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Turkeys islamic banks consider subordinated sukuk issues

* Islamic banks have issued only two sukuk so far* Fast asset growth has left capital ratios relatively low* Last September's sovereign issue may clear way for banks* Subordinated issues might not be expensive for banks* Would diversify funding beyond deposits, murabahaBy Nevzat Devranoglu and Bernardo VizcainoISTANBUL/SYDNEY, Feb 12 Strong investor demand and a need to improve capital adequacy ratios are causing Turkey's Islamic banks to consider issuing subordinated sukuk, bankers and analysts say. Ibrahim Oguducu, head of the financial institutions business at Bank Asya, the country's largest Islamic bank, said longer-tenor subordinated sukuk would help balance mismatches between the maturities of banks' liabilities and assets, while diversifying their funding sources."A public subordinated sukuk transaction would definitely attract more investor appetite than murabaha," said Oguducu, declining to say whether his bank specifically was considering such an issue. Turkey's four Islamic banks have so far issued only two sukuk; both were from Kuveyt Turk, which is 62 percent owned by Kuwait Finance House and raised a total of $450 million in 2010 and 2011. That is likely to change soon. Bank Asya said in December that it was finalising a 100-150 million lira sukuk issue and also planned a $200-300 million dollar-denominated sukuk in the next two or three months.

Officials at Al Baraka Turk, a unit of Bahraini lender Al Baraka, have been talking about a $200 million sukuk issue for over a year. The Turkish government's landmark issue last September of a $1.5 billion sukuk, which drew massive demand, may be the trigger for such plans finally to go ahead. While subordinated instruments are more expensive for issuers than their secured counterparts, the current appetite for Turkish debt seems strong enough to translate into favourable pricing for the banks, protecting their profit margins in the increasingly competitive banking sector. And with Basel III global banking standards expected to be phased in from this year, some Turkish banks could consider subordinated instruments to raise capital, according to Alex Roussos, counsel at the Norton Rose law firm in Dubai."Current capitalisation levels of certain banks and the desire for innovation would encourage them to consider such a structure," Roussos said.

"Where the underlying credit is solid and the issuer can present a good story, the hike in pricing of a subordinated sukuk will not be as painful. Issuers know they will still be able to get a decent pricing despite the subordinated nature of the instrument."PRICING Turkey's Islamic banks, which describe themselves as "participation banks" because of domestic political sensitivities and to adhere to local law, have in the past obtained their funding mostly from retail deposits and short-term, syndicated murabaha loans. Murabaha is a common cost-plus-profit arrangement in Islamic finance. Subordinated sukuk could give them a welcome alternative to these sources, while classifying the sukuk as Tier 2 capital would help the banks meet the regulator's minimum 12 percent capital adequacy requirement as a proportion of assets.

Although Turkish Tier 2 bonds have in the past priced about 85 basis points higher than comparable Eurobonds, a Tier 2 sukuk could see tighter pricing, a London-based banker estimated."This spread may be a little bit narrower as sukuk investors are of a different style and may accept a narrower spread," he said. In many parts of world, sukuk have been pricing slightly tighter than conventional bonds because of a shortage of supply relative to the size of cash-rich Islamic funds. Turkey's Islamic banks have enjoyed a jump in assets over the last year, but profitability and capital adequacy remain concerns. The banks held a combined 68.9 billion lira ($38.8 billion) of assets in November, or 5.2 percent of the country's banking assets, according to Turkish brokerage IS Investment. This represented 24.7 percent growth from a year earlier, compared to 10.2 percent growth for the overall banking sector. But net income for Islamic banks grew only 10 percent in the same period versus a 37 percent increase for the overall banking sector, the report showed. The capital adequacy ratio (CAR) for the Islamic banks combined stood at 13.68 percent in November, a fall of 0.34 percentage point from a year earlier, data from the regulator showed. The ratio for the overall banking sector was 17.39 percent, up 1.02 percentage point."Participation banks like Al Baraka and Bank Asya have relatively low capital adequacy ratios. Subordinated bonds will boost their CAR and they will have a freer hand in giving out loans," said Duygun Kutucu, senior analyst at brokerage Burgan Securities."I think these (subordinated sukuk) will have a more profound impact on loan growth."Bank Asya's CAR stood at 13.77 percent as of September 2012, while Al Baraka's was at 12.45 percent, according to bank financials. Kuveyt Turk's CAR was 14.91 percent as of June 2012, according to a bank statement; Turkiye Finans, majority-owned by Saudi Arabia's National Commercial Bank, had a CAR of 14.24 percent as of December 2011.

Your money auto insurance loyalty can cost you

(The author is a Reuters contributor. The opinions expressed are his own.)By Mitch LipkaJune 25 When Jonathan G. Stein became unhappy with his long-time car insurance carrier earlier this year, the 41-year-old lawyer from Elk Grove, California switched to a new company. How was he rewarded for his disloyalty after nine years? With savings of about $300 a year and a boost in his under-insured motorist coverage. Despite discounts for long-term customers, studies show that you can get lower premiums on car insurance by shopping around rather than sticking with one company, and the savings can be significant. The Texas Office of Public Insurance Counsel did a study showing that a consumer who has stuck with the same auto insurer for eight years could reduce the premium by 19 percent by switching."It is disappointing to think your loyalty to a company can hurt you," says Carol Lachnit, features editor for automotive website Even when rewarding loyalty with a percentage off, insurers may use a practice called price optimization that considers a number of factors beyond risk, including what pricetag they think you will tolerate."They're sort of measuring how likely you are to resist a price increase to your premium," Lachnit says.

Still, many consumers stick it out. Jonathan Stein, for one, has only had three car insurers in his adult life."I did get a loyalty discount, but each time I switched, it was because I received better coverage for less money," he says. Others take a different view. Linda Carlson has stuck with USAA for more than 10 years because of what she considers exemplary customer service.

The Seattle resident ticked off a series of accidents and other problems over the years, including a crash, and how pleased she was with the way USAA handled them. Her husband has used the company since 1970. Other customers are simply lulled into staying. A recent survey by customer satisfaction measurement company J. D. Power and Associates found that even though auto insurance rates increased by 2.1 percent last year and 2.5 percent in 2013, a relatively small percentage of customers switched carriers. About 39 percent of those surveyed said they did check on other insurers' prices, but just over a quarter of those who price-shopped actually switched.

"You have to look at your own pocketbook and your own budget and decide,"'s Lachnit says. SHOP AROUND Lachnit says it makes sense to shop around every few years. It is important, though, to keep a list of your coverage in front of you to be sure you are comparing apples to apples. Also keep in mind that not every insurer offers the same level of service or enjoys the same reputation. It is worth checking on the complaint history of a particular company through your state's insurance commission, she says. A list is available (this site) through the National Association of Insurance Commissioners. If someone offers you a better rate and you would rather not switch, Jeanne Salvatore, vice president of the Insurance Information Institute, says it will not hurt to go back to your insurer and let them know about the lower quote. Auto insurance it not the same as a lot of industries that routinely haggle with customers, but there is no harm in trying, she says. The only consumers who might not benefit from comparison shopping are those with bad driving records because they will have fewer choices, Salvatore says. She recommends asking for every available discount, whether you are staying or going. These include such things as bundling multiple policies, good driving records, certain vehicle-safety features, paying in a lump sum, being a student with good grades, and belonging to certain membership or affinity groups.

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