Turkey’s banking sector has come a long way since the dark days of 15 years ago when poor regulation led to a wave of collapses. Now fully Basel-compliant and strictly regulated, the sector is a picture of health and still attracting new entrants and new international investors.
Since arriving in Turkey just four years ago, Lebanon’s Bank Audi has expanded its Odeabank subsidiary to the point where it is Turkey's ninth largest private bank by assets. Earlier this year, Qatar National Bank completed its $3.08bn purchase of Turkey's fifth largest private bank, Finansbank, joining Citigroup, BBVA, BNP Paribas and UniCredit to become the latest overseas institution to take a major stake in Turkey’s banking sector.
Challenges remain, however. Strict regulation of credit cards has hit profits and forced banks to refocus, and Turkey’s well-publicised political woes have led to bank seizures.
The seizure last year of the publicly traded Bank Asya surprised many – although arguably not as much as the failed coup in July this year, after which Asya’s banking activities were suspended amid allegations it had acted as a financial conduit for those behind the coup.
Similar allegations have resulted in the seizure of hundreds of Turkish companies including Boydak Holding and its participation bank Turkiye Finans Katilim Bankasi. While further seizures seem unlikely, many in the industry fear that their customers may yet be implicated in the ongoing investigations.
A market in flux
Limits on consumer finance, falling loan growth and generally tougher market conditions have forced those in Turkey’s financial sector to switch from concentrating on growth to simply protecting margins.
As recently as five years ago, Turkey’s biggest banks were opening as many as 50 branches a year. Nowadays the focus is firmly on branch efficiency, boosting loan-to-branch ratios and even closing branches that do not perform.
Both Garanti and Yapi Kredi have reported no new net openings in 2016, while Is Bankasi, which with more than 1200 branches is Turkey’s largest bank by branch numbers, has reported only 10 openings despite announcing plans for 40 new branches this year. Akbank has gone further, closing more than 100 branches in a major change of corporate strategy.
“With these margins it’s difficult for banks to get a return on equity above the cost of equity. The only input you have 100% control over is costs,” says Can Demir, banking analyst at investment bank Wood & Company. Increased digitalisation of banking operations offers considerable scope for banks to rationalise their branch portfolios, he adds.
Some 59% of Turkey’s 79 million people own a smartphone, meaning that the potential exists to shift many banking operations online, particularly those of the country’s 58 million active credit cards.
Data produced by the Banks Association of Turkey suggests this migration is already under way: the number of active internet banking customers rose 17% to 18.3 million and transaction volume grew 31% to Tl675m ($226.5m) in the year to June; the number of active mobile phone customers rose 67% to 15.2 million over the same period.
Change of focus
While credit cards remain popular in Turkey, a series of measures aimed at reducing consumer debt have greatly limited their profitability. Annual percentage rates on Turkish cards averages about 24% compared with 19% in the UK, for example, despite respective interest rates of about 0% and 11%.
Turkey’s economy as a whole has slowed since the first quarter of 2016, with year-on-year loan growth down from 12.5% in July to 9.2% in August and consumer loan growth falling from 5.3% to 4.5%.
In response, the government has moved to cut mortgage rates in an effort to encourage first-time buyers to enter the housing market and hence benefit the wider economy. “Encouraging mortgage growth boosts the construction sector, which boosts employment levels and triggers growth in other areas as well,” says Mr Demir.
Turkey’s construction sector remains a major engine of gross domestic product growth, and new house sales promote sales of furniture and other goods, further boosting the economy. But with low mortgage rates doing little for their profits, banks are turning to small and medium-sized enterprise (SMEs) loans.
“With the rate cap on credit cards limiting profits, SME loans are the next best area,” says Mr Demir. He adds that with SMEs contributing significantly to economic growth, the asset quality of SME loans is good and they are increasingly important for bank profitability.
Increased availability of collateral from international funders means non-state banks are taking an increasingly important role.
Funding savings
One challenge facing Turkish banks is the country’s historically low level of savings. This is a particular problem given the scarcity of funding sources in Turkey, where lenders rely more heavily on deposits than on the central bank for financing.
With a loan-to-deposit ratio of close to 124%, Turkish banks have been obliged to offer deposit accounts with interest rates over the 8% inflation rate to attract funds. This in turn limits the effectiveness of the central bank’s counter-inflationary measures.
Since July, policy-makers have lowered the rate at which banks can borrow on the overnight market by 50 basis points to 8.5%. They have also lowered reserve requirements, increasing the level of reserves the banks can hold as gold to 35% by adding a 5% tranche for scrapped gold.
While Turkey's private gold holdings are substantial (the country is the fourth biggest gold importer in both Europe and Asia), analysts question whether the increase will have much effect.
They point out that much of the gold held ‘under the mattress’ in Turkey is either gold coin held against an economic meltdown or jewellery, which owners are reluctant to want melted down.
Likely to have a far more significant impact is the plan deputy prime minister Mehmet Şimşek announced in August for an obligatory private pension scheme. A parliamentary bill envisages the automatic enrolment of all wage-earners under the age of 45 from January next year, with contributions to be deducted by employers and the state to contribute an additional 25%. According to Mr Şimşek, the new scheme could bring in additional savings of Tl100bn over the coming decade.
However, analysts caution that while the plan will certainly increase the amount of savings, it is not clear how much will remain in the banking sector and how much will be diverted to other vehicles such as a planned state infrastructure investment fund.
Stake in the future
With local funding limited, Turkish banks are fortunate to have the support of the European Bank of Reconstruction and Development (EBRD) and the International Finance Corporation (IFC), which together have been responsible for investing in strategies promoting the development of Turkey’s economy.
Since entering the country in 2009, the EBRD alone has invested in 199 projects worth a total of just under $8bn, mobilised more than $17bn in additional sources of finance, and supported seven of Turkish banks’ eight securitisation programmes. It is now widening its sphere of activity into a portfolio of equity stakes in Turkish companies and institutions. All this makes Turkey the single biggest recipient of EBRD investment.
“Turkey is a growing, dynamic export-driven market with a young population, receptive to what the bank stands for,” says Noel Edison, EBRD director for financial institutions in charge of Turkey. He adds that the bank focuses on investment in sustainable energy, improving infrastructure, strengthening private sector competitiveness, deepening capital and local currency markets, while promoting regional and youth inclusion and gender equality.
Finding partners
Currently the EBRD is working with 12 Turkish banks including the five biggest private sector banks – Akbank, Yapi Kredi, Isbank, Garanti and TEB – as well as state-owned Vakifbank, investment bank TSKB and Denizbank, Finansbank, Fibabanka, Odeabank and Sekerbank. A further seven non-banking financial institutions are also involved.
This has enabled EBRD to commit $2.85bn to private sector companies via equity debt and capital market instruments, and helped launch Turkey’s first mortgage-covered bond, via Vakifbank.
According to Mr Edison, the main criteria for choosing banks to work with are transparency in ownership and management, strong corporate governance and quality regulation. Through the chosen institutions, the EBRD is able to reach one of its key target groups for financing, SMEs in Turkey’s more remote regions, helping them gain access to capital markets.
“Ninety-eight per cent of our investment is in the private sector, with a focus on building a middle class who want to have a stake in society,” he says, adding that the private sector focus gives the EBRD a platform for dialogue with the government.
This commitment to SMEs has led to the EBRD taking equity stakes in two fast-growing Turkish banks heavily involved in SME lending: Odeabank, a subsidiary of Lebanon’s Bank Audi, and Fibabanka, founded by veteran Turkish banker Husnu Ozyegin.
Last year saw the EBRD take a 10% equity stake in the Istanbul stock exchange (BIST), through which it now also holds a stake in Turkey’s nascent Epias energy exchange.
“It’s a strategic investment, a hub-and-spoke arrangement. We see BIST as a possible regional player,” says Mr Edison, explaining that with a seat on the board the bank will now be able to contribute to the development of the exchange ahead of a proposed initial public offering.
At the same time, he adds, through Epias the EBRD can influence the continued liberalisation of Turkey’s energy markets and promote another of its key aims: increasing energy efficiency and reducing carbon emissions. The EBRD is already the biggest source of funding for Turkey’s fast-growing geothermal power sector.
Ambition pays off
It is one thing to enter a fast-changing banking market such as Turkey’s during its major growth period, when return on equity (ROE) is as high as 45%. But unlike most international banks entering the country, Lebanon’s Bank Audi arrived in 2012 when the financial sector was already on the downward slope and ROE was falling towards its current level of 10%. The bank’s results, however, speak for themselves.
In just four years Audi’s Turkish subsidiary, Odeabank, built up Tl32bn in assets, making it Turkey’s eighth largest bank by deposits and ninth by total assets.
“We said from day one that we wanted to be in the top 10, which we have done. More importantly, we are very close to achieving the business model that we wanted to establish,” says Odeabank CEO Huseyin Ozkaya. “I wouldn’t say we had achieved 100% of our objectives, but we are very close.”
At first, Turkey might seem like an unusual choice for an established Middle Eastern bank such as Audi. Unlike in its south-eastern European neighbours, Turkey’s fast-growing economy is manufacturing- and export-oriented. The bulk of trade goes west to Europe, with which it has long-standing political ties. But Mr Ozkaya says Audi had been considering Turkey for some time, and with good reason.
“A large, dynamic manufacturing economy with strong ties to the Middle East and Europe, a young, well-educated population and a demographically very attractive market. Who wouldn’t be interested?” he asks. Mr Ozkaya adds that the challenge was to find a business model that would give Odeabank an advantage over Turkey’s established high street banks.
Techno-literate
While its competitors were boosting branch efficiency or even closing branches, Odeabank’s approach was to focus on technology, taking advantage of Turkey’s high levels of smartphone and internet usage.
“We are very agile. Our model is based on technological advances and operational and process efficiency,” says Mr Ozkaya. “We can score, approve and process thousands of consumer loan applications in a day.”
The results speak for themselves. From only 50 branches, Odeabank boasts 750,000 loan customers including 330,000 credit card holders, and adds about 2000 customers a day.
The success of this imaginative business model, coupled with parent bank Audi’s sound international reputation, has paid dividends: the EBRD and the IFC have taken equity stakes. “This will open more doors for us, helping us address the SME market,” says Mr Ozkaya, explaining that the bank has taken credit lines from the EBRD and IFC under programmes specifically designed for SME financing.
Turkey’s SME market has grown in importance, and not just because of falling margins in consumer finance. As the most dynamic area of the Turkish economy, SMEs are also increasingly the engine of the country’s economic growth. It is precisely this dynamism and growth that attracted Audi to establish Odeabank.
