Reuters, Bloomberg

Turkish state-run lender Halkbank has decided to establish an Islamic finance unit, in line with a government effort to develop the sector and tap a pool of investors in the Gulf and southeast Asia.

The bank said late on Thursday its management would seek regulatory approval for the Islamic unit, known locally as a participation bank, but gave no further details on the plans.

“The Halkbank board has mandated the general management for the establishment of a participation bank, and to carry out the required processes for legal and administrative permissions,” it said in a stock exchange filing.

Bank management was waiting for some amendments to regulations before proceeding with their Islamic banking plans, Mehmet Hakan Atilla, head of international banking, said yesterday.

Turkey’s Saving Deposit Insurance Fund, or TMSF, could sell the licences of defunct lenders Adabank and Turk Ticaret Bankasi to state banks, following the approval of legislation submitted to the Parliament in draft form, Sabah newspaper reported on Thursday. The licences could be sold to allow state banks to enter Islamic finance, Sabah said.

While state banks’ entry into Islamic banking won’t have a material impact for a few years, “gradually it may make up to a 5% to 10% contribution to the results of Halkbank,” said Ak Investment’s Aygun. The effect of the competition on existing Islamic banks could be “depressive,” he said.

Islamic finance has developed slowly in Turkey, the world’s eighth most populous Muslim nation, partly because of political sensitivities and the secular nature of its laws.

This changed in 2012, when the government issued its debut $1.5bn Islamic bond and kick-started regulatory moves to allow wider use of Islamic finance contracts. The government has since issued dollar and lira-denominated Islamic bonds.

There are currently four Islamic banks operating in Turkey, which hold a combined 5% share of total banking assets: Albaraka Turk, Bank Asya, Turkiye Finans and Kuveyt Turk, a unit of Kuwait Finance House.

State-run Ziraat Bank has received regulatory approval from the banking watchdog (BDDK) to establish what would be the fifth Islamic lender with capital of $300mn, the regulator said this month. Vakifbank, another state-run lender, has also been looking to set up an Islamic bank.

Meanwhile, Halkbank cut its 2014 profit forecast as it said a loan valued at 1.08bn liras ($490mn) was non-performing.

The bank forecasts a 15% contraction in profit this year, compared with previous guidance for there to be little change, Elvan Oztabak, head of investor relations, said on the lender’s earnings call late on Thursday. The bank reported profit of 601mn liras for the third quarter, narrowly beating analysts’ estimates.

Halkbank used 132mn liras of its free provisions to cover 20% of a loan made to electricity grid operator Osmangazi Elektrik Dagitim, according to a report by Deutsche Bank yesterday. Halkbank said on the earnings call that it expects to set aside more provisions, increasing the ratio to 50% next quarter. Bank executives didn’t respond to requests for comment made to the investor relations department yesterday.

“A big portion of the burden, which is a result of this provisioning process, could be met by existing buffers in this quarter,” said Hakan Aygun, an analyst at Ak Investment in Istanbul. “However, in the fourth quarter and in 2015 it will have a negative impact on Halkbank’s former earnings guidance.”

Halkbank’s non-performing loan ratio rose by more than 1 percentage point to 3.7% in the third quarter, compared with an industry average of 2.9%.

Slowing Turkish economic growth may add to pressure on bank loan books. The government revised its year-end growth forecast to 3.3% from 4% this month. Murat Mergin, head of strategic planning for Turkiye Garanti Bankasi, Turkey’s largest publicly traded lender, said on his bank’s earnings call on October 27 that Turkey would see an increase in non-performing debt “across the board” as growth slows.

Halkbank advanced 0.7% to 14.75 liras by 3:05pm in Istanbul, extending their increase to 21% this year. The shares are still more than 6% below their level on December 16. That’s the day before former Halkbank chief executive officer Suleyman Aslan was arrested and jailed in a corruption probe involving alleged bribery for facilitating trade with Iran.

 

 

 

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