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 001492 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EINV ECON EFIN BEXP TU
SUBJECT: GE CAPITAL ENTERS TURKISH BANKING SECTOR AS TURKS 
DEBATE FOREIGN OWNERSHIP 
 
This message is sensitive but unclassified-- not for internet 
distribution.  This message was coordinated with Embassy 
Ankara. 
 
¶1. (SBU) Summary: The August 24 announcement that GE Capital 
will acquire 25.5 percent of the shares of Garanti Bank, one 
of Turkey's four leading private banking institutions, is a 
welcome indication of U.S. interest in the Turkish financial 
sector, following a wave of European acquisitions over the 
past year.  It will also likely intensify the ongoing debate 
over whether foreign investment in the sector should be 
limited, however, as two of Turkey's four largest private 
banks will henceforth have significant foreign participation. 
 With the purchase, foreign participation in Turkish banking 
will rise to 18 percent, still modest in comparison to 
Eastern European levels, but a dramatic increase from its 
anemic 3 percent level last year.  The purchase is the fifth 
announced over the last year, and even before it materialized 
there was a vigorous national debate and calls from some in 
government and opposition to limit foreigners' share in the 
sector to 30 percent.  While the debate will continue, the 
deal also highlights increasing international interest in 
Turkish assets, as the price a major international financial 
institution was willing to pay for Garanti rose three-fold in 
a little over a year.  End Summary. 
 
¶2. (SBU) Garanti's Coup: Garanti was courted extensively in 
recent years by Italy's Intesa Bank, and even initialed an 
agreement last year.  The deal ultimately foundered over 
pricing and other issues.  Since that time, the bank has 
explored other options, flirting briefly with HSBC Bank and 
most recently with General Electric's consumer lending unit. 
The August 24 announcement that GE would purchase a 25.5 
percent stake was thus not a surprise, but it did prove that 
sometimes at least, all things come to those who wait.  In 
place of the 800 million USD that Intesa offered for 40 
percent of Garanti's shares, the Dogus group will receive 
1.556 billion USD for 25.5 percent of the shares, and retain 
five of the nine seats on the bank board.  Dogus owner Ferit 
Sahenk will remain as Chairman and Dogus and GE will operate 
on the basis of an "equal partnership".  Dogus will also 
acquire 700 million USD of Garanti's non-core assets over two 
years.  Closure of the deal is contingent only on transfer of 
the bank's pension fund to the state (President Sezer earlier 
vetoed legislation providing for such transfer but the GOT is 
expected to pass it over his veto early this fall.) 
 
¶3. (SBU) Onward and Upward:  Analysts welcomed the deal both 
as an indication of U.S. interest in the sector, as well as 
for the increasing valuation for Turkish assets that it 
represents.  Indeed, the bank's valuation has now increased 
three-fold, from 2 billion USD in the Intesa deal to 6.6 
billion USD, a level that some Istanbul analysts characterize 
as "rich."  This has led some leading brokerages to advise 
minority shareholders to sell into the tender call that GE 
plans on conclusion of the deal.  Analysts also believe the 
deal bodes well for Garanti's future operations.  As analyst 
Figen Cevik at Oyak Securities notes, beyond the benefits of 
partnership with GE, the transfer of non-core assets back to 
Dogus will "clean up the balance sheet and boost 
profitability in line with an improved cash equity base." 
 
¶4. (SBU)  Going, going gone: The GE deal is the latest in a 
string of acquisitions in the banking sector that have 
prompted national debate over what the appropriate level of 
foreign involvement should be.  Over the past year, the 
sector has successively witnessed foreigners acquire in whole 
or in part a small bank (the Turkish Economy Bank-- TEB), a 
medium-sized bank (the Dogan Group's Disbank), a major 
franchise (the Cukurova Group's troubled Yapi Kredi Bank), 
and now a second major bank, Garanti.  In total, the deals 
have increased the level of foreign participation in the 
sector from 3 to 18 percent, well on the way to BDDK Chief 
Bilgin's prediction last year that in the near future foreign 
ownership could reach a third of the sector.  Only one deal 
has been for outright control by a foreign partner (Belguim's 
Fortis Bank's acquisition of Disbank).  Others have involved 
equal partnerships-- BNP-Paribas in TEB, and now GE in 
Garanti.  Koc-Unicredito's acquisition of Yapi Kredi stands 
as a hybrid case of a joint Turkish-Foreign partnership 
acquiring overall control of the market leader in commercial 
lending and credit cards.  Further deals may be on the 
horizon, as there have been rumors of courtship between 
market leader Akbank and Citibank.  In public comments this 
week, however, Akbank board member Susan Sabanci Dincer 
stressed that the Sabanci group is not interested in selling 
off control of the bank, but only in acquiring a foreign 
"partner." 
 
¶5. (SBU) Nationalist Backlash: The trend initially sparked an 
outcry in nationalist circles, with opponents of foreign 
investment such as Radikal's Yigit Bulut leading the charge. 
The issue was swiftly picked up by both government and 
opposition politicians.  A recent report by the Republican 
People's Party (CHP) suggested capping foreign participation 
in the banking sector at 30 percent.  This level is similar 
to that advocated by Deputy Prime Minister Sener earlier in 
the summer, though he stressed he was expressing his 
"personal" view.  EFG Brokerage Chief Economist Baturalp 
Candemir observes that AK party contacts have frequently 
questioned him about whether it would not damage Turkey's 
national interests if foreign banks took over their Turkish 
counterparts.  His AK interlocutors, he notes, have been 
particularly concerned about whether in a crisis foreign 
banks might refuse to lend to the Turkish Treasury, and 
whether the supply of credit to Turkish businesses wouldn't 
dry up.  Candemir has dismissed such concerns, noting that in 
moments of international tension, all banks tend to have 
hesitation, but at the end of the day the profit-maximizing 
incentives are the same for foreign as for domestic banks. 
Candemir believes most in AK have come to accept this view, 
though the fact that dissension continues is evident in the 
continuing dialogue between Sener and BDDK Chief Bilgin over 
the percentage limit idea. 
 
¶6. (SBU) Business Concern: National concerns are not totally 
absent even from the ranks of progressive business circles. 
One of our most thoughtful business contacts, Istanbul 
Chamber of Industry President Tanil Kucuk, notes that he 
personally opposes restrictions on foreign investment in any 
but strategic sectors, but that he concurs that it is 
important that two or three large banks remain Turkish to 
ensure that there is healthy competition between foreign and 
domestic participants in the sector.  Overwhelming foreign 
predominence in banking, he suggested, might harm business as 
such foreign banks may not fully appreciate Turkish 
realities.  Isbank CEO Ersin Ozince, head of the Turkish 
Banking Association, himself has frequently intimated that 
foreign ownership in the sector should be limited, saying 
most recently that "national capital accumulation" should be 
the sector's main aim, and that this should be supported by 
the government.  Other business contacts remind us that the 
concern about the sale of leading Turkish banks largely 
reflects profound ambivalence about foreigners taking over 
flagship Turkish institutions, rather than opposition to new 
job-creating foreign investment.  In this, they argue, 
Turkish opponents of such sales are not so different from 
Americans who opposed the sale of Unocal to CNCC. 
 
¶7. (SBU) Comment: Whatever the basis of the critique, 
advocates of foreign direct investment, who up until earlier 
this year spent their time rueing its absence from Turkey, 
now must spend their time defending the necessity of such 
capital for Turkey's economic development.  Increasingly, 
they recognize that the best defense is a good offense, and 
have spilled ink and taken to the airwaves to stress that 
Turkish capital alone is insufficient to bring Turkey the 
level of economic growth it needs both to raise standards of 
living and absorb new entrants to the labor market.  Turkey's 
trade imbalance is another justification they have seized on. 
 As Erdal Saglam, a prominent economic commentator in 
Turkey's leading paper "Hurriyet" wrote recently about the 
country's looming trade deficit, "a country with this large a 
trade imbalance cannot be against foreign investment."  At 
the very least, however, recent sales have answered one past 
criticisim of such acquisitions in that foreigners are not 
profiting from  Turkish "firesales," but instead are paying 
healthy premiums to take a stake in what they perceive will 
be a growing and profitable market.  End Comment. 
JONES