GEM financials - Finansbank with a little bit of Yapi Kredi
/This is a short story of Finansbank and its founder with some background on Yapi Kredi. The story is mostly based on facts and our experience with these two banks as a stock analyst over the years.
My first meeting with Finansbank
I met Mr. Husnu Ozyegin (Husnu Bey) for the first time almost 20 years ago. It was after the IPO of Finansbank, which was book-run by Nomura. I was a stock analyst based in London at the time considering adding Finansbank to my coverage universe. Finansbank appealed to me back in the 1990s in ways other banks did not. The bank was relatively small by assets and deposits meaning it had a greater chance of delivering value to shareholders and hence much better upside than some of its larger competitors did assuming, of course, the management executed on its business plan. I had reasons to believe that the management did just that. My predisposition was that Finansbank was a lean bank with a positive attitude to intelligent growth run by smart people. With that in my mind, I went to see the Chairman. Husnu bey took the time to explain the business model at length. He discussed how he went about recruiting clients earlier on and his interactions with them afterwards, and various cross-selling opportunities the bank was working on at the time. He was as pleasant, charming as he was forthcoming with information and guidance. He might have also, and quite naturally, thought research coverage of Finansbank by Salomon Brothers would boost his visibility and recognition in the broader market place. We went on discussing further about Finansbank's clientele. He then told me that he could name most of his top customers by province of operation and that he developed strong, often personal, relationships with them. Many of his enterprise clients were his relationships acquired when he was the Chief Executive at Yapi Kredi.
The Chairman went on to discuss dynamics of funding business and concentration in deposit market in Turkey. That is when I realized how Finansbank fought for marginal depositors in districts/towns where it had a retail branch. Husnu bey told me Finansbank was either the largest or the second largest bank by deposits where they had an operation. They did not have presence in many Anatolian cities; but where they did, they did well in terms deposit penetration. In the 1990s, the bank had a strong presence in and around Istanbul and coastal towns. Their presence in Anatolia was small but growing. The branch in Bebek/Istanbul, where Finansbank was the market leader in deposits as well as loan originations, was his favorite.
It was not one of your typical meetings, by any stretch of imagination, between a bank management and an analyst. What impressed me the most about this first encounter with Finansbank was that Husnu bey presented the bank to me as if it was a food retailer where he had to constantly monitor the shelves to make sure the goods were always there for taking. This rather enthusiastic approach to banking indicated commitment to business and it was refreshing. Most balance sheets in the industry at the time, including that of Finansbank, were tailored to earn on investments in high-yielding Lira assets funded by foreign currency and bond trading. Most commercial banks in those years ran short positions in currency to finance their Lira-denominated investments. The net-open positions were in multiples of their shareholders funds; there was no specific restriction against running open positions at the time. However, only those banks which successfully invested in retail banking assets in order to be close to customers and explored cross-selling opportunities created value for shareholders later on when inflation declined to single digits. Finansbank was one of those banks.
Salomon Brothers initiated Finansbank coverage
I returned to London and wrote my very first equity research report on the company as an analyst working for Salomon Brothers. It was not usual to cover Finansbank as an equity analyst in those years for variety of reasons. Finansbank was not on the short list of EMEA banks analysts as there were several larger banks to take care of both in Turkey and the rest of the region. Some investment banks in London did not even have coverage of the larger Turkish banks. Finansbank also "failed" the market value test. The bank's equity market capitalization was a little over $100 million at the time. Against these odds, we picked up coverage. We were in fact the only house initiating Finansbank coverage out of London after Nomura. We rated the stock BUY and started marketing the idea to money managers. We had a strongly positive investment view on the stock, which we expressed in the initiation report. We thought the idea warranted no less than our best effort to communicate to emerging market funds. That is when I decided to bring him over to meet the potential clients face to face. I called him up and asked him to do a non-deal corporate roadshow with us in London. He accepted our offer and came to London. We spent two full days together to visit institutional money managers.
London roadshow and a smart money manager
Husnu bey was the epitome of a great salesman. He knew how to pitch an idea to convey his message successfully. It was a rewarding experience to participate in an investor trip with him. Wherever we went, people paid attention to what he had to say although investment proposition he promoted had some serious drawbacks with some significant downside risks. For one, Finansbank was not a very liquid stock back then so it was not everyone's "cup o tea." It was also the aftermath of Russian crisis so appetite for emerging markets was not particularly good. Yet, he still managed to attract interest by simply talking to the operation he has built. He explained the business model rather convincingly addressing both the merits and the demerits of his business. He was indeed balanced between rewards and risks when he presented the bank carefully phrasing where he could be wrong. He was flawless saving occasional buts and ifs.
Finansbank idea was a risky proposition not only for emerging markets related reasons but also on idiosyncratic risks. Finansbank was an above-average risk bank. The bank was profitable because it earned sector high margins. Yet, high margins meant low credit quality. In fact, Finansbank's non-performing loans were above industry norms. The bank also displayed some of the highest expense ratios in Turkey. Thus, its ranking by ROE was not as good as its ranking by NIM. All these as well as other sources of downside risks were communicated during the meetings. In the end, most clients were still convinced that they had met a top quality banker in Husnu Bey, who knew what he was talking about. Almost all funds we met during the roadshow reacted positively to the proposition. They much liked the pitch and praised Husnu Bey for his success with Finansbank. One client in particular turned so upbeat about the stock and decided to build sizeable exposure in it.
This very client who did decide to buy the shares later told me it took him two weeks to complete the purchase because daily trade volumes in shares were low. When he had eventually completed the order, this client probably became the largest institutional shareholder of Finansbank. His average cost per share was consistent with an equity value under $150 million. What fascinated me about this particular client's love affair with Finansbank was that he remained a shareholder through some of the most volatile periods in Turkish banking history or for nearly 7 years, a holding period unusually long in the fund management industry. He had told me he sold some of his position in the run up to NBG's acquisition but tendered most of the shares during the minorities buy-out. The equity value implied by NBG's acquisition of Finansbank was above $5 billion.
Harvard/Cambridge connection and credit cards
Husnu bey went to Harvard business school in Cambridge. The Harvard/Cambridge angle is important not only for Husnu bey but also for the future of two Turkish banks, namely Yapi Kredi and Finansbank. Massachusetts is where credit cards were invented. I cannot help but think that there is a connection between Husnu bey's years in Cambridge and two credit card operations he oversaw at two different banks. Husnu Bey returned to Istanbul after Harvard and joined Yapi Kredi Bank. He worked his way up to become a CEO in the 1980s.
Finansbank is an ideal compromise between Yapi Kredi and Garanti Bank. Yapi Kredi, when Husnu Bey was its Chief Executive, became the leading credit card franchise in Turkey. This is because Yapi had started selling credit cards in Turkey before anybody else did and benefited dramatically from early entry. Husnu Bey's overall retail banking strategy to open satellite branches/kiosks at college campuses also paid off handsomely and complemented credit card divisional sales. In fact, Yapi Kredi, which is still the most profitable card operation in Turkey, owes the success of this business to no one other than Husnu Bey. When Husnu Bey left Yapi Kredi to set up Finansbank in 1987, Yapi commanded nearly 50% of Turkey's lucrative credit card market. Garanti did not have much credit card business back in the 1980s, neither did Isbank or Akbank.
Finansbank is a smaller replicate of Yapi Kredi as far as bank cards business is concerned. Yet, punching well above its weight, Finansbank's credit card business is the Nation's third largest after those of Yapi Kredi and Garanti Bank. It is extremely difficult, if not impossible, to replicate the bank's card operation organically, from scratch, because of the adverse selection risk, which is phenomenal. If you push your product too aggressively, you attract bad credit. Good credit households do not change vendors frequently or do not change them at all. Good credit tends to have high search costs, which discourage cardholders to shop for cards. The only way to grow credit card business to gain market share is to acquire one. There is overwhelming evidence indicating conventional organic growth strategies, when pursued, almost always fail, not just in Turkey but in other markets too. In the U.S., large money-center banks (e.g. Bank of America) have also grown their credit card presence in the regions by acquisition. In Turkey, several banks have indeed failed badly trying.
The bank card business also helps drives revenues in other segments. In fact, Finansbank's bank card operation is one of the major reasons why the bank is good at cross-selling. Finansbank has consistently earned NIMs at least 100bp above the industry average and generates fees equivalent to 1.5% of its assets. Thus, its earnings quality is high and its credit card operation is instrumental in all these.
Finansbank changing hands, first NBG and now QNB
Husnu bey and other insider shareholders sold their stake to National Bank of Greece some 10 years ago. The transaction valued Finansbank's equity at circa 4 times. More recently, NBG sold its entire ownership in Finansbank to QNB. This latest transaction valued Finansbank just under 1x book equity, slightly below the average PBR of 6 major banks at the time the deal was announced. In a separate research commentary (National Bank of Greece: Wrong Side of Finansbank Trade Yet Again, Global Emerging Markets Monitor 23 December 2015), we criticized NBG shareholders for their poor judgement on valuation and congratulated QNB for acquiring one of the best retail and SME banks in Turkey. Our critique of NBG rested on two points. The first had to do with the strong contribution of Finansbank to NBG's group financials. Finansbank was indeed the group's most profitable business, the absence of which would reduce NBG's ROE, probably significantly. Second, the price agreed on did not only massively undervalued Finansbank's equity but was also well below what NBG had paid to acquire Finansbank 10 years ago.
Money-center banks in Turkey or putting Finansbank in context
Let us put this Finansbank story in some context. It took five decades to more established banks in Turkey to accomplish what Finansbank did in less than 15 years. Most established banks were treated favorably by the State, especially in the beginning. The majority owners of money-center banks in Turkey are the holding companies or the families who also own the holding companies. Then there are three other banks of size owned by the Republic of Turkey. Most of the families who control the banks were actively promoted or, in some cases, directly funded by Turkey, when the Republic was still young. The list of banks which benefited from state funding includes Garanti Bank (established in 1946, Koc Holding first, then Dogus Holding and finally BBVA and Dogus Holding jointly), Akbank (established in 1948, Haci Omer Sabanci Holding), and Yapi Kredi Bank (established in 1944, Cukurova Holding first, then jointly by Koc Holding and Unicredit).
Isbank (established in 1924, the pension fund and CHP), which was set up by Mustafa Kemal Ataturk, the founder and the first president of the Republic, was directly funded by the State. The Cumhuriyet Halk Partisi (CHP), the majority shareholder of Isbank, was the only political party in Turkey at the time and, as such, it assumed the Republic's executive power. The CHP was the main shareholder at Isbank until its stake was successfully reduced to minority by the Isbank's Employee Pension Fund. Finally, you have Ziraat Bank, Halkbank and Vakifbank controlled by the Republic.
As for Finansbank, the bank did not even exist until late 1980s. It was largely self-funded from the start to become a major retail bank in Turkey in less than 15 years time.