* Selling retail business in Turkey a priority -sources
* Turkey a difficult market for foreign banks
* Political worries have hit confidence in Turkish economy
By Asli Kandemir
ISTANBUL, April 30 (Reuters) - HSBC faces a toughtask selling its loss-making retail arm in Turkey, where it hasbeen hamstrung by tough competition and faces a decline in botheconomic growth and investor confidence.
Chief Executive Stuart Gulliver said in February HSBC's fourproblem businesses -- Brazil, Mexico, Turkey and the UnitedStates -- needed to improve or be sold.
The bank has started the process of selling the Turkishretail business, according to four sources with knowledge of thematter.
That may prove hard as HSBC's network of nearly 300 branchesis not enough to provide a new entrant with sufficient scale,yet too costly for smaller local players.
"It will not be an easy sale. Big Turkish banks already havemany branches, so buying HSBC's branches would not make muchsense for them," said one of the sources, an investment banker.
"A newcomer would be more interested in buying its bankinglicence rather than its branches. There isn't much appetite forTurkish banks now, and foreign banks aren't sitting on loads ofcash either."
HSBC declined to comment.
To cut costs and reduce complexity, the London-based lenderis pulling out of countries and businesses that are unprofitableor lack scale. It is also expected to sell its retail arm inBrazil.
It has the 13th largest branch network in Turkey, wellbehind some state-run banks and major private lenders Isbank and Garanti Bank, whose top shareholder isSpain's BBVA.
HSBC's Turkish retail business has $4 billion of assets andcould be sold at around book value, meaning the bank would notsee a gain or loss on the sale, analysts at Citi said.
It is keen to keep its profitable commercial and investmentbanking businesses in Turkey, but could be forced to sell all ofthe units together to draw a buyer, the sources said.
Any foreign interest is likely to come from cash-flushChinese or Qatari banks, said one source.
TOUGH MARKET
Turkey remains a difficult market for foreign banks,particularly in retail lending, where competition is stiff andlocal lenders offer sophisticated services such as biometricATMs and multiple currency accounts.
HSBC's retail business has lost money for the last threeyears, more than doubling losses in 2013 and again in 2014, whenit lost $155 million, hit by regulatory changes capping interestrates on credit cards and overdrafts.
While investment banking profits have remained stable,commercial banking has seen profits drop sharply over the lastthree years. Overall, HSBC lost $64 million in Turkey last year.
Turkish banks' return on equity (ROE) averaged 11.4 percentin 2014 and could fall to 10.4 percent this year, according tothe Turkish banks association. Global emerging market banks average an ROE of around 14 percent accordingto Thomson Reuters data.
Politics have also put investors off.
Faced with flagging growth and looming parliamentaryelections, President Tayyip Erdogan has fulminated against highinterest rates and said those who defend them are traitors.
Investor worries about the independence of the central bankhave sent the lira currency down around 14 percent, making itone of the worst performing emerging market currencies thisyear.
In February regulators took control of Islamic lender BankAsya, whose profits and capital have been eroded in afeud between Erdogan and a U.S.-based cleric whose followersfounded the bank.
The struggle shows the potential for political risk to spillinto the financial system, Standard & Poor's has said.
Despite the difficulties, keeping a presence of some sort inTurkey remains critical for international banks.
"It is important to have a footprint in Turkey therefore anexit seems less likely," the investment banker said. "They wouldlike to remain in corporate and commercial banking." (Additional reporting by Steve Slater and Sinead Cruise inLondon and Ebru Tuncay in Istanbul; Writing by David Dolan;Editing by Keith Weir)
HSBC Holdings (HSBA)