* Government cancels tax collection, social security deals
* Babacan, PM advisor at odds over possible sale to Ziraat
* Bank Asya shares plunge, then suspended (Adds finance ministry, bank statement, details)
By Seda Sezer
ISTANBUL, Aug 7 (Reuters) - The future of Turkey’s Bank Asya looked dim on Thursday after the authorities cancelled its tax collection and social security payment deals - a sign according to observers the government may be a step closer to winding down the controversial lender.
Bank Asya has seen its profits and capital base collapse since it found itself at the centre of a power struggle between Prime Minister Tayyip Erdogan and his former ally Fethullah Gulen, the Islamic cleric whose sympathisers founded the bank but has since become Erdogan’s foe.
Gulen is now based in the United States but his Cemaat movement is still seen as a threat to Erdogan’s increasingly authoritarian style of government.
State-owned companies and institutional depositors loyal to Erdogan have withdrawn 4 billion lira ($1.8 billion), or some 20 percent of the bank’s total deposits earlier in the year, according to media reports. Bank Asya’s first quarter profit fell 9 percent to around 41 million lira and its deposits fell 24 percent in the same period. It reports second quarter results on Monday.
Shares in the bank tumbled 5.3 percent on Thursday morning and were then suspended after the revenue administration said in a statement that an agreement between the finance ministry and Bank Asya allowing the bank to collect taxes had been cancelled.
A while later, the Social Security Institution said in a statement it had cancelled its contract with the bank, effective Sept. 8.
In response to the loss of the tax deal Bank Asya said it would “not have a significant impact” on its activities, but one analyst took it as a sign that the government was planning to wind down the bank and said it could prompt further deposit outflows from Bank Asya.
“The termination of tax collection protocols between Bank Asya and the finance ministry is a big sign that they are looking to wind down its deposit base,” he said, declining to be quoted by name because of the sensitivity of the issue.
“This is the first solid action that the government took on Bank Asya since mid-December. The government thinks that the bank is controlled by Cemaat and they are against this. We might see further actions in the next days.”
Bank Asya is one of four Islamic lenders in Turkey. It started operating in 1996 and has 272 branches.
Adding to the confusion, top government officials appeared to be at odds over a possible state purchase of the bank.
Deputy Prime Minister Ali Babacan said on Wednesday state-run Ziraat Bank, which is looking to launch its own Islamic banking unit, could buy Bank Asya, but an advisor to Prime Minister Tayyip Erdogan subsequently denied such a plan.
“This buyout is not on the agenda under current financial criteria... If a bank’s 2.8 billion lira worth of receivables are non-performing loans, its out of the question to buy it by giving money... There is no such initiative,” Erdogan’s advisor Yigit Bulut said late on Wednesday.
Babacan on Thursday stood by his comments, saying that he had clearly explained developments regarding Bank Asya a day earlier and there was no new information.
Bank Asya attempted earlier this year to form a strategic partnership with Qatar Islamic Bank (QIB) but sources close to the matter told Reuters last month that QIB and Bank Asya had ended the talks after a disagreement over price.
Though state-owned Ziraat Bank is seen as the most likely partner for Bank Asya but the two banks have not officially begun talks.
Analysts at Oyak Securities said in a note to clients that the to and fro “adds to the uncertainty surrounding the bank” and the “controversial statements from authorities and the PM’s chief advisor regarding Bank Asya might add to the worries regarding economy management after the elections.”
The Prime Minister and his deputy are increasingly at odds ahead of a presidential election on August 10.
Babacan, in charge of the economy and seen by investors as a market-friendly voice in the ruling AK Party, guided the Turkish economy towards unprecedented stability in recent years, whilst trying to tackle long-term imbalances including inflation and a stubborn current account deficit.
Erdogan’s personal preference for a more pro-growth economic policy has, however, given rise to talk of a battle of wills in the top tiers of government that could shift in his favour if, as expected, Babacan leaves politics after the parliamentary elections. (Additional reporting by Dasha Afanesieva, Birsen Altayli and Ebru Tuncay; Editing by Sophie Walker)