BBVA gambles on growth with Turkish move When BBVA, the Spanish banking group, announced a €2bn investment this week to take control of Garanti, a leading Turkish lender, its optimism about the country's banking sector came through loud and clear. "Turkey offers one of the most attractive growth outlooks in the world," said Jaime Saenz de Tejada, chief financial officer, in announcing the transaction, which increases BBVA's stake in Garanti from 25 to just shy of 40 per cent. But one of the key questions is how far the sector can maintain its impressive growth in recent years. On Wednesday, the day the Garanti deal was announced, rating agency Standard & Poor's sent out a rather different message. In a note, it warned that while Turkish banks were resilient and well capitalised, the sector would feel the pain from regulatory measures designed to stop breakneck increases in loans - although this would open the way to more sustainable growth. Banking executives in Turkey have made similar cautionary noises. "With consumer lending down, in particular credit card lending down, some of the props of the profitability of the sector have been removed," said one recently. Part of the reason is the sheer pace of the past growth. According to the Organisation for Economic Cooperation and Development in Europe, Turkish bank assets have jumped from about 50 per cent of gross domestic product in 2003 to more than 100 per cent at the end of last year - even as GDP tripled in nominal dollar terms. During that period, loan growth, which frequently exceeded 40 per cent a year, comfortably outpaced the increase in deposits. The loan-to-deposit ratio hit 110 per cent last year, leaving the sector dependent on external funding for future growth. Turkish authorities have now stepped in to check the sector's expansion, effectively keeping loan growth down to about 15 per cent a year through restrictions on lending, such as credit card limits, as part of efforts to prevent the country's current account deficit from growing out of control. President Recep Tayyip Erdogan, an Islamist-rooted politician who regularly inveighs against high interest rates, has also made stands of his own against banks. Last year, after Ergun Ozen, Garanti's chief executive officer, signalled sympathy for anti-government protests, Mr Erdogan suggested it was time to teach privately owned banks "a lesson," adding: "There are state banks, you know what I mean." He has also spearheaded a campaign against Bank Asya, an Islamic bank founded by supporters of Fethullah Gulen, an ally turned enemy. State institutions have withdrawn deposits from the bank, while trade in its shares has been restricted. Meanwhile, the sector is navigating other risks. Standard & Poor's warned Turkish banks were "vulnerable to a potential downturn in debt and capital markets abroad," noting they had $85bn in debt coming due over the next 12 months. But Can Demir at Renaissance Capital argued he was less worried about the banks" own foreign currency debt than by their corporate clients" exposure. According to the OECD, Turkish corporates" foreign currency liabilities have quadrupled since 2004 to about $170bn. "The banks are extremely knowledgeable about the markets," said Mr Demir. But the corporate FX position is more risky. Setting out the rationale for its acquisition, BBVA hailed the size of the Turkish market, its youthful population and, naturally, its growth potential. The Spanish bank expects Turkey to grow by an average of 4.6 per cent a year until 2023, although the International Monetary Fund, for example, does not foresee the economy growing faster than 4 per cent in the years ahead. "Geographical risk is obviously an issue that is taken into account," Mr Saenz de Tejada acknowledged, before indicating that BBVA was now much more familiar with Turkey's promises and pitfalls than it was ahead of its 2010 purchase of its initial Garanti stake. Since the original transaction we have learnt much better how things are done. Additional reporting by Tobias Buck