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Odeabank is 'Turkey's Best New Bank'

Interview - December 18, 2013
Hüseyin Özkaya, General Manager of Odeabank, speaks with World Report about Turkey’s financial sector and the bank’s highly successful first year
Odeabank is a very young bank, with Lebanese roots. Could you tell us about the bank’s origins?

Let me tell you about our short-term history, before moving on to talking about our business model and how we see the general situation regarding foreign investment in Turkey. The finance sector is one of the most attractive areas of foreign investment. Turkey is always competing with many other similar countries in terms of investment. Most international companies and asset managers etc. once they think about their global plans, they look into privatised markets that are relevant to them. They look at the basic strengths and weaknesses of that market, and then they go and invest. That is how international companies usually work.
From the perspective of Bank Audi, which is the largest bank in Lebanon, their prospective of Turkey was a country with stable growth, whereas they wanted to grow more and faster. Being the largest bank in Lebanon was probably not enough for them, so they engaged in an expansion plan, and established a franchise in Syria and Egypt, and a few other places, but mainly these.

They always considered Turkey to be the perfect place within the Middle East and Europe, and one of the fastest growing and probably the most attractive country in terms of its demographics, the structure and the advanced stage of the economy, the diversity of the economy and service industries that are playing a role in Turkey, and all those factors. They saw Turkey as an option, and they realised that they should establish a bank, so they looked at certain options. They realised that it would be better to apply for a licence, which had not been done for the past ten years, because they predicted that Turkey would reach that stage of granting licences. 
In 2001, when there was a crisis in Turkey, the Banking Regulatory Advisory Board (BRSA) was formed, which was very instrumental over the past ten years in terms of maintaining the Turkish financial system’s stability and differentiating it and diversifying it compared to other financial markets. In 2008/09/10 Turkey contracted by 9-10% in line with the rest of the world, but the financial market was not affected at all, and it has actually improved. We have a very strong financial system. The Turkish financial system stood out as a good example, and was an important factor in the overall improvement of Turkey’s rating, and as was seen from the recent comments of two ratings agencies as to why they operate in Turkey. One of the main ones was the strength of the financial system.
This means that the financial system is highly resistant to shocks and it is profitable, and able to adapt in general. Turkey has to be like that, because it does not have the mass size of China or the research and development of Germany, so it has to be a very dynamic and fast-moving country. Those are the basic features of Turkish entrepreneurs.

The BRSA has helped Turkey a lot in terms of its financial stability and ability to adapt to programs without really having to think about the financial system’s strength. There was no talk about recapitalisation in Turkish banks at all, because they were already well-capitalised and monitored and supervised by the BRSA. There have been talks about the US and Europe over the past four to five years in terms of the financial regulations and recapitalisation, but there has been no restructuring in Turkey.
Before, Turkey was always growing, with sound demographics, but now it is about the strength of our financial system, our well-educated people and foreign investment, and risk. Those are starting to become part of the checklist for any investor coming to Turkey. When you think about the Istanbul Financial Centre, you have to look in-depth into the reasons behind it. I think the financial system and the strength of the banks is a major determining factor in this regard. 
Bank Audi know the system very well. Lebanon was part of the Ottoman Empire for centuries, and there is a cultural link, in terms of the way people think and behave. Bank Audi decided to invest in an organic establishment, and I think it coincided with the fact that the BRSA had stopped giving licences because of the need to strengthen the financial system. Then they decided to use the opportunity to obtain foreign capital, which is a must in Turkey. We do not have much capital in Turkey, and that is why direct capital flows were necessary, and the banking system was one of the first areas that you can actually attract foreign capital.
The Turkish Government started in 2010 and 2011 with the idea of awarding licences. Bank Audi applied at the same time. It would be unfair to call it a coincidence, but I do not know really, because I was not there. They called me last February when I was the CEO of HSBC Russia and they said that they were forming a bank, and there was a big opportunity. I accepted, and within two or three months I quit my job there and I started here.
Where did they see opportunity? What motivated Bank Audi to enter the Turkish market?

There were a number of factors. In corporate banking, definitely the huge growth of trade and investment was on the list. In 2012 and 2013, total trade growth reached $50 billion plus, which is a lot. Turkey is an historical trade partner with the European Union, reaching 50% historically and now it is down to 40%. That is where Turkey proved its flexibility once again. There was huge growth as well in the Middle East and North Africa over the past four years. There was also a big opportunity with retail banking, with a population of 75 million, and 50% are under 30 years of age. 
There is a huge population growth. My daughter did her high school exams this summer and there were 1.1 million students doing the exam to go from 7th grade to 8th grade. So from 10 to 15 years of age, there are something like 15 million people. There are also 1.2 million people doing university exams, so that means that every year 1.2 million enter university, meaning that they are 17 to 18 years old. We are talking about 15 to 20 million people entering the economy in some way or another over the next 10-15 years. I do not think there are any such statistics anywhere else. There are 700 to 800,000 people who get married every year. That means 500,000 houses, and 700,000 washing machines, dishwashers etc. It is phenomenal.
When you look at total loans in the retail banking market, it is only 30% of total lending in the system, which is about 300 billion Turkish Lira as of now out of the total of 950 billion Turkish Lira of loans in the system. This is still very low compared to income per capita, and the debt per capita is also much lower than that, compared to all European countries. Even the emerging markets have increased their ratios and penetration. Despite all these uncertainties, are about 25%, which is much faster than the 3% growth in the first quarter.
So you have actually seen 2.4% growth in 2012 whereas assets grew by 15 to 20%. Whereas in other markets such as the US it is more or less in line with the growth rate in certain sectors. corporate banking, retail banking, equity flows and the Istanbul Financial Centre is also an area where the Borsa Istanbul will be a much higher market capitalised institution than it is now.
When we met with Dr Turhan, he stated that he thinks that the Capital Markets will be the engine of growth for Turkey over the next decade. Do you agree with this, and if so, is Odeabank positioning itself to capitalise on this?

No, we are not really willing to capitalise on it now, because this is the shareholders’ decision, not mine. So from Odeabank’s perspective, I cannot really comment on it, because it is not my call. From a general perspective, it makes a lot of sense. Some people say Turkey is under-priced, whereas others say it is fairly priced or over-priced. I look at the real industry and real growth. There is growth in consumables and project finance loans, and there is a big opportunity. There is a second airport being sanctioned for $4 or $5 billion. Any investment like that has prospects not just in the real industry, but also the Borsa Istanbul. 
These will also lead to other financial products and derivatives, which we do not see now. We just see 15-20% of companies being public. I cannot say that real estate development in the Borsa Istanbul has been used effectively over the past two decades – now it is being looked at from a wider perspective, and that it can lead to an acceleration in the rising of capital. Turkey has not raised capital that easily. Hopefully, if the European banks are willing to lend, then they can lend from them, which is not really that dependable. We have to look at fundamental ways of raising capital, in order to exploit the huge growth potential.
How we exploit it is another question, and that is why I think Borsa Istanbul plays an important role if it is done well. If the market prices and the multiples in the market are right, let’s go and sell 15% of our market companies that is a typical financing model for all Turkish companies, with just one or two exceptions. Then the shareholders might end up going and buying a few more from the market, which is not really what Turkey is. I think Turkey is huge leverage financing, which will then be taken out by IPOs – that is not happening in Turkey. It is all happening with shareholder money, bank funding or via private equity from the UK or the US. I definitely believe in the potential.
Taking the US and the UK markets as an example and how those markets developed in the past, how can we have more billion dollar plus companies, and how can we ensure that over 50% of their shares are actually traded? Right now, the only examples that fit into the system is banks and ICT because they are both very big in their sectors, and they have joint ventures and growth, which they have financed through IPOs or secondary offerings, but you do not see too much of them. 
You mentioned that increasing the leverage of the Turkish banking sector could be one of the pivotal points to strengthen the economy as a whole. What do you think is an adequate capital ratio, which Odeabank is maybe striving for? How many loans on the books is the risk appetite that Odeabank has?
We have a huge appetite of course. In the first six months, the Turkish banking system grew by about $65 billion. We grew as the last entrant in the market, with zero per cent market share and only having established on 2nd October 2012. Just eight months later, we achieved about 5 billion Turkish Lira [£1.5 billion]. We actually achieved 5% of the growth in 2013.

Considering that the Turkish banking system is quite diversified in the sense that there is no concentrated one large bank like in Russia. There are four private banks, which have 10-12% market share, and you have three state banks, which again have similar market share. These are around 100 billion Turkish Lira, plus let’s say $50 to $100 billion for the top seven banks. Then you have five other banks, which are all multinational. Four of them are 100% and one of them is 80%. These are very small with $20 to $40 billion. So the number of banks is actually quite high, and they cover 90% of the market. 
We are the 14th bank out of 45 banks. With regard to loans, assets and deposits, which are the three main drivers of banks in general, we are currently number 14. After just eight months of opening, if a bank can achieve this, I think there is nothing else that demonstrates the potential of the market that is enabling this. We are doing it in a profitable way. Unfortunately we are not as profitable now, with tens of millions of dollars of investment, as there are some depreciation and investment costs, but our shareholders are happy with the profitability prospects. They are not huge profits, but the target ratios are between 10% and 15% equity over the coming years.

But combining this with Audi’s intentions has been such that Audi is very happy with the investment, and where we are now is a testament of that. Of course, I should underline that this is the beginning, and we could be doing very badly, but so far, after nine months of operations, the first bank with no ties in Turkey whatsoever and no starting fuel with billions of dollars of capital, but a new entrant, is a very good example. It is impressive. 
That gives a message to others that if the fundamentals are there and the conditions are there, and if the market enables you 100%, there is nothing really that can stop it. I am sure there are examples in other sectors, but I think the most striking one is in ours, as it is the most visible sector in Turkey.

Out of the 7 billion TL loans you have on your books already, what is your target market? 

We always say something combined. The shareholders and the CEO say something, and then you combine it. There is a synergy. Our model has always been to grow in corporate, commercial, retail etc. with equal importance and no preference. The sectors might change from time to time. Five years ago, there was a lot of appetite in the shipping industry, but now there is no appetite. Apart from that, we have no preference to any sector. 
I know that Odeabank relies heavily on advanced technology to increase its competitive advantage in the market. Can you tell us a little about this?

The idea is clear about what our strategy is in terms of business lines. The idea is to do corporate banking and to lend to large companies and increasing flows within the companies, and going to the commercial sector. There are good synergies between different sectors. Dealerships are SMEs, so you can work with SMEs as well as commercial. The key is to have the right technological tools for that, like online internet banking, cash management tools, trade finance tools etc.

You can actually go through the supply chain. Retail is at the end of the chain. If you go into the retail shops as SMEs, then you will also have credit card products, where people spend in those shops. Then we get the flows of student tuitions, and we have gone into residential mortgages as well as project finance for contractors. When we do take a risk, we make sure that we approach many different customers. Therefore, we need all of them to agree to the risk or exposure we are taking on.
In terms of innovation, we are lucky that we received the first award for this bank for the most innovative bank in Turkey, which was quite a surprise for us. We were not expecting it so soon. We focus on technology, and as you noted, it is one of the most important aspects that we have to adopt so that we can compete with others, who have been here for 20 to 30 years, and which are very strong banks, and have all the techniques that we want to apply. Our pillar is basically technology, which is fast, dynamic, hands-on, and focused. We have an advantage in that we have started from scratch, so we can be more efficient than others.
What do you think about the Government’s private pension plan? This is one of the biggest initiatives that they are taking to deal with individual savings in the Turkish population. 

That is a must from two perspectives. One is given the fact that there are some risks involved with the Turkish population and unemployment. The social security system has been one of the bottlenecks for Turkey – many people were retiring early in the past, and were a burden on the Government as a result.

Someone yesterday who was an ex-banker told me that he retired when he was 41. He is only 50 now but he has been working in other things, so he has been receiving his pension, but he has also been working. Although you can retire early, the pension is very low, so he could not live on it, and he had to get another job. He is also a burden on the Government. It is vital that there is a private pension plan, which has actually been a driver in developed markets for the past 50 years, so there is no need to reinvent the wheel. The last initiative was to contribute to the private pension plan.

But the culture is not there. There are things that are missing from the Turkish system, like insurance, pension plans – these are not in the culture. Families help each other a lot. Everyone has their children and cousins, and I see many people who actually pay the credit cards of others, and that does not happen in other markets. It is a cultural thing. 
The second effect is on the development of the capital markets. Unfortunately you have a very low level of public ownership in industrial companies and really successful ones do not really want to go public.

There are a number of factors that have been affected in the past, while the stock market did not grow as much as Turkey as a nation. Right now, portfolio investors are mostly European or American, whereas we need to have Turkish portfolio investors as well. The way to achieve that is through pensions and insurance companies, but because of the Turkish system, very few of them have invested. I think the regulation needs to be amended or prepared in accordance with this. 
When we met with Dr Ertaş, Chairman of the Capital Markets Board, he said that one of their top priorities right now is the knowledge and education of the Turkish population and investment possibilities, because it is not that high at the moment. Do you think that this is an important initiative to increase knowledge and awareness – educating the average Turkish investor of the capital markets, loans or retail banking?
I am not sure whether that is the real problem. I think the level of financial literacy amongst the Turkish public is actually high compared to most other countries. In most countries, people have job security and good job initiatives, and a good pension plan, but because most people do not have this in Turkey, if they have surplus cash, they find many good ways of investing. This is not the case in the UK typically, where you would not even think that you would get an attractive rate in another bank. But in Turkey, everybody does it.

It enhances competition. You have to work with your existing customers as well. We have 9 billion of deposits as of today. Where do we get these deposits from? From other banks. I do not think that education is really the issue. People are financially literate. People watch CNBC and other channels even if they are from non-financial markets. 
The real issue is about regulating the market better, via the Capital Markets Board, to encourage publically owned stocks, and to do it without speculation. Unfortunately from a local investor’s perspective, the Turkish stock market is very much in the hands of a few people, who speculate. There is little that Dr Ertaş can do about it, but I think he is doing a great job with public ownership and the image. There is a need, and he is doing very well, but the Capital Markets Board also has to invest to make sure that everything is preserved so well, that there is no compromise. 
Although there is a tremendous increase in efforts to prevent and evoke licences of small brokers who do speculation, I think there is much more growth there to protect the minority. It is so easy now; you can buy any stock from any bank online. But some people get burned as they are not capable. These people should be directed towards buying equity index funds, which unfortunately are very poor now in general. 
London is considered to be the financial capital of the world, with a higher GDP of even some European countries, such as Sweden and Belgium. Considering Istanbul’s aspirations to be the financial capital or regional hub, what do you think Istanbul could learn from London in this regard, or vice versa?

From a financial perspective, financial market regulation, monitoring and promotion, of course Turkey has to learn from London. London is the world, because everybody is there. It is not just a nation’s stock market – it is along with New York, the centre of the world. Of course, you have to learn from the past. I think there has to be increased cooperation and institutionalisation. We have to look at the institutions that are governing the FTSE index and all the other markets. Given that Turkey is also competing with other markets, which form these organisations and counterparts like yourself to promote this, maybe the same thing, if not more, is happening in Russia, in Moscow.

I have seen so much pushed forward by the Russian Government and the banks. I do not think Moscow is a better place – I think Istanbul is a much better place to go and ask for the right to claim that role, because of many things.
We have already discussed how fantastically Odeabank has performed in less than a year of operation. If we were to come back here and interview you again in say five years’ time, optimally what achievements or accomplishments would you liked to have completed?

We would definitely like to be one of the top ten banks in Turkey. It is much more difficult now, because things have been changing a lot over the past five years. The ranking has changed. But I think it has a lot to do with the behaviour, investments and strategies of other banks that are in the top ten. If some of them are looking to divest for example, that is an opportunity. If some of them are willing to grow, that is another thing. Everything being equal and if there are no big changes, we strongly believe that we have to go for the top ten position, organically. This is the same path of investment over the past five years.

By 2017, we definitely want to have achieved our ambition of being in the top ten. If we do it efficiently, we will achieve much better performance ratios.
What final message would you like to send to our readers about Odeabank or even about Turkey as a whole?

Odeabank has a different model. It will be difficult to say without self-praising too much. It is probably not just a first in the Turkish financial market, but you can probably argue that such growth and such a definition of strategy, which is to invest in everything, to achieve such goals and to do it with infrastructure investment and a shared shareholders structure, we would probably be unprecedented in other markets as well. When you go into detail as to how that was achieved, it is about the fundamentals, doing financial banking, but maybe have a much more forward-looking and much more self-motivated, structural way than a bank would do probably in the first six months. 
For example, using business technology is one of the pillars. In terms of performance assessment, scorecards, online, etc. we can see any portfolios, ranges or profitability and different KPIs (key performance indicators) online. We did this, but at the same time, on a very structured and calculated basis, we invested in technology and the long-term achieving tools, like technology, business intelligence and risk management tools. We probably do not need them, as we have low volumes which we can do manually with Excel etc., but we said that this is not the way forward, because when we grow, there will be a time when we will not be able to do it manually. 
When you invest in Turkey or anywhere else, you need very committed shareholders and be willing to pay the price. I have to reemphasise that shareholders are very important. Turkey is not the market for ‘wait and see’ investors. I do not think it is going to work in these respective industries. If it is going to be in heavy industries, that is something else. But if it is a retail or consumer business, not only the finance sector, even if everything is equal and stable, you have to not be afraid of investing.

The biggest factor for us is the confidence given to us by the shareholders. That is what we are grateful for. I would advise any potential investor to do a strong, fundamental analysis, really know what they want to do, and not be afraid of investing.