REFILE-UPDATE 2-Profits of Turkey's Islamic Bank Asya hit by political feud

Tue Aug 12, 2014 11:11am EDT

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* Bank Asya deposit base shrinks, lending down

* Profits drop in both Q1 and Q2

* Governments ups pressure, contracts cancelled

By Seda Sezer

ISTANBUL, Aug 12 (Reuters) - Turkish Islamic lender Bank Asya said its second-quarter net profit slumped 81 percent to 10.6 million lira ($4.9 million), as its deposit base shrank and lending wilted under pressure from the government.

The bank has seen its profits and capital base collapse since December when it found itself at the centre of a power struggle between Prime Minister Tayyip Erdogan and his political foe Fethullah Gulen, an Islamic cleric whose sympathisers founded the bank.

Erdogan accuses Gulen, who is based in the United States, of seeking to overthrow him and has pledged as president to continue purging institutions, such as the police and judiciary where Gulen is believed to wield influence, of his supporters.

Bank Asya is one of four Islamic lenders in Turkey.

Three state-run Turkish banks - Ziraat, Vakifbank and Halkbank - have also been looking into setting up Islamic banks over the past year as the secular republic has opened up to Islamic finance to tap a pool of rich investors.

An economy regarded as one of the most progressive and successful in the Muslim world, Turkey seeks to play a bigger role in Islamic finance.

The ruling AK Party, which espouses Islamic values, helped to cement its 12-year rule with a win in local elections in March and Erdogan, who hails from its ranks, was elected president on Sunday.

Bank Asya has been caught in the middle of the wrangling between Erdogan and Gulen. Earlier this year, state-owned companies and institutional depositors loyal to Erdogan withdrew 4 billion lira, or some 20 percent of its total deposits, local media said in January.

Bank Asya's Chief Executive Ahmet Beyaz said then that the lender had weathered mass deposit withdrawals and was not at risk. The government declined to comment at the time.

Bank Asya was not immediately available for comment.

Loans contracted by 11 percent in the second quarter, while deposits shrank 3 percent, the bank said in a statement to the Istanbul stock exchange late on Monday.

Net fees and commissions declined 33 percent to 55.1 million lira, while loans and receivables dropped 28 percent from the end of 2013 to 14.99 billion lira, it said.

Bank Asya shares have been suspended from trading since Aug. 7 after Turkish authorities cancelled key contracts with the bank, including a tax collection deal.

Bank Asya said at the time that the loss of the tax deal would "not have a significant impact" on its activities. The stock exchange has not said when the suspension would be lifted.

CONFUSION OVER SALE

Last week, top government officials appeared to be at odds over a possible state purchase of the bank.

Deputy Prime Minister Ali Babacan said on Wednesday that state-run Ziraat Bank, which is looking to launch its own Islamic banking unit, could buy Bank Asya, but an advisor to Erdogan subsequently denied such a plan.

The two banks have not officially begun talks.

Bank Asya attempted earlier this year to form a strategic partnership with Qatar Islamic Bank (QIB) but the deal never materialised, opening the way for alternative suitors. (1 US dollar = 2.1597 Turkish lira) (Additional reporting by Ceyda Caglayan, Ebru Tuncay; editing by Tom Pfeiffer and Shadia Nasralla)

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