rescinded.

Bank Vulnerabilities

For William Jackson, an analyst at Capital Economics in London, the actions against Asya “reflect a deterioration in the business climate over the last few years” in Turkey that may deter foreign investment, he said by phone from London. While the action against Asya has specific roots and causes, it “may turn attention to some of the vulnerabilities that have been building up in the banking sector as a whole,” he said.

While the non-performing debt ratio at Turkey’s banks is 2.8 percent, bad debt grew at the fastest pace since September 2012 in July, according to data compiled by Bloomberg. Fitch Ratings said earlier this month that the recent increase in Turkey banks’ foreign borrowings to $164 billion by end-June, or 38 percent of the country’s total external debt, leaves banks vulnerable.

“Typically when you get such massive lending, standards become lower and you see a rise in non-performing loans,” Jackson said. “We haven’t seen that so far in Turkey, but there are clear warning signs.”

Last week Finance Minister Mehmet Simsek said that Turkish bank sector’s credibility was important and will be protected. At a conference yesterday Deputy Prime Minister Ali Babacan joined him in saying that responsibility for Bank Asya lies with the regulator.

Officials Spar

Turkish officials have sparred about Bank Asya in recent months. While the Islamic lender was still involved in partnership negotiations with Qatar Islamic Bank SAQ, Babacan said that the government desired a takeover by state-owned TC Ziraat Bankasi AS, as part of a push to expand Turkey’s share of Shariah-compliant banking.

Those comments were contradicted by Yigit Bulut, the chief economic aide to Erdogan, who was still at that time the Prime Minister. Bulut said that the government had no interest in taking over a bank with such a high ratio of non-performing loans, in comments that whipsawed the bank’s share price.

In a statement to the Borsa Istanbul yesterday Bank Asya said it faces an “economic lynching campaign” but continues to fulfill its responsibilities and has paid all customers on time and in full.

To contact the reporters on this story: Isobel Finkel in Istanbul at [email protected]; Selcan Hacaoglu in Ankara at [email protected]

To contact the editors responsible for this story: Dale Crofts at [email protected] Steve Bailey

 

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