ISTANBUL—Turkey’s banking watchdog placed Asya Katilim Bankasi AS under watch and armed regulators with broad powers over the beleaguered Islamic lender.
The move brings the bank one step closer to state seizure, as capital outflows and a ratings downgrade exacerbate damages from a political fight embroiling the lender, which has fallen from the largest of Turkey’s four Islamic banks in December to third in terms of assets.
Islamic banks operate under the principles of Islamic law or Shariah, which shares profit and loss, while prohibiting the collection and payment of interest. Turkey’s Islamic-rooted and conservative government has repeatedly said that it would like Islamic banks to significantly expand their current share of less than 6% of the $850 billion market. Bank Asya ranks in Turkey’s top 20 of the 50 lenders, with about $9 billion in assets.
The Banking Regulation and Supervision Agency is reviewing the bank and gave authorities the right to replace Bank Asya executives, facilitate a takeover by other financial institutions, find new stakeholders to boost equity capital, and halt domestic and international transactions, a spokesman for the watchdog known as BRSA said. Istanbul-based Bank Asya didn’t respond to requests for comment.
Regulators enacted their measure under Article 70 of Turkey’s banking law, which enables them to take restrictive measures against lenders that fail to fix deteriorating fiscal positions, the BRSA spokesman said. Bank Asya is at risk of being seized by the state’s Savings Deposit Insurance Fund, or TMSF, under Article 71, if the banking watchdog’s current steps don’t help put the lender back on its feet.
“The BRSA is the emergency room, while the TMSF is the morgue,” said an official from the state fund. The official wouldn’t specify whether there were plans to seize the lender, saying that TMSF was monitoring the developments and that the issue had not yet been referred to the fund.
The measures mark the latest twist in a monthslong saga that has seen Bank Asya lose its market-leading position after a political fight erupted mid-December between President Recep Tayyip Erdogan and his former ally Fethullah Gulen, a U.S.-based Turkish cleric with millions of followers back home. Bank Asya, run by people publicly perceived to be Mr. Gulen’s followers, found itself in the crossfire after prosecutors believed to be close to the imam charged then-Prime Minister Erdogan’s allies and cabinet members with corruption.
Mr. Erdogan has called the bribery allegations a “judiciary coup” against his government, and vowed to go after Mr. Gulen’s congregation. Newly appointed prosecutors have dropped the graft charges.
In vowing to go against Mr. Gulen’s supporters, Mr. Erdogan also urged everyone not to support their businesses, helping fuel the capital outflow.
Since then, Bank Asya’s net profit has plummeted by 65%, deposits have slumped 27% and the shares had declined by 40% until Aug. 7, when regulator halted trading of the stock.
Meanwhile, Moody’s Investors Service MCO +1.10% cut Bank Asya’s long-term deposit rating twice from Aug. 22 to Aug. 29, lowering it five steps from Ba2 to Caa1, the fifth-lowest junk grade.
“The downgrade reflects increasing external pressures that may exacerbate the bank’s deposit volatility,” said Moody’s analysts Irakli Pipia and Yves Lemay after their second revision. “Although Bank Asya continues to search for merger opportunities, the prospect for a quick resolution that would stabilize its franchise and financial position is looking less likely.”
Mr. Erdogan’s chief adviser, Yigit Bulut, scuttled on Aug. 6 what analysts saw as Bank Asya’s most likely exit from turmoil: a takeover by Turkey’s largest lender by assets, that is also state-owned, Turkiye Cumhuriyeti Ziraat Bankasi AS.
Hours before Mr. Bulut torpedoed the deal, Deputy Prime Minister Ali Babacan, who is in charge of the economy, had announced the talks between Bank Asya and Ziraat Bank, saying that the government desired a deal between the two lenders.
Ziraat Bank said Aug. 21 it has ended unofficial talks with Bank Asya, saying the acquisition wasn’t in line with its priorities.
Previously, Bank Asya had also entered exclusive talks for a stake sale with Qatar Islamic Bank. But regulators told Bank Asya that they wouldn’t approve the transaction.
Originally published on online.wsj.com