Iana Dreyer in Brussels -
Intesa Sanpaolo’s announcement in June that it was opening a branch in Istanbul puzzled observers. The Italian bank’s move came after peers Citigroup, HSBC and Dexia had all decided to pull out from the country.
Since 2007, Turkey’s banking sector has attracted between 20% and 30% of the total annual foreign direct investment flows that have gone into the country. But today, the new game in town is banking consolidation.
Banks’ profit outlook has become more uncertain because of the country’s economic slowdown. The IMF forecasts 3.1% gross domestic product growth in 2015, a better figure than last year’s 2.9%, but a far cry from the stellar growth of previous years. Turkey’s regulators’ moves in late 2013 to restrict credit, including limits on the issuance of credit cards, have also dented profits.
Beyond economic and market realities, there is also a sense in Western banking circles that the regulatory environment for foreign banks is getting tougher for them. The signals Ankara has been sending to foreign investors in the banking sector in recent trade negotiations have not been very positive. In the ongoing Trade in Services Agreement (TiSA) trade negotiations held in Geneva over the last three years and involving 25 WTO member economies, the market access offer Turkey has tabled to its partners has been disappointing to many.
An EU document leaked this spring revealed that Brussels believes the banking offer is less ambitious than the commitments Ankara undertook in 1995-97 when it joined the World Trade Organisation.
Turkey’s laws on data localisation are a particular obstacle in the talks, which are currently going through a stocktake. Data localisation requirements for financial services are increasingly being outlawed in bilateral free trade agreements across the world. But an April 2014 law on the rights and responsibilities of the National Intelligence Agency (MIT) explicitly requires banks to keep their data stored in Turkey. What is more, MIT may connect to that data without requesting the banks’ consent. Such requirements raise substantially the operational costs of global banks, which rely on seamless data flows to provide services optimally and to keep costs in check.
Assessing Turkey’s role in TISA, Pascal Kerneis, Managing Director of the European Services Forum, a lobby group in Brussels, told bne IntelliNews: “In TiSA Turkey is a drag”
Scraping the barrel
So why are banks like Italy’s Intesa still opening shop in Turkey? Many are sceptical about the move. “The Turkish market is clearly more dynamic than the European market. [Intesa] is just scraping the bottom of the barrel. It is almost impossible for a newcomer like Intesa to grow organically in this market”, a senior Istanbul-based banking analyst told bne IntelliNews.
Real profits are to be made in the retail mass market catering to consumers and SMEs. “I doubt Intesa would set up a retail operation – which is impossible actually, as it requires a huge, fresh network”, the analyst adds.
In fact, the Italian bank’s ambitions have been scaled down. When Intesa applied for a licence that allows it to open shop back in 2012, news reports of the time revealed it was hoping to open branches in several cities, including Ankara and Izmir and then expand into the provinces, tapping the consumer market on top of engaging in commercial loans.
Fast forward to 2015: Intesa has limited its announcements to one branch only (at least so far), and talks about entering the wholesale market only, mentioning activities such as corporate banking, services for export credit, local and international payments, and treasury products.
Intesa also hopes to get involved in the many infrastructure investment projects sponsored by the Turkish government. Italian news reports also say Intesa is interested in participating in Turkish Stream, the natural gas pipeline project from Russia to Turkey across the Black Sea proposed by Moscow late last year as an alternative to its South Stream project to ship gas to the EU.
Intensa undoubtedly would also like to win business from Turkey’s desire to play a role as a trading hub between East and West and to diversify its business ties.
While the European Union remains its biggest trading partner and source of investments, Turkey has significantly diversified its business ties. And Turkey is not only looking to Russia for business and investment, a trend reflected by Russian bank Sberbank’s move into the country three years ago.
The share of the Middle East in Turkey’s exports stands out as having increased dramatically in recent years. The share of Iraq in total Turkish exports increased from 3.7% in 2005 to 6.9% in 2014, according to official Turkish government statistics. The share of the United Arab Emirates increased from 1.2% to 2.5%. Business with Iraq has suffered recently due to the conflict there. But the likely lifting of sanctions on Iran after a nuclear deal was clinched in July with the UN Security Council means that business opportunities could very soon arise there.
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