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The [not so little] bank that could

Bank Audi’s Turkish venture is performing beyond expectations

by Thomas Schellen
The Lebanese Audi Group’s Odeabank in Turkey is a shining success so far

Turkey’s newest bank is all but 19 months old and has a single parent, Lebanon’s Audi Group. It goes by the name of Odeabank. Odea is apparently not a Turkish word but a brand name chosen because using the family name-based Audi brand would have collided with the four-ringed German car maker’s rights. But look how the kid has grown.

Assets of $8.8 billion, customer deposits of $7 billion and loans of $6 billion were the cornerstone figures for Odeabank at the end of March 2014. That compares to a practically blank slate for a balance sheet with assets of $300 million in the form of the bank’s capital when management threw open the doors of the first branch in November 2012.

This growth was far beyond anything that Audi had anticipated, says Freddie Baz, the chief financial officer and strategy director of Bank Audi. “If you had asked me in mid-2012, ‘What are your prospects for asset growth two years down the road?’ I would never have told you $8 billion because I couldn’t have imagined that we could achieve this figure,” Baz tells Executive.

[pullquote]The growth was far beyond anything that Audi had anticipated[/pullquote]

Similarly, Odeabank General Manager Hüseyin Özkaya was cited by media reports from early 2013 [The Banker Magazine Feb 2013] as saying that the bank was aiming to become one of Turkey’s top 15 banks by 2017. But a year later, this growth target was no longer valid because the bank’s balance sheet at end 2013 already put it into 14th rank among the country’s 49 banks.

While Baz declines to publicly cite the number of Odeabank account and card holders at end of the first quarter 2014, he puts the growth of the customer base as 110 percent in just this quarter, and not from a low base but a solid five-digit number of account holders that the bank had accumulated as its customer base by end of last year. Similarly, the number of issued cards had almost doubled in the first quarter of this year versus the number at year-end 2013.

These growth metrics are more important in demonstrating the new bank’s future earnings potential than the figures for assets and deposits, Baz says. “Your franchise at the end of the day is the number of customers you have, the number of accounts you have, [and] the number of credit cards you are issuing. We are on the right track to build a solid franchise, a stable franchise [and] a growing franchise. The rest will come.”

Successful rollout

The first-year expansion experience of Odeabank is based on Audi Group investing $1.1 billion into the unit. This entailed the rollout of a branch network of 37 outlets, the implementation of high-grade systems and usage of a substantial war chest to acquire top hires from the Turkish banking sector.

Odeabank’s growth also deserves to be seen in context of its national economic and banking environment. According to Turkey’s Banking Regulation and Supervision Agency (Bankacılık Düzenleme Ve Denetleme Kurulu or BDDK) unconfirmed total banking sector assets grew 31.2 percent between January 2013 and 2014 to TRY 1.79 trillion ($861.8 billion). The sector’s one-year growth rates for deposits and loans were equally impressive, at 24.8 percent and 34.8 percent.

The expansion of Odeabank’s assets, deposits and loans in 2013 were multiples of sector growth rates but, starting from a low position at the end of 2012, looks a bit less extravagant when put in perspective of the overall expansionary banking sector data.

A second factor for consideration is Turkey’s economic profile. The World Bank says Turkey’s GDP reached $789.3 billion in 2012 on its country data page. Per capita gross national income of $10,830 in 2012 is not too far ahead of Lebanon’s $9,190 but the Turkish figure correlates with a population size of an estimated 74 million to constitute an economy that is marked by huge potential and the ambition to become one of the world’s ten largest economies by 2023.

This market size alone is worth an expansion effort for a Lebanese banking group with strong financial and development capabilities. Lebanese equity analyst Nadim Kabbara, who covers Bank Audi under his remit as head of research for FFA Private Bank, says that in hypothetical terms, the 20-times larger Turkish GDP when compared with Lebanon would give Bank Audi a loan portfolio representing “perhaps one fifth of Bank Audi’s balance sheet right there,” if the group captures just 1 percent of an assumed $600 to $700 billion loan market in an $800 billion economy with high loans-to-deposits ratios.

But assumptions are assumptions and then reality offers challenges. The Turkish growth story of the past decade began to stutter quite heftily in 2013, and the Turkish lira had a really bad time. Critics of the Turkish success scenario say that credit and property bubbles have been building up and predict busts of these bubbles and rising rates of defaults in the economy.

According to an April 2014 Economic Outlook by the Turkish Ministry of Economy, the World Bank’s GDP growth forecasts for the country are 2.4 and 3.5 percent, respectively, for 2014 and 2015. However, the Turkish government aims at 4 percent GDP growth this year and 5 percent next year and also seeks to improve the ratio of current account balance to GDP from -7.9 percent in 2013 to -5.9 percent in 2015.

Even if Ankara will be able to manage the disruptions of the country’s political stability and perhaps deflect accusations of corruption as propaganda, Turkey’s economic agenda appears to require a lot of structural adjustments. The World Bank said last month that Turkey needs to increase its market share in global trade if it wants to reach long-term export targets. Key to such improvements would be “a policy agenda that is centered on upgrading Turkey’s physical, human and institutional capital.”

Entry strategy

But this World Bank advice on Turkey’s trade growth strategy might actually be water on the mills of Audi Group, because of its original motivation for entering the Turkish market. In talking Executive through the short history of Odea, Baz emphasizes that the project to establish Bank Audi’s presence in Turkey was not initiated in response to the market turmoils that the two group units experienced in Egypt and Syria starting with the Arab Spring and anti-government protests in 2011 and 2012.

“There is a misunderstanding that Audi went to Turkey to mitigate the rising challenges in the Arab World,” Baz says. “[The decision] was within our regional expansion strategy which aimed at a strategic footprint with respect to the exponentially growing trade, financial and human flows between Turkey and the Arab world that we witnessed at that time. You cannot be a regional player without having a footprint in Turkey and the decision was taken before the first quarter in 2011.”

[pullquote]“There is a misunderstanding that Audi went to Turkey to mitigate the rising challenges in the Arab World” [/pullquote]

The basic calculation was to conquer a share of growing trade finance business between Turkey and the Arab world, which according to Baz reached $50 billion annually in 2013. “Initially from our standpoint as shareholders, our case was built on very solid assumptions of basic economic synergies between Turkey and the Arab world. If we can get 10 percent market share of Arab-Turkish trade-related business, [this means] $50 million in yearly commissions and if we can go up to 15 percent, it is $75 million,” he says.

As such, Odeabank was a child of reason, not emotion; its conception was carefully planned and benefited from an unexpected opportunity, namely the fact that top BDDK officials encouraged Audi Group in 2010 to apply for a new Turkish banking license. This was unexpected by Audi strategists because no new licenses had been granted in Turkey since the days when the country plunged into a series of economic and currency stress phases between 1996 and 2001.

When the group started its search for an entry point into the Turkish market in the mid 2000s, it concentrated its efforts on an entry by acquisition but aborted negotiations with several banks due to the high premiums demanded by prospective sellers.

The opportunity to install a subsidiary from scratch was more than a viable alternative to buying an existing franchise ­— it was far superior because of cost advantages. According to Baz, once the smooth one-year process for application review and license issuance was completed, the next part of the story entailed “no mysteries, no miracles, just strong underlying realities. The main difference between acquiring and getting a license is that when you succeed in getting a license, you are spared the goodwill that you normally pay when you acquire. This goodwill in Turkey easily corresponds to 50 percent of the capital of the acquired institution.”

In other words, Baz views the cost differential between the group’s $1.1 billion investment into Odeabank and the price which Bank Audi would have had to pay for an acquisition of a comparable bank as $500 million — money which can be spent better than handing it over to a seller.

Local talent

According to Baz, this meant that Audi Group could focus on people. “When you can start a business in a new market without incurring any goodwill expense, this provides you with great flexibility in buying talent and allows you to be very competitive in buying the best people in the market.”

The management profiles in Odeabank’s annual report show that the bank’s general manager, Hüseyin Özkaya, has behind him a career of more than 20 years in Turkish banking, mostly with units of HSBC, and was the global bank’s country manager in Russia between 2010 and 2012. He is working with a team of nine assistant general managers who all have backgrounds in high-profile banks, both domestically owned and Turkish units of internationals such as HSBC, ING and BNP Paribas.

[pullquote]“Bank Audi did the right thing in who they hired in Turkey … targeting senior management who would bring in their teams”[/pullquote]

In FFA Bank’s Kabbara’s view, “Bank Audi did the right thing in who they hired in Turkey and in their strategic focus. Comparing with some banks from the Gulf which paid premiums to enter the Turkish markets via acquisitions and who perhaps moved people in who were not cognizant of all risks and circumstances, Audi did some things differently as they built Odeabank from scratch and hired [local] talent — targeting senior management who would bring in their teams.”

In light of the advantage of being a “greenfield” bank, Baz says that the negative bottom line of the first two years of operation, which incurs in both a startup and an acquisition scenario, amounts to $44 million for Odeabank, “well below whatever goodwill we would have paid to acquire an existing bank of the same size.”

He also is not overly worried about the economic challenges that Turkey has started to face in 2013, including the impact that the depreciation of the Turkish lira had on Bank Audi’s financial results. According to him, the size of the negative currency valuation impact moved down from $90 million at the most dire exchange rate to about $50 million at the time of his interview with Executive in May.

The uncertainty over the development of the Turkish economy is not affecting the group’s positive medium-term view on the market, he adds, “but we aim to avoid shocks and pains in the short term.” This, he concedes, “is frustrating for our management there who believe that despite the current environment they can achieve much higher growth.”

When compared with the concerns over the short-term economic outlook, the bigger change in the group’s approach to the Turkish market originated in the hunger of Odeabank’s management team to build a domestic franchise. Bringing their existing relationships with corporate and commercial clients with them, the managers attracted domestic account holders and loan clients, says Baz. “We are building a Turkish franchise thanks to the team there. However, our managers there also like the idea for Audi to become the best Middle Eastern bank in Turkey; so they also want to develop a franchise covering either Middle Eastern corporations established in Turkey or Turkish corporations engaged in business with the Arab world.”

While Odeabank added marketing bells with direct banking services and branding whistles through sponsorship of the women’s basketball team of Istanbul sports club Galatasaray, Baz says that the main focal areas of the bank will be in serving the corporate and commercial segments of the market: “Our ultimate aim is not mass retail. In 80 percent of our network [development] we are driven mainly by business sensitive to our brand.”

For the further growth of Bank Audi into an even bigger regional bank, the group aims to employ a new team of Turkish bankers at its head office in Beirut. “We have an aim to recruit a group of Turkish bankers, mainly corporate and commercial bankers, who will be domiciliated in Lebanon under a group dimension,” says Baz.

Visibility is a key objective for Odeabank and on the day of our interview, the bank’s name certainly received another boost. The Galatasaray Odeabank women’s basketball team won the Turkish League Championship after a 13-year wait and the International Basketball Federation congratulated them on the “most productive season in their history,” which also included the first-ever win of the EuroLeague Women’s title by a Turkish team.

Can any banking performance beat that?

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Thomas Schellen

Thomas Schellen is Executive's editor-at-large. He has been reporting on Middle Eastern business and economy for over 20 years. Send mail

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