MURAT YÜLEK

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MURAT YÜLEK
April 24, 2007, Tuesday

What are the İMKB investors pricing?

With only one IPO so far in 2007 on the İMKB, its investors seem to have shifted their attention from international factors to domestic politics.
The İstanbul Stock Exchange (İMKB) 100-Index last week finished at an all-time high on the back of a mini rally that followed a strengthening conviction that Prime Minister Erdoğan will not be the Justice and Development Party’s (AK Party) candidate for president. Interesting, because in February of this year, Erdoğan forecast the İMKB Index would reach 48,000 (although his forecast did not really materialize in due time).

The standard explanation for the mini rally was that Erdoğan’s backtracking means less political uncertainty (or more certainty that there will not be a political quarrel during the presidential election process). That explanation is logical, given the quite myopic vision of the stock investors, both local or international.

A less myopic or more rational investor mentality would perhaps question “Who, if not Erdoğan?” and “Would that really mean less political friction during and after the election?” An even less myopic investor rationality would calculate the prospects for the Turkish economy of Erdoğan remaining prime minister in the medium run (assuming the AK Party wins the next general elections) against him becoming the president.

If we assume an even deeper investor rationality as above, the increasing index could mean either that the market players expect better Turkish economics under Erdoğan’s leadership or that he may not make a good president.

More banks to launch Initial Public Offerings in the İMKB

In the meantime, more banks are preparing for their IPO: Halkbank and Al Baraka.

The Halkbank IPO is being pitched by the government simply because, while the treasury conditions are better than ever, government finances are not growing quite on par with the performance of previous years. As in the case of the Turk Telecom privatization advance payment by the Oger Group, more privatization revenues are badly needed this year. That is not a good decision, and would remind one of Paul Krugman’s warning against fire sale privatizations.

Halkbank (as well as Ziraat Bank) is largely shielded from political interference since the recapitalization following the 2001 crises. Its credit portfolio is quite sound -- and still generously provisioned. Profitability is increasing rapidly (a 60 percent nominal increase, year on year, in September 2006 -- the latest available financial data), and the management has recently implemented innovative practices such as the first completely online promotion examinations in Turkey.

Nevertheless, the IPO of Halkbank is a good decision as it is going to impose an additional market discipline on this last purely state-owned bank (together with Ziraat Bank). The IPO could be made much earlier (and less in a hurry) if the government did not insist on a block sale of shares for quite a while. The government could perhaps realize better returns under a block sale of shares, but that would have surely instigated a lot of social and political resistance.

The better mood in the İMKB as evidenced by the TAV IPO and the recent (debatable) optimism on Erdoğan’s revealed intention to not run for president makes this a good time for a Halkbank IPO. The market will probably value Halkbank at better multiples than the current ones for Vakifbank (a state bank with similar size with Halkbank whose IPO was launched 2005) because Halkbank has a very long list of small and medium-sized enterprises (SME) clients and because its profit trends are much steeper than those of Vakifbank. That suggests a probable market cap around that of Yapı Kredi (fourth largest public bank in terms of market cap). If that forecast of mine does not hold, the amount of shares to be actually sold should be limited for a better timing (and better value for the state).

A smaller participation bank, Al Baraka, is also preparing for an IPO. A well-managed bank and a long-awaited IPO candidate, Al Baraka probably intends to gain from the rising trend of Asya Bank, the first public participation bank whose shares have more than doubled since its IPO of less than a year ago. That is a good decision, as market discipline (even under myopic investors) will benefit the participation banks as well.


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