Gulf bank’s growth push takes wrong turn in Turkey
The author is a Reuters Breakingviews columnist. The opinions expressed are her own.
By Karen Kwok
LONDON, May 21 (Reuters Breakingviews) -After flirting with a Standard Chartered STAN.L bid last year, First Abu Dhabi Bank (FAB) FAB.AD now seems to be taking a riskier turn in Turkey. The $36 billion Gulf lender is in talks to buy 61% of Istanbul-based Yapi Kredi YKBNK.IS, Reuters reported on Tuesday citing three sources close to the matter. Increasingly deep ties between the United Arab Emirates and Turkey offer a thin rationale, and the price looks too high.
FAB is hammering out the details of a roughly $8 billion purchase of Turkish conglomerate Koc Group’s controlling stake in Yapi Kredi, the report said. Buying such a large chunk could force FAB boss Hana Al Rostamani to bid for the whole of Yapi Kredi, which would have a valuation of $13.1 billion based on the reported stake-sale price. Al Rostamani lacks the capital to fund a cash bid, since her common equity Tier 1 capital was just $4.3 billion above the minimum required level in March, based on Breakingviews calculations. It follows that either Koc would have to accept FAB’s equity as payment, or Al Rostamani would have to tap shareholders including state fund Mubadala Investment Company for cash.
The price will give investors cause for concern. A $13 billion offer would value Yapi Kredi at 1.6 times forecast tangible book value in 12 months’ time, using LSEG data. That compares with 0.8 to 1.2 times for other Turkish lenders. FAB’s return on investment would be 17%, using consensus 2024 Yapi Kredi earnings of $2.2 billion. That sounds high but it’s probably not enough to compensate for the risk in such a volatile economy. JPMorgan analysts, for example, use a 35% cost of equity in their valuation of Yapi Kredi.
True, deepening links between Turkey and the UAE give Al Rostamani some justification for a deal. Ankara and the Gulf Cooperation Council recently launched negotiations for a free-trade agreement. Turkey’s 85-million-strong population is a potential growth market for FAB, which has little room to expand in its key wholesale-banking business at home. Still, there are no obvious cost savings on offer from the deal, and it’s not clear why FAB needs a big Turkish bank to benefit from future regional trade flows.
Turkey’s problematic economy is another risk. High inflation and a historically unstable lira would make FAB’s earnings more volatile for shareholders. Currently, the bank reports in the UAE dirham, which is pegged to the U.S. dollar. Shares in Al Rostamani’s bank were flat on Tuesday, but they’ve dropped by roughly one-tenth since the first reports of a possible Turkish deal in early April. Al Rostamani’s investors have already made their feelings clear.
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CONTEXT NEWS
First Abu Dhabi Bank (FAB) is in advanced talks to acquire Turkish conglomerate Koc Group’s 61.2% stake in Istanbul-based lender Yapi Kredi for about $8 billion, Reuters reported on May 21 citing three sources close to the matter.
Final details of the potential deal for Turkey’s fourth-biggest private bank are being hammered out after several months of negotiations, the report said. Turkish conglomerate Koc has sought about $8.5 billion for its shares in Yapi Kredi, Reuters reported citing one of the sources, while FAB has offered about $7.5 billion.
Shares of Yapi Kredi rose 10% to 37.96 lira as of 0935 GMT on May 21, while FAB’s shares were flat. The Gulf lender’s shares have lost 9.4% of their value since April 4, which was the day before Bloomberg first reported that it was studying acquisition targets in Turkey.
Graphic: Turkish banks’ multiples of forward tangible book value https://reut.rs/4apJG2F
Editing by Liam Proud and Oliver Taslic
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