By Dr Manish Sinha
Not all banking collapses are alike or lead to extinction. Some are caused by systemic, catastrophic events such as the global financial crisis of 2008, whilst others are caused by idiosyncratic exposure to geopolitical factors. Bank Asya, Turkey’s largest private participation bank, is currently in the midst of the latter and is potentially edging toward disintegration. A 2014 market value decline of 55 percent contemporaneous with a 22 percent gain for the broader Turkish financials index, multiple stock market trading suspensions and significant client withdrawals have reinforced the downward spiral. Can Bank Asya survive a politically motivated onslaught orchestrated by Turkey’s President, Recep Tayyip Erdoğan? What parallels might its fate exhibit with banking casualties of recent years?
Bank Asya was established in October 1996 by sympathizers to the Gülen movement, a multinational religious and social movement founded by Turkish Islamic scholar Fethullah Gülen upon the principles of Hizmet (“the Service”). It was seeded with initial capital of 2 million TRY (Turkish lira). By June 2014 its assets had reached 23,355 million TRY elevating it to the largest privately owned participation bank in Turkey. Unlike conventional banks, participation banks use funds from savers exclusively to finance projects in the real economy under the principles of Sharia Law. According to Ernst & Young, in 2014 there were $2 trillion Sharia-compliant assets worldwide that expanded annually at a rate of 17.6 percent from 2009 to 2013. Whilst comprising just 4.5 percent of Turkey’s financial industry’s assets, its resilience to market downturns in comparison to the more highly leveraged conventional banking model has fuelled an expansion of the sector. A desire to attract capital from the cash-rich but religiously conservative Gulf region coupled with a more conducive regulatory and legislative environment, established by the present administration, has provided further catalyst for growth. Between 2001 and 2009, deposits increased fourteen-fold to 33.6 million TRY.
From 2008 to 2013, Bank Asya’s assets and net revenue grew annually at 28 percent and 12 percent respectively. Its reputation and business were soaring when, in December 2013 and without prior warning, President Erdoğan launched a powerful and concentrated attack on the bank, alleging it was weak and insolvent. This attack was borne not out of concern for its financial health; rather, it was instigated in response to the unveiling of an orchestrated corruption scandal that implicated senior members of his own administration, but which Erdoğan claimed was the work of Gülenists operating within the Turkish civil service attempting to overthrow him; an accusation that Gülen firmly denies. Despite losing almost half its market value during one excruciating week in September 2014 and reporting its first ever quarterly loss in eighteen years of 301 million TRY, Bank Asya’s response has been anything but pusillanimous. Unequivocal yet measured rebuttals highlighting its capital adequacy ratio of 18.3 percent, in excess of both the regulatory minimum and industry average of 15.9 percent, have been repeatedly issued. Despite this, the bank has suffered large-scale withdrawals from a multitude of government-related companies. The bank underwent further ignominy by virtue of trading suspensions from the stock market on at least six separate occasions.
Its precarious position warrants comparison with three now-defunct financial institutions; Bear Stearns, Lehman Brothers and Northern Rock. A five-year period preceding each institution’s demise is split into two phases: firstly, the first four years and, secondly, the final twelve months. During the first phase, Bank Asya witnessed a share price deterioration of 42 percent whereas the failed banks experienced healthy appreciation of between 62 and 128 percent. During the second phase, Bank Asya suffered a 64 percent decline, milder than the 93 percent decline experienced by the others. Bank Asya’s recent haemorrhaging market value does not therefore represent a sudden and sharp reversal (like for the other three) but a continuation of its occasionally erratic five-year decline. The daily fluctuation of each bank’s share price is also insightful. During the first phase, Bank Asya experienced daily volatility of 2.1 percent, similar to the 1.3 to 1.6 percent experienced by the others. However, in their final twelve months the failed institutions experienced a significant volatility increase to between 5.9 and 7.5 percent whereas Bank Asya has experienced a more modest increase to 5.1 percent. An examination of the balance sheet portrays a similarly contrasting account. In the most recent twelve months for which data is publicly available, Bank Asya witnessed a drop in total assets of 0.4 percent (though significantly more at the time of writing) whereas Lehman Brothers, Bear Stearns and Northern Rock experienced an increase in total assets of between 1.1 percent and 8.2 percent. With regard to net revenue, Bank Asya experienced a healthy increase of 20 percent whereas the failed institutions experienced precipitous drops ranging from 40 to 112 percent, which undeniably accelerated their insolvency.
The clearly contrasting share price trends and volatility therein, and changes to total assets and net revenue place Bank Asya into a distinctly different performance division. This is partly because the demise of the three failed institutions was accelerated by their mismanagement of exacerbated leverage levels coupled with the systemic and once-in-a-lifetime failure of the credit markets. Bank Asya, by contrast, employs significantly lower leverage, generates consistent profits but has been subject to idiosyncratic measures: a targeted attack by the government.
According to Süleyman Yaşar, a prominent economist and former bureaucrat, Bank Asya’s collapse is extremely unlikely. In his view, participations banks rarely fail. This, despite what many believe to be President Erdoğan’s ultimate aim, is due to its Islamic operating principles. Profits and losses are shared, it does not have fixed costs in the manner of conventional banks and its investments comprise funded partnerships with companies. Indeed, a recent study by the Cass Business School of the United Kingdom investigated 421 banks from 20 Middle and Far Eastern countries from 1995 to 2010, discovering that Islamic banks are 55 percent less hazardous than conventional banks. Furthermore, they are less interconnected thereby reducing the likelihood of concurrent failures. Ultimately, the solution to Bank Asya’s current predicament ideally lies with President Erdoğan withdrawing his unfounded allegations. Failed takeover bids by Qatar Islamic Bank SAQ and state-owned TC Ziraat Bankasi AS might have strengthened the bank’s position had they materialized. Nonetheless, Bank Asya shareholders can take comfort as it enters “something of a stabilization period” according to Deputy Chief Executive Officer Feyzullah Egriboyun, coupled with board approval to raise 1.125 billion liras in the form of a rights issue by the end of 2014. The present may be dark for Bank Asya but there is light at the end of the tunnel supported, perhaps, by the huge disparity in performance between it and three financial institutions that have collapsed in recent times.