The Turkish Competition Board fined 12 Turkish banks a total of TL 1.1bn (USD 620m) on Friday after the market close following an investigation which began in November 2011. The total fine for the six banks under our coverage is TL 855m (USD 475m), 5.1% of their 2013F consensus net income. This came as a negative surprise for the banks, both in terms of the decision and the magnitude of the fine. 

Decision to fine banks more important than fine amountTurkish banks were accused of agreeing on deposit rates, interest rate increases on credit cards, and commissions and fees by the Competition Board. Even though it is too early to judge, this decision is likely to affect the future competitive environment for Turkish banks, potentially pressurising them both in terms of net interest margins and fee and commission income. 

Akbank, Garanti and Yapi Kredi fined at a higher rateThe competition board fined Akbank, Garanti and Yapi Kredi at 1.5%, Isbank, Halkbank, Vakifbank, Ziraat and Finansbank at 1.0%, Denizbank, HSBC and ING at 0.6%, and TEB at 0.3% of their respective 2011 gross annual income. The total fine for Yapi Kredi and Garanti stands at around 1% of their equity base and over 6% of their 2013F consensus net income. For the remaining four large-cap banks under our coverage, the total equity hit is around 0.7% and the 2013F net income hit is in the range of 3.4-5.3%. 

Higher than expected finesEven though there was not a clear expectation in terms of the total size of the fines, we believe the market was expecting 1-2% of 2013FE net income, at most, while some market participants did not even expect any fines at all. Therefore, we expect a negative reaction from the market. 

Banks likely to appeal the decisionWe think Turkish banks will likely appeal the decision. However, until we see the final decision from the Council of State, the banks are likely to provide provisions for these amounts. There is also a high possibility, in our view, of them getting a discount of at least 25% if they agree to an early settlement with the Competition Board.

Initial reactions

So far, the Turkish Bankers Association has made a statement that the decision was inconsistent, unfair and created a lack of confidence in the sector. On the other hand, Economy Minister Zafer Caglayan said that the Board had done the right thing and it was more than fair on the banks. 
Conclusion

In the coming days, we expect to hear several comments both in favour and against this decision, but what is clear to us is that this is a sign that the Turkish banking sector is likely to face further regulatory challenges in the future. The sector had been the backbone of what has been seen as a strong and resilient economy in the past several years, but at the same time it has been much more profitable than the non-financial sector, and it would not be too wrong to assume that the market might be concerned by the possibility that the authorities think that banks were over earning and in certain aspects in an unfair structure.