Buoyed by an expansion in foreign investment, a strong local currency and an influx of external funds, the assets of the Turkish banking system increased 28.5% to a record high of Tl500bn ($350bn) in 2006, according to the Banking Regulation and Supervision Agency (BDDK), the country’s supreme banking authority.
The BDDK’s special report, published at the end of April, also revealed that Turkey’s banks raked in a record net income of Tl11.5bn in 2006. State-owned TC Ziraat Bankasi, Turkey’s second largest bank, recorded the highest profits among Turkish banks in 2006, posting a net income of Tl2.1bn. All 16 banks listed on the Istanbul Stock Exchange, including the top and middle-tier private and state banks, reported healthy earnings for 2006 (See Table 1).
The developments come as foreign direct investment continues to flow into the nation’s banking and financial system, and consumer banking and financing of small and medium-sized enterprises increasingly become major business lines of the county’s commercial banks. Many of the bigger commercial Turkish banks are also beginning to provide long-term loans to finance development projects, including dams, highways and rail systems – unthinkable a few years ago – and provide credits to finance Turkey’s booming foreign trade.
Contained inflation
In the 1990s, when Turkey was suffering from triple-digit inflation and high interest rates, financing the state’s huge deficits by buying and selling government bonds and Treasury bills was the bread and butter business of most Turkish banks. But annual inflation has been hovering between 7% and 10.5% over the past three years, and interest rates have fallen, compelling the banks to turn to their main business line – lending – to make money.
Turkey has seen phenomenal growth in consumer loans, issuance of credit and debit cards and wide use of cash machines and points-of-sale (POS) terminals over the past five years (See Table 2).
Consumer loans increased nearly
60-fold from $800m in 2001 to $47.8bn in 2006, according to the BDDK. One third of all consumer loans in 2006 went to finance home purchases. This segment of consumer banking – housing finance – is expected to grow after Turkey’s National Assembly finally enacted legislation in February establishing a legalised mortgage system that will allow low and mid-income families to become homeowners.
The Association of Real Estate Investment Companies (GYODER) believes the mortgage market could reach $60bn a year in Turkey, as the country’s banks begin to tap global markets for long-term housing loans.
Debit card goliath
With 32 million credit cards and 55 million debit cards issued, Turkey ranks third in Europe in credit cards after Germany and France and second in debit cards, reports the Interbank Card Center. The nation ranks 10th in the world in total credit card issuance.
Credit cards were first introduced into the Turkish market in the 1960s, but credit card usage did not take off until the 1990s with the full liberalisation of the financial system.
Turkey’s banks expanded cash machine services to 16,646 locations as of January 31 from 4656 machines in 1995.
The growth of POS terminals has been heady in the past 12 years. The number of POS terminals grew to 1.3 million on January 31, up from 300,000 in 2000 and only 25,000 in 1995.
The availability of funds, more consumer loans and increased credit card usage have allowed Turks to be able to afford purchases of durable consumer goods, paying for them in instalments. About 62% of Turkey’s 280,533 car purchases in the first nine months of 2006 were made using consumer loans, according to the Banks Association of Turkey.
Foreign investment
Since Turkey began membership negotiations with the EU in 2005, foreign banks have been buying Turkish banking assets in a mad rush. Foreign investors have also snapped up Turkish insurance, factoring, leasing and brokerage companies, many of which are affiliates of the local banks.
More than a dozen foreign banks and institutions have acquired Turkish banks or shares in Turkish banks and financial institutions in the past two years. The shares of banks listed on the Istanbul Stock Exchange, some of which are now fully or partially foreign owned, have been the best performing equities on the bourse, driving share prices upward.
In 2007, Kazakhstan’s Turan Alem Bank acquired a 34% stake in Sekerbank for $260m. Lebanon’s Bank Med and the Jordan’s Arab Bank, both partly owned by the family of slain former Lebanese prime minister Rafiq Hariri, acquired a 91% stake in MNG Bank from the MNG Group for $160m and renamed it Turkland Bank.
The International Investor Group from Kuwait in March 2007 acquired Adabank, a small bank, from the Savings Deposits Insurance Fund for about $32m, and said it would turn the bank into an Islamic finance house. The group also announced plans to invest $200m in Turkey’s property market.
In March, Merrill Lynch acquired small investment bank Tatbank from the Tatlici family and named it Merrill Lynch Bank. Greece’s EFG Eurobank Ergasias acquired a 70% stake in the small Tekfenbank from Turkey’s Tekfen Holding for $182m in March.
Turkey’s Anadolu Group is awaiting approval from Turkish banking authorities to sell a 50% stake in Alternatifbank to Greece’s Alpha Bank for $204.7m. Meanwhile, Italy’s Intesa Sanpaolo was reportedly seeking to acquire Oyakbank from Turkey’s Armed Forces Pension Fund for $1.5bn, banking officials said, while ABN AMRO was reportedly attempting to buy small-cap Tekstilbank.
The entry of the foreign banks has improved the financial structures of Turkey’s banks, raised their capital adequacy and increased their competitiveness, say bankers.
Mid-sized Türk Ekonomi Bankasi (TEB) reported asset growth of 65% in 2005 and 48% in 2006 after France’s BNP acquired a 42.165% stake in the bank from the Colakoglu Group in February 2005.
“We’ve rapidly expanded in consumer banking and doubled our customer base,” Varol Civil, general manager of TEB, told a news conference earlier this year. “Our consumer loans increased 78% and our deposits are up 113%.”
Many of the foreign banks that have acquired Turkish banks prefer keeping existing managers rather than bringing in their own teams. The National Bank of Greece, which acquired Finansbank in October 2006, has kept the same management team that transformed it from a one-office operation with no major assets in 1997 into the country’s ninth largest bank with assets of $8.15bn in 2006
Expansion horizon
The Turkish banking system still has room to grow, bankers say. This is because total assets of the banking system account for only 87.6% of the country’s gross national product (GNP), while in many EU countries bank assets are higher.
“Turkey is under-banked,” Ersin Özince, president of the Banks Association of Turkey and vice-chairman and chief executive officer of Türkiye Is Bankasi (Isbank), the nation’s biggest bank, said in an interview with The Banker. “Citi or HSBC, which operates in several countries, each have five times greater total assets than the assets of the entire Turkish banking system. Our banking sector is small. We need to grow.” As of April 31, some 50 banks operated in Turkey, down from 81 at the end of 1999, as a result of consolidation.
The state operates six banks, three of which are commercial banks and three development and investment banks. One commercial bank is still under the control of the Savings Deposits Insurance Fund (TMSF), a state banking receivership fund. This is Birlesik Fon Bankasi, formerly known as Bayindirbank. Some 39 banks are privately owned.
Turkey also has four Islamic-orientated participation banks, where interest is shunned in favour of a direct investment in a venture. These institutions, which have cash and reserve requirements like other Turkish banks, were brought under the supervision of the Turkish banking system following the 2001 collapse of the biggest Islamic finance house, Ihlas Finans, and are now subject to the country’s banking laws and regulations.
From 1997 to 2004, the TMSF intervened in the affairs of 23 financially tottering banks, which it took over following the liquidity crunch of November 2000 and the financial crisis of February 2001. Most of these banks have been merged with state banks or shut down. The boards of directors and top executives of some of these banks have been tried and sentenced on charges of fraud and lending to affiliate companies beyond legal limits
As a result of the consolidation in the banking system and elimination of the weaker banks, the number of bank branches fell to 6735 at the end of 2006 from 7691 branches in 1999. The number of bank employees also dropped from 173,988 in 1999 to 143,168 in 2006.
