NBG should not back out of Finansbank deal over politics

The political risk of investing in Turkey may still be material as last week’s unfortunate event with the Greek and Turkish planes crashing over the Aegean Sea showed and Turkey’s European Union convergence may not be a done deal. Nevertheless, it would be a mistake for Greek outward-looking companies with regional ambitions to ignore it in their expansion plans. The question should not be whether they should expand their operations in the neighboring country but what is the best way to do it.   Takis Arapoglou, the chairman of National Bank of Greece, is expected to be grilled in Parliament tomorrow over his move toward an agreement for the acquisition of a majority stake in the Turkish mid-sized bank Finansbank. He is also expected to face a tough questioning session, sprinkled with some archaic nationalist tunes, on Thursday during the repeat general shareholders meeting of National Bank’s shareholders. Nicholas Nanopoulos, the CEO of EFG Eurobank Ergasias, Greece’s second largest private commercial bank, does not have to worry about it. EFG Eurobank Ergasias, which owns a brokerage firm in Istanbul and recently acquired a 70 percent stake in Turkish Tekfenbank for 182 million dollars, is controlled by the Latsis family and state-owned pension funds do not have any influence over its business decisions. Both banks apparently share a common view of the Turkish market but have chosen two different routes toward realizing it. They both understand Turkey is a large country with a relatively young population which offers significant growth potential but also entails bigger risks, especially for Greek companies which have to take politics into account. National Bank, always aiming for a leading banking role in the larger geographical area, was more pressed to enter the Turkish market in a more aggressive style after losing out in the bidding process for BCR, Romania’s largest credit institution, in late 2005. Austria’s Erste Bank acquired BCR by paying a sizable premium, 5.8 times its price-to-book value. With Romania, the second more populous country in the Balkans, counting more than 20 million people, almost out of the M&A picture, especially after the Romanian authorities’ decision to continuously postpone the privatization of CEC, the Romanian Postal Savings Bank, National Bank did not have much of a choice if it wanted to become a big regional powerhouse but to enter the Turkish market with a bang. A smaller deal? Arapoglou and his team could have gone for a smaller Turkish deal than Finansbank’s had they wanted to minimize both the acquisition costs and the associated political risk. It would have been an easier decision, causing a good deal of applause at home, but for the wrong reasons. It would require a small, if any, share capital increase to finance the deal so the «Greekness» of National Bank, measured by the equity stake controlled by state pension funds, would not be in danger. The fact that the smaller Turkish franchise would not have had the same quality management or customer base and would require more time and effort to restructure would likely have been considered trivial. So, it does not surprise anybody that National Bank’s bigger bet in the Turkish market with Finansbank has come under fire. To this extent, Arapoglou is not lucky. Had his predecessors succeeded in buying a 30 or a majority equity stake in Garanti, an even larger Turkish bank, in the late 90s and earlier this decade, he would now be busy managing the bigger entity without having to be grilled in Parliament about the Finansbank deal. The previous top management of National Bank would have gone in his place and criticism would likely be centered on the price paid. But strategic deals should not be judged by the same terms used by institutional investors, who usually have a two-year investment horizon. «In 10 years, nobody will remember the cost of acquiring a majority stake in Finansbank since the latter will be the growth driver for the (National Bank) group,» says a fund manager with great experience in the Turkish market. One may argue that a gradualist expansion approach into Turkey such as EFG Eurobank’s may be more appropriate. After all, it gives one time to learn more about the Turkish banking market as well as being less exposed to the risks of the neighboring country, especially the political risk that comes from the tumultuous relations between the two countries. This is undoubtedly a valid argument but better fits a bank that does not have the urgency of confirming its role as a powerful regional player. «You cannot want to be regional powerhouse with little or no presence in the larger market of your neighborhood,» says a top banker from a private bank and he is obviously right. The big mistake would be to stay out or wait on the sidelines and let the time pass while looking at Turkey’s large current account deficit as a percentage of GDP or watching its political parties fight it out on the Kurdish issue and even the EU negotiation process. Undoubtedly Turkey is an emerging market and all such markets are characterized by a good deal of volatility and high growth prospects. No doubt its traditionally shaky relations with Greece make it an even tougher market for local companies. Nevertheless, it would be a big mistake for all Greek firms with aspirations, whether it is banks, industrial companies or others, to ignore it regardless of Turkey’s gaining special status with the EU or full membership down the road. Turkey is a rather volatile, but quite a big fish to pass over.