The country’s entrepreneurs are increasingly drawing on private bankers’ skills as they seek out new sources of income and ways to pass on wealth to younger family members.
Turkey private banking debate participants
- Gökhan Mendi (GM) is assistant general manager, retail and private banking, at TEB.
- Pierre Ramadier (PR) is head of international retail markets at BNP Paribas Wealth Management.
- Banu Taskin (BT) is private banking group director at TEB.
- Gülcan Ustay (GU) is office head at Fitch Ratings Turkey.
- Murat Üçer (MU) is an adviser at Global Source Partners and a senior lecturer at Koç University.
How fast is Turkey growing economically, and how is that growth transferring into an ever-larger private banking and wealth management market?
GU, Fitch Turkish banks have taken their lessons from the 2001 banking crisis in Turkey. The Turkish banking system including TEB has performed very well since then despite the post-Lehman Brothers financial crisis. I would also say that BNP Paribas made a very wise and far-sighted decision in 2005 to enter the Turkish market, particularly given the rate of economic and material growth since then. There is still room for newcomers in the market but it will be ever more expensive and more competitive to capture market share.
MU, Global Source I would like to offer a few observations on the global economy, which seems like the consensus view to me. The world has a growth crisis at the moment, but this is more a developed world problem than an emerging markets problem. Most future global economic growth will inevitably be in emerging markets, and Turkey in particular is well positioned to be one of the drivers of this broader theme. If you don’t have growth, you don’t have wealth generation. So by implication, the future of wealth accumulation must lie in emerging markets as well. Turkey has four great growth fundamentals working in its favour. First, we have the right demographics, with over 40% of the population younger than 25. Second is geography: Turkey is in a great position straddling east and west, and if any one country is going to rise up economically from this region into the list of advanced nations, it’s going to be Turkey. Third, the country has a highly entrepreneurial business environment. Finally, I would add the overlooked issue of balance sheets, which are strong in Turkey, whether in households, corporates, banks or the public sector. This is not to say that Turkey has no weak spots, but these, like the high current account deficit, seem manageable in a highly liquid and rapidly shifting global economy.
This is one of the world’s great growth economies, which is translating to growth on the ground. How fast is the private banking sector really growing? And what needs to be done to convince a greater percentage of the populace in Turkey to embrace private banking and wealth management services?
BT, TEB Just 1% of the individual deposit holders in Turkey control roughly 50% of all deposits, so this is a highly concentrated market. Moreover, it’s a highly deposit-based market. But as interest rates tumble, clients are looking for returns from different products. We are trying to offer them advice that would differentiate their holdings and diversify their portfolios away from deposits. This will help attract new customers to the private banking market in Turkey.
PR, BNPP When we compare mature countries with emerging markets, what do we see? It’s very simple. An emerging market tends to be full of entrepreneurs investing in their businesses or buying other companies. There are people selling their companies, as they can’t grow fast enough. You have mergers and acquisitions and IPOs. You have people investing and people acting. Then, in Turkey, you have a generation of people who created, 25 or even 35 years ago, their own companies, and now there is in Turkey what I would call a generational issue, meaning that these first-generation entrepreneurs are looking either to sell assets or to transfer them to a new generation. This is a great opportunity for wealth managers as we can help these entrepreneurs actually to think about their wealth: how to restructure their wealth, and how they can use the bank’s skills and facilities to, for instance, access capital to buy a new asset. This is typical of modern Turkey: there are so many deals happening out there, and I believe that is a good sign.
Another big trend among our clients is philanthropy. We have been very active in this field. As early as 2008, we created the BNP Paribas Prize for Individual Philanthropy, celebrating philanthropists’ personal commitments. In the 2011 edition, the prize was won by Turkey’s Koç family.
GM, TEB With interest rates coming down, it’s going to be difficult to make money out of deposits, so we need to develop new, diversified wealth management instruments. Most of our Turkish clients are mainly exposed to time deposits at the moment. So we have to come up with new, innovative products and we are relying on BNP Paribas to help us with that. Turkey is also creating a new class of entrepreneurs that is already worth millions of Turkish lira, despite its companies having been founded only a few years ago. This creates new opportunities for private banking, and we need to find new ways to capture these clients and these new opportunities. Also, the average age of our private banking clients is going to come down. At the moment the average age is 50-plus. This will fall into the 40s and then maybe into the 30s in the coming years, as Turkey is such a young country. Also, the way we are using technology here is unbelievable. There are more Facebook users in Turkey than anywhere else in Europe, so we have to be more active on the digital side: we already offer a daily digital podcast on our all-purpose site for private banking customers. This will be a big differentiating factor for the best private banks in Turkey in the future.
MU, Global Source: We also have to think about the absorptive capacity of the Turkish market. This focus on instrument diversification really has to be pushed forward. It has been on the agenda for many years but I don’t think sufficient advances have been made. We have seen financial deepening and growth in GDP in recent years, but instrument diversification has to be put on the agenda more explicitly. We need to look into technicalities – how is this going to happen, and why hasn’t it happened so far? The more I look at Turkey’s outlook, the more I believe we are going to have more capital inflows, and the whole country should get into the mind-set of absorbing this new inflow. We all grapple with unidentified inflows into Turkey. In the past five years, since the Lehman Brothers crisis, almost $30 billion in capital has flooded into Turkey – this is a striking number. These are basically inflows you cannot identify in the balance of payments accounts, so something is being missed, and I believe a chunk of this is repatriation of money as Turks bring their wealth back from abroad, basically to finance growth. There’s always been this big thing about Turkish wealth abroad, which has always been underestimated. I hear $150 billion, $200 billion – I think that’s a huge exaggeration, but there is plenty of wealth out there and in the post-Lehman world we have seen a lot of that coming back here. So wealth management’s big responsibility is to build financial literacy and to develop instruments and infrastructure to deal with these capital-inflow surges.
GU, Fitch: Turkey is going to be one of the few countries with a positive growth rate in the coming years. We hold a European Senior Fixed Income Investor Survey on a quarterly basis. The respondents are mainly from traditional European asset managers with more than $200 billion in assets under management. The latest review offered us some very telling results. They overwhelmingly favour emerging market corporates and sovereign emerging-market debt. Most importantly, we asked them where they would choose to put their money if they had €1 to invest. The investment of choice, by far, was investment-grade financials, while the least-favoured option was sovereign developed-market debt. This means we can expect to see more investor interest in Turkish banking assets and Turkish Eurobond transactions over the coming years. And when we look at future investments, we expect more to be made in infrastructure. In Istanbul we will build a third bridge across the Bosporus and a third airport, and all of this has to be financed by international sources. Much of this will come from global wealth being invested here, but also by Turkish wealth increasingly flowing back into the country. This latter flow of wealth will be increasingly channelled into local wealth management services. Again, this might create new opportunities in private banking.
Murat, you mentioned the number of Turkish people living abroad and bringing their money back to the country. Do we have any evidence that this is really happening? And is this helping to develop and expand the private banking sector?
MU, Global Source: We cannot know for sure – it’s inevitably a speculative issue. But when you see almost $30 billion in unidentified money entering the country over the past five years, you know that some of this must be repatriation – capital somehow re-entering the country. Over the years there has been a considerable amount of wealth accumulated abroad by Turks. But two things have happened since Lehman. One is that growth has shifted toward developing markets, as I noted earlier. All figures and projections bear this out. So obviously there is a natural tendency for Turks to see things the same way: they are going to believe, as well, that the best place to invest is Turkey. And the other interesting facet here is Turkey emerging as a safe haven compared with the chaos going on out there, with banking sectors in advanced, mature markets still suffering to some extent and Turkish banks looking so solid by comparison. These are important motivations for people and they help explain why Turkey has been successful in dragging in capital. The trend is with us, and it’s going to stay with us. One thing that the wealth management industry has to work on – being at the receiving end of this trend – is to enrich the instruments available to investors and understand the obstacles that stand in the way of portfolio diversification. In short, to help enhance the absorptive capacity of Turkish financial and capital markets.
PR, BNPP: When you have some savings today, the first thing you look for is a safe environment for your money. This means two things: first, that the bank you are going to work with is safe and in good condition. More than ever before, people follow credit ratings: what is said on the financial markets about a bank is important to their reputations. The second point is transparency. People these days are looking for simple financial products. What Lehman has taught us is that even if you invest in non-risky products, at the end of the day you might still lose some money anyway. Today, we have a new focus on product creation and product transparency, and this is being observed very carefully by the regulators and authorities. In many countries we have the Mifid directive – European legislation on everything from new financial products to profiling clients and rating products. For me, this is a very strong move in the industry. People are increasingly looking for safe banks. They look for transparent products, and banks today have an obligation to better analyse client profiles everywhere. In this respect, TEB is doing great things: it is a genuine leader in this way in the Turkish market.
GM, TEB: For sure, security is paramount here. Everyone wants to put their money in safe havens and assets. Turkey’s BRSA (Banking Regulation and Supervision Authority) took a lot of very good measures to create a safe financial environment, with the result that today we have a very good banking system, which is vital for the wellbeing of Turkey’s economy. For many years, customers tended to keep their money outside Turkey, but in recent years they have started to bring that capital back into the country. Another vital factor here is growth. If investors are looking for somewhere to invest and to make profits, Turkey is the right place to come. Turkey is also starting to offer – as we are seeing with TEB and BNP Paribas – better and more complex private banking services, so you don’t necessarily need to go outside Turkey to invest in complex financial instruments anymore.
BT, TEB: Technology is vital to the development of the private banking sector, particularly as private banking grows and spreads in popularity, and the age of the average wealth management customer continues to fall. Most banks don’t invest much in technology, but we do. We have just launched our iPad application for TEB Private clients, which is the first application designed for private banking clients in Turkey. Indeed BNP Paribas gave us an award following its development. We are investing heavily in technology, at both the front end and the back end, particularly in systems that will allow us to send detailed market reports to clients. We are the first private banking outfit in Turkey to do this for our clients. We set up a back-office division focused purely on private banking as well. This is paramount in order to help us deliver key services to clients safely and securely. Client expectations are growing as well, notably as customers return from abroad with greater knowledge about private banking: many of them have their own expectations about what they would like to invest in, and what sort of returns they should expect to see. I also believe adamantly that we need to change our mind-set. I have been in the banking sector for nearly 20 years and we have faced many crises in Turkey over that period, but now we are in a different position. We are in a fast-growing environment in which clients demand more from us, and we need to work much harder than usual to meet those higher demands.
GM, TEB: We can serve all customers’ financial needs. If they want to keep their investment in local domestic products we are analysing the risk profile of customers and we are offering them suitable products. This is the important rule of TEB Private Banking. In Turkey, we have services that increasingly meet their demands. If they want to invest in fine art or vineyards we can help meet their needs.
PR, BNPP: There is another new area that is growing rapidly: wealth planning activities. In many of the world’s more mature countries, we offer wealth planning activities designed to serve the needs of the owner of a family-run company. We help optimize his financial situation, to see whether or not he could diversify his assets or his company, if he has family members who are willing and able to take the company forward. Wealth-planning activities aren’t so well developed in Turkey yet, and we plan to develop and build out our own services here next year. This will help corporate clients and business owners to better structure and integrate all this advice. This is part of our wealth management added-value range of client-focused services.
Let’s look at the new financial products that wealth management customers are increasingly demanding in Turkey. As the market develops, do clients increasingly demand a more diversified and exotic range of services and products from their private banking providers?
BT, TEB: Customers keeping their deposits in foreign exchange tend to continue to demand foreign-currency investment options. We are increasingly offering more fund-based products because the interest rate has come down so dramatically in recent times. So rather than buying a bond directly, we are increasingly offering funds to clients, so long as we believe there are potentially sizeable gains in those funds.
PR, BNPP: The big issue in the past in Turkey was that we had very high interest rates. When you have interest rates up at 11% or 12%, it isn’t that useful to pile on added risk just to promise to boost profits by one or two percentage points, since if you fail to achieve your aims, you can jeopardize all the gains and all the profits you made that year. Take Brazil, which until the recent past at least was in a comparable situation to Turkey. Interest rates in Brazil were also high, so people simply put most of their money into bank deposits – that merely meant that they didn’t need to do much to earn a very nice pay-off. But as interest rates fall, we see banks and their customers unable to maintain that easy profitability, so clients aren’t putting their money into just one vehicle any more. Today, the big issue is that some clients want to come back into more aggressive product areas like the equity markets. But at the same time they don’t want to increase their risk exposure, so we are offering new products such as structured products and protected capital fund products, in order to provide a capital guarantee, and to diversify their holdings. Lower interest rates, as a result, will benefit everyone, by making the market – and banks and products – better and more competitive. And in this respect we can benefit in Turkey from what we at BNP Paribas do in so many countries and what TEB does here in Turkey. We have product specialists working on new structured products that can be intertwined to private banking clients’ existing portfolios and used to diversify their wealth.
GM, TEB: There will be a big shift toward corporate bonds and structured products over the next three to five years. But another vital aspect of wealth management is pension fund reform. The government is pushing this heavily as it seeks to increase the size and clout of the pension fund business. Pension fund reforms will be another important motivating force driving the expansion of private banking in Turkey. In addition to corporate bonds and structured products, we want to be leaders in this area. At the same time, we are pushing pension funds as a vital investment opportunity to our private banking customers. Some of our customers are already starting to invest big amounts of their personal capital in their own pension funds and this will only increase in time. Some bigger clients are putting €1 million or more of their personal wealth into pension funds, guaranteeing their futures and their families’ futures. This is an important shift in long-term wealth generation in Turkey.
BT, TEB: We have plans to launch products that will help our private banking clients invest in the very long term, for their children and their grandchildren. We are rolling out a whole suite of new services in 2013. We are also developing an investment advisory desk designed purely to analyse products and the markets. This is designed to give our relationship managers a daily summary of everything that’s going on around the world, from macroeconomic forecasts to the performance of stocks, bonds, funds, and currencies. We are also spending money on technology that will help us determine which product is suitable for a specific client. It’s so important to get this right, as one type of investment doesn’t suit everyone. Our aim is to find the perfect investment for each individual client.
Do you spend a lot of your time in the development cycle, creating new products for clients?
BT, TEB: We do spend a lot of our time, effort and money building and engineering new products and services. We are constantly finding new ways of analysing clients manually and then integrating that information back into the system, which helps enormously in the long term. From next year, our system will alert us when a specific service is sold to a specific client – again, all of this information is fed back into the system, profiting our clients further in the long run. We are also working externally with BNP Paribas, using its wealth management technology and expertise to deliver the right service to the right client.
PR, BNPP: For me, client profiling is maybe the most important aspect of wealth management. You cannot have wealth management development without having perfect product suitability for clients, and you cannot advance if you’re not able to measure and exactly define the client profile. This is very important. What we are trying to do at TEB and BNP Paribas in Turkey is to benefit from high standards implemented in other countries. There is nothing more important than customer satisfaction, and to reach this level of satisfaction we need to be sure that we are successfully defining the correct profile for the client and focusing the correct products in the direction of each client.
Do TEB and BNP Paribas define a private banking client as being a more high-end client – someone with considerable personal or family reserves – than do other banks in Turkey, some of which appear to place high-wealth customers in the mass affluent segment?
BT, TEB: Around €200,000 is roughly the benchmark these days for a private banking client in Turkey. Below that, you are likely not to be considered a true private banking customer.
GM, TEB: We are looking carefully at segmentation on both banking and private banking. We have a mass group and then an affluent segment that stretches from TL100,000 ($56,000) to TL500,000. That said, if we know that the customer has TL200,000 to TL300,000 in assets, held with us, and if we know he has more assets at other banks in Turkey or outside the country, we can seek to offer him services that will encourage him to invest more of his capital with us.
PR, BNPP: What we try to do is to differentiate clients with around TL400,000 and TL10 million in assets, and what we at BNP Paribas call key clients: individuals or families with more than €25 million in assets held purely at the bank. You wouldn’t service a client with assets of €25 million as you would service a client with €500,000. And besides, each client has different needs. Segmentation is very important, and we are always seeking to better segment and distinguish each, in order to meet their individual needs.
What rules and regulatory changes are taking place right now that will change how the private banking market in Turkey is run and managed?
BT, TEB: After the banking crisis of 2000/01, the role and responsibility of BRSA was redefined, with the aim of ensuring stability and confidence in the financial and banking markets in Turkey. Since then, the market has been tamed, and that’s one of the reasons why we didn’t suffer too much following the Lehman Brothers collapse and the financial crisis. At TEB, we work very much in line with BNP Paribas’ wealth management division. We are always using their expertise, and we are always well prepared in advance of any new regulation likely to be written into legislation.
MU, Global Source: One question that comes to mind here is this: is there any pending capital markets legislation out there that is likely to have implications for the wealth management industry?
GM, TEB: The most important continuing issue is that the government is seeking to compel banks to inform their clients about the actions and decisions we take in terms of new products. We are required to explain new financial products very clearly and carefully to clients: in essence, to educate them. Our aim always is to be sincere and honest with customers, to be open to them, to explain what we are doing, and what they can expect if they decide to invest in something. We need to be very clear with clients at every step of the way. This is the most important issue at present: regulators are penalizing banks if they see any failure on our part to educate the client. TEB is placing a lot of importance on this new development. We are investing heavily in front-office and back-office technology on the operational side to ensure we follow up on everything properly and inform customers on all issues in a timely manner. These new changes are actually all very positive for everyone, including us. Once a customer sees that we are very sincere, that we are honestly seeking to engage with them over financial services, they will become much better educated and much more loyal long-term clients.
We recently launched a new concept called the Family Academy, which is the first of its kind in Turkey. The purpose is to train our customers, to invite them to the branches, where we educate and train them about the benefits of specific financial products. We help them understand why they could or should take out a mortgage or a credit card, even what the tricks are in these products. We explain it all very openly. It’s an accepted practice now, and we are even getting requests from big Turkish companies, which are inviting us to their factories or offices and putting us in a room with their executives and employees, then encouraging them to ask us questions. This is a really important project for us: we launched it only a couple of months ago and it’s the first time a bank has ever done anything like this in Turkey.
PR, BNPP: In a complex economic and financial environment, our mission as wealth manager is to guide our clients. This is what we did a few months ago with the second generation of our biggest clients. We took some of our wealthiest clients’ children, from Asia, Europe and Turkey, and we organized our Next Gen seminar. This involved educating a group of around 30 people aged between 25 and 35 over a period of two days on everything from what a hedge fund is, what private equity is, what corporate finance is, what it takes to launch an IPO. The purpose was not to sell at all, but rather to help the next generation understand better what is going on and how things are done. This sort of initiative is a way for the bank to promote transparency and to help the next generation of private banking customers gain a better understanding of complex situations. We received wonderful feedback from the seminar. I met some of these clients and they were very happy because they said it was the first time a bank had ever educated and trained them without also seeking to sell them something.
What lessons did you learn from that seminar that can be transferred to the Turkish market?
PR, BNPP: I believe that we need to help clients to better understand what financial products best suit their needs. One of the hardest things to do today is to find good investments at the right time. The most important takeaway from those Next Gen seminars is that if you have three or four hours spare, to just talk with someone about hedge funds or private equity, they will see those investments differently in the future. For us, this is a way to increase contact and transparency with our clients, to educate and train them. If we can do this, they are better able to make good decisions. And what’s also important is to create a kind of network between them – allowing private banking clients to contact each other, to bond and ask questions of each other – which also proved useful. It’s all about the long run. When we took a stake in TEB eight years ago, we did it in order to develop relationships with clients in Turkey over the very long run.
BT, TEB: We are doing the same thing for our clients in Turkey. Next week we are taking 200 clients to one of most developed industrial cities of Turkey, Bursa, where we will also start explaining financial concepts and services such as corporate finance, IPOs, hedge funds, and so on, to the next generation of wealthy Turkish clients. It’s very much part of our plans here at TEB.
MU, Global Source: There is good support for what you are doing in academic literature as well – there is proof that financial literacy boosts savings rates. If you just tell people: ‘you can do this differently, with this product, in this way’, that is, nudge them in the right direction, they respond favourably. Turks have suffered from a series of financial crises, policy mistakes and mishaps of the past, so it’s like a therapy thing: you need to keep educating people to convince them. The longer and more you hold their hands, the more they begin to trust you.
PR, BNPP: I meet clients every day and I notice that they will enormously benefit from education and training. The economic and financial environment is moving fast and individuals need to adapt quickly. We help clients decide the right time to invest. For instance, BNP Paribas is more favourable now on equity markets in Europe as we believe some of the worst part of the crisis is now behind us. Nevertheless, we think diversification is key in asset allocation.
Istanbul is being talked of as being a regional banking hub. Can it viably become a regional private banking hub?
GU, Fitch: That’s a difficult question. Turkey clearly wants to become the financial centre of the region. But before that happens, there are many different things to take into consideration. Our local investor base is still very limited. And as we have discussed before, retail customers still tend overwhelmingly to think in the short term. In order to have deeper and more diversified financial markets in Turkey, we have to offer better, more diversified products. In this way, wealth management and private banking can really help deepen the financial markets in Turkey. That’s what the country is missing at present. Of course, we have strict regulations and a very sound banking system, and we need that to become a financial centre. But we also have to have other different products to offer that will attract both local and nonresident investors who are willing to come here to invest in Turkish financial products. Without that happening, it’s hard to say that Turkey is ready to become a regional financial centre or a private banking hub.
MU, Global Source: It’s more about the ease of doing business angle. Ultimately, you can locate a place and construct nice buildings, but reforms to date notwithstanding, Turkey needs really to become a much easier place to do business. We need better infrastructure, better people, and more skills and so on. Our regulatory system and risk structures need to be improved. Turkey is mid-pack in the World Bank’s Doing Business rankings, ranking in the 65 to 70 range out of over 180 countries: basically we need to make doing business in Turkey, and living in Turkey, exceptionally easy. That should be a key goal for the government. Also, we should go beyond comparing ourselves with other emerging markets. We need to aim higher: we should really shoot for better rankings in the advanced-country league, and then I think Turkey can get there in time.
Finally, to come back to the issue of generational change: A generation of high-net-worth Turkish entrepreneurs is now retiring, or looking to pass on their wealth to a new generation. Is this proving to be a seamless process, and does it create new opportunities for the likes of TEB and BNP Paribas, and for the private banking and wealth management industry in general?
PR, BNPP: What we are looking at is entrepreneurs. I think that some of the people who created their companies 15 or 25 years ago will face generational issues in the coming years. This is where we can help. We can lend money to help clients buy other companies; we can leverage activities on the investment banking side when it comes to IPOs or corporate finance. When you look at entrepreneurs, you have all manner of different cases. You have a guy who created his own business from scratch five years ago and sold it recently for millions of euros; or you have the guy who is 65 and is selling his business to his first cousin. Anything can happen. The key for any country is to create entrepreneurial wealth: this raw material is vital for economic growth everywhere. When we talk about development, we are always talking about how many new entrepreneurs there are in a country, how many are investing, how many come from abroad, and so on. This is a good indicator of the health of the country and its economy. When someone creates a big new company, he creates something great for his country, as to get there he had to take risks and get support. One day, he will make a change in his life, and that’s when he will really need us.
GM, TEB: It is essential in private banking to be part of customers’ life stages, to provide the best appropriate solution. We believe that we need to find new ways to help all of our clients down the generations; as long as the economy continues to develop and create new wealth.