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WorldOctober 1 2014

Regulators burst Turkey's consumer credit boom

The Turkish banking sector is riding a wave of expansion thanks to the country's growing population, but regulation curbing consumer lending is hitting revenues hard, leaving banks looking for new avenues of growth.
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Regulators burst Turkey's consumer credit boom

Banking in Turkey has been a profitable business in recent times. Returns on equity (ROE) hitting the high teens – peaking at more than 20% – has been a common occurrence in the past 10 years, and the country has a healthy population growth outlook, a good indicator of continued profitability.

In 2013, Turkey's population stood at 76.67 million, a 1.4% increase on the previous year, according to the Turkish Statistical Institute. The institute forecasts a 9.9% increase on the current population by 2023. Looking further ahead, forecasts suggest that Turkey's population growth will continue until 2050, handing the country's banks a recipe for success.

However, there is a factor weighing on the demand side of the Turkish retail banking equation; the increasing volume of regulation designed to disincentivise lending to consumers.

Consumer clampdown

The first measures designed to curb consumer lending in Turkey were introduced in 2006, and, over the course of the past two years, the Turkish regulator has stepped up the intensity of such macro-prudential measures which, for example, discourage an expansion in credit cards. After a one-month grace period, customers now have to pay a minimum of 40% of the balance on their credit cards – an increase on the previous 20% – and instalments are limited to nine months, whereas previously there was no limit.

“The aim is to make credit card spending less convenient, and that is why credit card volumes are decreasing and why credit card balances are 12% lower in the year to date,” says Atıl Özus, CFO at Akbank, the country’s second largest bank by Tier 1 capital and fourth largest by assets.

The measures introduced by the government are intended to curb consumer lending and instead incentivise banks to lend to commercial, small and medium-sized enterprise (SME), and, especially, export-oriented businesses. One way that the government does this is by assigning higher risk weightings to retail lending – up to 250% – and reducing the risk weighting of lending to exporters to zero. This is part of a bid to see the country’s large current account deficit narrow.

“In the Turkish banking sector we have obviously felt the impact of [both the] moderating of loan growth and declining profitability,” says Ergun Özen, CEO at Garanti Bank. “Moreover, the composition of loan growth has changed in favour of SME and commercial loans, while retail loan growth has decelerated.”

Downwards trend

Results from mid-2014 show that net profits across Turkey's 10 largest banks have broadly fallen by 16.6% year on year, leaving ROE across the 10 lenders at 13.13%. Data collected by the Turkish banking supervisor, Bankacılık Düzenleme ve Denetleme Kurumu (BDDK), shows that ROE for the entire banking sector was down to 14.2% in 2013, compared with the 18.5% averaged in the decade up to 2013.

“If you invest your money in Turkey, you would like a return in Turkish lira [that is] more than inflation [currently at about 9.5%] and you also have to add the risk premium for the country,” says Ömer Aras, CEO at Finansbank. “Therefore, some 13% or 14% of ROE vis-à-vis some other markets looks high but, in adjusted terms, it is not so much, and you can see a significant decline in the multiples of the Turkish banks on the stock exchange.”

He adds that price-to-book ratios were at about two in 2010 and, after the central bank started using monetary policy with reserve requirements and other regulations, it is now down to between 1.1 and 1.2.

BDDK is currently working on a consumer fee regulation draft, which could hit banking profits from fees and commissions, according to Garanti’s Mr Özen. “Albeit not a game changer… [an implementation of the draft would] constitute another challenge for Turkish banks in 2015 and thereafter,” he says.

Survival of the largest?

Should profitability fall to single-digit levels in certain banks, questions could be asked about the sustainability of their operations. This is causing many to look towards expansion.

Denizbank, the country’s ninth largest by Tier 1 capital and eighth largest by assets, was taken over by Russia’s largest bank, Sberbank, in 2012, and is interested in “opportunistic growth”, according to CEO Hakan Ates. “Last year we acquired Citibank’s retail business in Turkey, together with the branches, credit cards, the clients and staff, and we integrated it door to door within four months,” he says. “If there are any [other] opportunities for inorganic growth, we will be interested. In five to 10 years we expect another consolidation in the Turkish banking system among the private banks.”

While some lenders are looking for external growth opportunities, others are only just starting their ventures in the Turkish market. Odea Bank, the Turkish arm of Lebanon’s Bank Audi, was founded in 2012, and it had Tl14.3bn ($2.22bn) of loans and Tl16.8bn of deposits as of the second quarter of 2014.

Japan-based Bank of Tokyo Mitsubishi UFJ recently also entered the Turkish market with its BTMU Turkey operations, which started in November last year. Other newcomers include Industrial and Commercial Bank of China, which agreed to acquire Turkey’s Tekstil Bankasi in April 2014, and Rabobank of the Netherlands, which received its banking license from BDDK in September this year.

“Where there is competition there are better services, better prices and better quality,” says Faik Açıkalın, CEO at Yapı Kredi. “Extra capital is always good for the banking system, the clients and the country. We will be welcoming them, but we will be very tough competitors for them as well. We are ready to compete.”

Yapı Kredi, the fifth largest Turkish bank by Tier 1 capital and assets, is also partly foreign owned. Italy’s UniCredit holds 40.9% of the bank and an equal stake is held by Turkish industrial conglomerate Koç Group.

Meanwhile, at Finansbank, the country’s eighth largest lender by capital and the ninth largest by assets, majority shareholder the National Bank of Greece (NBG) has announced plans to sell a 40% stake in the bank through a secondary share offering by the end of 2015. The sale is part of a restructuring plan of NBG agreed with the European Commission.

“Going forward, the size of a bank, the type of franchise, capital adequacy and liquidity are all very important factors as these will impact growth – but only for the stronger banks,” says Mr Özus, who adds that Akbank, which is majority owned by Turkish conglomerate Sabanci Group, has been preparing for this trend for years.

Top 10 Turkish banks

Finding value

In the hunt for profits, Turkey's banks are targeting either traditional areas of focus, such as agriculture in the case of state-owned Ziraat Bank, or they are making strategic growth choices.

“In Turkey, [it is not] the individuals but the institutions paying the salaries that choose which bank they pay the salaries [into],” says Mr Açıkalın at Yapı. “That is why we are focusing on salary-paying companies [in a bid] to enhance our focus on the payroll business. Once we have the payroll, it is easier to sell more services and products to this client.”

Others, such as Finansbank, are focusing on promoting online-only banking products, prioritising this over opening new branches.

Denizbank is catering for niche sectors, though it is keen to stress that it is not “a niche bank”, according to Mr Ates. It adds additional revenues to its operations from sales of its banking software via its technology affiliate Intertech, which it has already sold to 18 banks in Turkey.

Meanwhile, the country's banks have another demographic-related opportunity. Within the workforce, which is growing by about 900 people per year, women still only account for 32% of the total number of employees. The large upside potential of more women entering the job market creates a whole set of new potential customers.

The European Bank for Reconstruction and Development, the EU and the Turkish government are working together on a support programme for 'women in business' in Turkey, including €300m of credit lines, which was expected to launch on October 22, 2014.

Breaking bad habits

The push to moderate consumer spending is aimed at changing the Turkish population’s behaviour – breaking the habit of using loans and credit cards to pay for everyday items and promoting savings instead.

“Banks are still mainly deposit funded, but up until 2014, when we started seeing a considerable slowdown in the overall pace of lending, there was a negative trend,” says Göksenin Karagöz, associate director financial services for central and eastern Europe, the Middle East and Africa at rating agency Standard & Poor’s. “The pace of credit growth was significantly higher than the pace of deposit growth.”

While deposits have been growing across all but one of the top 10 Turkish banks in the first six months of this year, loan growth still outpaces savings. As of the end of June, the banking sector’s loan-to-deposit ratio was 119%, according to BDDK data.

A change in the Turkish consumer mindset is yet to be seen, according to Mr Özus. “Savings growth is still not at the desired levels, although the government has taken certain measures in the past, such as increasing tax benefits on longer term deposits,” he says. “The government is also contributing 25% to what people are saving under pension plans. It takes some time to reach a higher running rate in savings and a lower running rate in consumption.”

One indicator of the continued reliance on credit cards is the upward trend in the country’s non-performing loan (NPL) ratio for this segment, according to Mr Karagöz. “We also observed an increase in the amount of restructured loans for many players,” he adds.

Cautious stance

Still, the NPL ratio in Turkey is low at 2.78%, and the coverage ratio relatively high at nearly 90%. Turkish consumers are not allowed to borrow in foreign currencies or floating rate products, and need to have 25% equity to receive a mortgage. Moreover, capital ratios are high – the Turkish banking regulator requires banks to have a ratio of 12%, which is higher than the Basel III requirement of 8%.

The regulator’s strict stance is linked to Turkey’s financial crisis in 2001, which was related to a poor macro backdrop, political instability and an extremely weak banking sector.

“Since [the crisis in the Turkish banking sector], we strengthened the regulation and supervision of the banking sector and have introduced macro-prudential measures,” says Mehmet Şimşek, Turkey's finance minister. “Even before the global financial crisis, we were doing regular stress testing, we were requiring banks to have additional capital for additional risks they take, we were asking banks to have additional risk provisioning.”

One eye on corporates

A concern raised by rating agencies such as Standard & Poor's is only indirectly linked to Turkey's banking sector. “Close to 30% of the total loans held on banks’ balance sheets are related to foreign currency debt of the corporate sector – quite a high figure, which is resulting in indirect credit risks for Turkish banks,” says Mr Karagöz. “We are talking about a total open foreign currency position for the private sector that is close to 20% of the gross domestic product [GDP] of the country, increased from about 10% in 2008.”

He adds that a large part of this is naturally hedged, but the exposure means that in times of currency imbalances, banks could fall victim to higher NPLs related to these foreign exchange borrowings.

“Using balance sheet data from 9000 Turkish companies, representing 72% of GDP, we have seen that 80% of companies that have short foreign exchange positions also have export revenues related to the export of services or goods,” says Mr Şimşek. “So there is a natural hedge for a lot of companies, while we think that a big chunk of the 20% without the hedge are SMEs and the positions are their own money.

“But still, it is an issue, we are looking at it, and if we think that this is becoming a risk for macro-financial stability, we will take measures but we are not there yet. In fact, we introduced a piece of legislation a couple of years ago that gives the government the ability to limit expensing interest on foreign loans – but we haven’t used it yet.”

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