Dubai: Emirates NBD (ENBD) was up 6.5 per cent in one day last week and this was on the back of confirmed talks with Russian lender Sberbank to potentially acquire its wholly-owned Turkish unit DenizBank, which is valued as much as $4.12 billion (Dh15.13 billion) or 1.3x book value.
We were less surprised with ENBD’s move to enter the new market as the bank has always been keen on inorganic growth (they entered the Egyptian market in 2013 after buying BNP Paribas’ subsidiary), rather than returning capital to shareholders via dividend payments.
Despite great fundamentals, ENBD has traditionally traded at a 20-30 per cent valuation discount to the UAE banking sector, mainly due to the foreign ownership limit (FOL) cap at 5 per cent for the stock.
Given that the acquisition is sizeable — between $3-4 billion — an all-in cash deal is unlikely, suggesting a high probability of a share-swap.
This has indeed got the market excited as the potential share-swap will likely result in the FOL cap of 5 per cent being lifted for ENBD.
Beyond this euphoria, we see less positivity in the transaction as the Turkish market has proved to be challenging for other GCC peers to break into due to:
a) Tight domestic competition,
b) Better support to state-owned and private Turkish lenders, and
c) A less appealing risk-return ratio
Moreover, the majority of GCC banks with Turkish subsidiaries have proved to be less efficient on foreign soil and have clocked lower returns on equity, which has weighed on their consolidated profitability.
While, we are equally excited about the possibility of the lifting of the FOL cap for ENBD, it would be take a few years to unlock value in the new and enticing Turkish market. We also expect the stock to be directionless, until the verdict of this deal is out.
Entering the Turkish market is not something new to GCC banks. Burgan Bank bought 100 per cent of EuroBank Tekfen in 2012 (below book value) and NCB bought 60 per cent of Turkiye Finans Katilim Bankasi in 2007 (5.9x book).
It would be hard to pinpoint the multiple of the potential ENBD transaction, but it is quite possible the current owner, Sberbank, wants to get rid of Deniz Bank from its books given the pressure from sanctions. This could possibly seal the deal below or at the book value of Deniz Bank — current value is 1.3x — for ENBD.
Being the ninth largest bank in Turkey, and with a 3.8 per cent lending market share, generating a return on average equity (RoAE) of 15.1 per cent as of September 2017, Deniz Bank appears to be a better banking franchise compared to most other Turkish subsidiaries that ENBD’s other GCC banking peers have acquired in the past. This acquisition, if successful, will be sizeable for ENBD as it will translate to 34 per cent of ENBD’s stand-alone balance sheet and 22 per cent of earnings.
With hindsight, the Turkish economy has a vibrant, young and rapidly growing population, and the country’s geographical proximity makes it an attractive market for merger & acquisition (M&A) transactions for GCC banks.
Turkey’s growth prospects look promising — it is still an under-penetrated market where loan penetration is at 70 per cent of gross domestic product (GDP), and where more than 40 per cent of the population is considered underbanked.
But the long-term views on the sector are mixed, with Moody’s having a negative outlook. The risks spans from domestic or geopolitical tensions, low economic growth (relative to historical levels), high inflation and an overcrowded banking sector.
Following the consolidation of the Turkish banking sector in early 2001, competition has intensified considerably, resulting in a few powerhouses, and they have held on to their position since then. By measure, Turkey has the highest level of competition in the banking sector among European countries, with the top seven banks holding 71 per cent of lending market share.
The Turkish lira is a less exotic currency now, losing 7 per cent in 2017 on the back of a 20 per cent erosion in 2016. Although the risks have diminished considerably, consensus still points to lira depreciation in 2018.
The banking sector’s RoAE trickled down to 12.1 per cent as at the end of September 2017 (down from 20 per cent-plus in 2010), although it is hard to deny the recent uptick in the profitability curve, rising 30 per cent in 2017.
Digging deeper, Turkish lenders were able to take advantage of a government-backed initiative that extended $53 billion (Dh194.67 billion) of guaranteed loans, which was the key determinant of growth and profitability in 2017. There is wider consensus that the economy and banking sector growth and profitability will fade away as the credit-guaranteed fund gets exhausted.