This record is a partial extract of the original cable. The full text of the original cable is not available.

UNCLAS SECTION 01 OF 02 ISTANBUL 000097 
 
SIPDIS 
 
SENSITIVE 
 
STATE FOR EUR/SE AND EB/IFD 
TREASURY FOR INTERNATIONAL AFFAIRS - RADKINS AND MMILLS 
NSC FOR BRYZA AND MCKIBBEN 
 
E.O. 12958: N/A 
TAGS: EFIN EINV ECON TU
SUBJECT: YAPI KREDI END GAME NEARS 
 
REF: A. 2004 ANKARA 1437 
 
     ¶B. 2004 ISTANBUL 1558 
 
 ¶1. (SBU) Summary:  In a move that marked the first official 
step forward towards realization of its long-rumored desire 
to buy Yapi Kredi Bank, Unicredito-Koc Holding on January 17 
announced that it had signed an agreement with the bank's 
dominant shareholder, the controversial Cukurova Group, for 
exclusive negotiating rights.   The statement stressed that 
the agreement was for the start of negotiations, rather than 
their conclusion, implying that agreement on price will 
likely await conclusion of the partnership's due diligence on 
Yapi Kredi.  That process may take time, as in addition to 
the 2 billion USD debt owed by the Cukurova Group to the 
bank, the bank's balance sheet includes other assets that 
many believe will need to be revalued.  Overall, however, 
markets and Istanbul analysts have reacted positively in the 
hope that the long-standing uncertainty surrounding one of 
Turkey's flagship banks can be brought to closure quickly. 
End Summary. 
 
¶2.  (SBU) After a weekend in which rumors (stemming in part 
from government sources) were rife that the Unicredito-Koc 
Holding financial services partnership had reached agreement 
to buy Cukurova Holding's 45 percent stake in Yapi Kredi Bank 
for 900 million USD, clarification came on Monday with 
announcement by both principals that agreement had been 
reached on an exclusivity agreement allowing for the start of 
negotiations between the two parties.  Both sides stressed 
that this was the start rather than the end of the process, 
and said that due diligence on the bank would begin 
immediately. 
 
¶3.  (SBU) Though apparently premature, the 900 million USD 
figure may end up not being far off the mark, as it implies a 
2 billion USD valuation for the bank, close to the target 
valuation assigned it by most Istanbul brokerages.  It is, 
however, below the bank's current market capitalization, 
which has increased 40 percent since the end of October 2004 
to 2.5 billion USD, as foreigners in particular have made 
Yapi Kredi one of the most traded stocks on the Istanbul 
Stock Exchange (ISE).  Key complicating factors for the 
bank's valuation are the outstanding 2 billion USD receivable 
owed it by the Cukurova Group, as well as overvaluation of a 
number of other assets on the bank's books.  These include 
400 million USD the bank has booked as receivables from a 
disputed hazelnut tax collection (few expect it to see any 
where near this amount), and a half share in A-Tel 
telecommunications, which the bank also generously values at 
400 million USD, but which analysts doubt is worth more than 
a tenth of that.  With the stock market's rise over the past 
two years increasing the value of the Turkcell shares held by 
Yapi Kredi as collateral for the Cukurova loan to nearly 1.7 
billion USD, the rumored 900 million USD sale price would 
appear to show that at least some preliminary discussion has 
taken place about how to compensate for these "holes" in the 
bank's balance sheet. 
 
¶4.  (SBU) Pressure has been increasing in recent months on 
the Cukurova Group, following the well-publicized failure at 
the end of the year of the revised payment plan that would 
have permitted it to settle its debt to Yapi Kredi and to the 
Savings Deposit Insurance Fund (to which it also owes 2 
billion USD for the takeover of the group's second bank-- 
Pamukbank).  That deal would have ensured that the group 
retained control of its other prize asset of Turkey's largest 
mobile phone operator, Turkcell.  The failure of the group to 
come through with promised financing severely damaged its 
credibility.  Just last week, Bank Regulatory Agency (BRSA) 
Chairman Tevfik Bilgin warned that the Cukurova Group was 
"walking on a thin layer of ice," and that while the agency 
would try to help it get across, "if the ice cracks, it is 
the group that will get wet."  The January 17 announcement 
precedes by two weeks the group's deadline to sell the bank 
by itself, under its agreement with regulators.  After 
January 31, the group and BRSA will jointly seek a buyer, and 
if that effort is unsuccessful by October 31, then BRSA 
assumes sole responsibility for the sale.  The agreement with 
regulators' built-in pressure on Cukurova to find a buyer has 
apparently worked, and probably explains the joint 
announcement with Koc-Unicredito. 
 
¶5.  (SBU) Given Yapi Kredi's size and role as a pioneering 
consumer bank in Turkey, the uncertainty surrounding it has 
cast a pall over the entire banking sector for some time. 
Nonetheless, bank management has worked intensely over the 
past two years to preserve the franchise, and while there has 
been some slippage in the bank's share of the loan market, 
recent statistics reflect the bank's staying power.  In the 
third quarter of 2004 (the latest period for which figures 
are available), while the bank's net profit fell far below 
market expectations because of an adjustment in deferred tax 
assets, bottom line figures for interest income and net fees 
and commission were in line with market predictions.  The 
bank's asset size increased 4.9 percent over the previous 
quarter (7.4 percent from a year earlier), with increases in 
desposits making up a third of that total.  Though its share 
has stagnated, Yapi Kredi, Turkey's oldest private bank, 
remains the market leader in credit cards, and booked 
continued growth in loan volumes (up to 6.5 billion USD in 
September from 5.8 billion USD at the end of 2003). 
 
¶6. (SBU) Notwithstanding this success, bank insiders have 
told us frequently in recent months that the continued 
uncertainty is hurting their efforts to maintain the bank's 
market position.  Especially, since last March, when the BRSA 
replaced the bank's board with its own candidates, they 
describe a culture that has grown increasingly cautious and 
risk averse.  The resultant unwillingness to undertake major 
promotions or campaigns ultimately led the bank's CEO Naci 
Sigin to tender his resignation in September.  Former Bank 
Chairman Rona Yircali described this to us as a serious 
mistake by bank management, though he conceded that the 
damage was minimized by the new board's decision to select 
the acting CEO from inside the bank (Vice President for 
Financial Analysis and Credit Risk Management Rena Yolalan). 
Despite a news campaign to the contrary, bank executives note 
that increasing numbers of personnel have left in recent 
months, and that those who remain are having difficulty 
maintaining their motivation.  The risk, one senior executive 
told us, is that if the sale takes a year or two, there may 
not be a franchise remaining to be sold. 
 
¶7. (SBU) Comment: Monday's announcement holds out the promise 
that this extended bloodletting can be avoided and that 
instead Yapi Kredi may find itself moving swiftly into the 
hands of one of the bluest of Turkey's blue chips.  If so, 
the outcome may turn out to be a win for all concerned: for 
Koc and Unicredito, which have openly aspired to raise their 
modest profile in the financial world in Turkey (Kocbank, 
which will likely remain a separate franchise, is less than a 
third the size of Yapi, with only a small share of Turkey's 
consumer market), for the BRSA, which has sought to avoid a 
protracted struggle with the Cukurova Group while still 
ensuring that the bank leaves their control, and for the 
Cukurova Group as well, which appears to have accepted the 
fact that it cannot preserve all of its current assets, and 
is now focused on trying to maintain its hold on Turkcell. 
The Unicredito-Koc gambit, following the recent deal between 
BNP Paribas and TEB, and rumored talks between other small 
Turkish banks and international partners, also marks another 
step towards increased international presence in Turkish 
banking, giving credence to BRSA chief Bilgin's prediction 
that foreign ownership in the sector may increase from 3 to 
15 percent by the end of the year.  End comment. 
ARNETT