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WorldMay 1 2014

Testing times for Turkish banks

The macroeconomic climate is taking its toll on Turkey's banks, with many predicting a difficult year for the industry. Growth avenues still remain, however, in the commercial loans and small and medium-sized enterprise sectors, not to mention the huge potential of tapping the country's large unbanked population.
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Testing times for Turkish banks

The past 10 months have been some of the worst the Turkish economy has faced in years. Once-explosive growth is slowing, inflation is above target, the lira has plummeted against the dollar and foreign investors are steering clear. Meanwhile, concerns about external and internal liabilities – including a high current account deficit and an increasingly indebted population – are growing. The International Monetary Fund labelled Turkey the most vulnerable emerging market in its most recent financial stability report.

The country's financial sector has outpaced the overall economy for some time, but it has not escaped the upheaval and executives are settling in for a tough few months. “[This year] is going to be a difficult year for the banking industry,” admits Carlo Vivaldi, executive director and deputy CEO of local bank Yapi Kredi from his Istanbul office.

Strong headwinds

İnan Demir, chief economist with Finansbank, predicts that it will be a “slow growth year” for Turkey, adding that it is already even slower in loan growth terms than the beginning of 2009, when credit growth stagnated the world over in response to the onset of the global financial crisis. “The headwinds we are facing are pretty strong, we have to admit,” he says.

Others agree. Ratings agency Moody’s said in March that it was conducting a review of its Turkish bank ratings due to deteriorating economic conditions, rising funding costs and political uncertainty, and that a wave of downgrades affecting the country’s biggest banks could follow. The previous month, Standard & Poor’s downgraded its outlook for six of the country’s banks and went on to forecast that the US Federal Reserve’s tapering strategy would likely have a particular effect on Turkey’s financial sector, which together with South Africa was identified as the most vulnerable among seven emerging market economies studied.

Government measures are having an impact too – in particular restrictions on credit cards implemented in 2013 that were designed to limit the amount consumers are able to borrow. “The decision by the Turkish authorities [regarding] the interest rates of credit card loans and overdrafts has significantly impacted the net interest income of all banks since the second half of 2013,” says Jean-Paul Sabet, deputy head of international retail banking with BNP Paribas Group, which owns Türk Ekonomi Bankası (TEB). ”These factors had a strong impact on 2013 banks’ profits: a very good first half and a weaker second half.”

Hande Tunaboylu, Garanti’s head of investor relations, says the bank’s internal forecasts for 2014 reflect this decline and it expects just half of the loan growth it booked last year (15% versus 30%).

Reasons to be hopeful

Commercial loan growth, however, should continue to grow by more than 20%, says Hakan Binbasgil, CEO of Akbank, something that will have positive implications for the sector. “This means that the financial deepening of the Turkish economy continues even in a period of below-potential economic growth, which is, by itself, an encouraging sign for 2014,” he says.

Mr Binbasgil adds that the banking industry may also be able to play a role in helping to alleviate some of the country’s larger macroeconomic issues, in particular the low savings rate. Banks, he says, will continue to develop the capital markets and incentivise private pension plans and the like. “The Turkish financial sector’s innovative use of financial products will help the economy attain a healthier saving-investment balance, which will – in turn – enhance our potential growth rate,” he says.

Mr Vivaldi also remains positive that the sector remains on solid ground. The 50 or so banks in the Turkish banking sector have strong fundamentals, he says. Figures back this up. The industry is well capitalised, with a capital adequacy ratio of 15.8%. Non-performing loan rates, meanwhile are a healthy 2.66%.

This is partly the result, Ms Tunaboylu says, of the country’s Banking Regulation and Supervision Agency (BRSA), which was formed in response to Turkey’s catastrophic financial crisis of 2001, which saw almost one-third of its financial institutions go bankrupt. BRSA now has a team in every bank with widespread access to everything from debt profiles to executive communications. It can apply different risk-weight requirements and has the ability to set capital adequacy ratios and revenue compositions at different levels for different banks and approve or deny dividends.

Mr Demir adds, however, that regulatory pressure is not always helpful and suggests there should perhaps be a little more room for manoeuvre and a counter-cyclical approach by watchdogs. “We owe quite a bit to [BRSA's] regulation and close scrutiny,” he says. “[It is] doing a good job restricting the banking sector and that’s an advantage when times are good, but when times are bad and the sector is struggling in terms of profitability, I think it has to loosen the leash a little bit.”

Gaining momentum

There are still some opportunities for Turkish banks, however. One of these, many think, is the small and medium-sized enterprise (SME) sector. There are about 3 million SMEs in Turkey, according to the country’s Union of Chambers and Commodity Exchanges, and likely many more unregistered, making them by far the most populous part of the business landscape.

Finansbank investor relations manager Şehsuvar Aladag says the risky but vast market could provide one of the few “pockets of growth” available in 2014. “It is likely the next wave of growth will come in the SME segment, and perhaps be even more pronounced in the small business segment. That’s what we, and most of the banking sector are looking into at the moment,” he says.

To capitalise on the strong industry-wide commercial loan growth expected by Mr Binbasgil, Akbank set a target of increasing lending to SMEs by 50% (50,000 customers) this year and launched a credit card with favourable terms aimed directly at owners of SMEs.

TEB meanwhile is focusing particularly on start-up businesses, according to Mr Sabet. It is collaborating with Turkish authorities, universities, venture capitalists and others, as well as providing non-financial services such as training and consultancy as well as dedicated banking services. Within a year, he says, the bank has gained 23,000 start-up customers.

Momentum is added to these efforts via a government drive to deliberately incentivise SME lending at the expense of consumer loans. In 2013, policy-makers cut provisioning ratios on SME lending 50 basis points to 0.5%. At the same time, those for consumer lending were boosted by 300 basis points to 4%.

Targeting the unbanked

There are other potential avenues for growth too. Yavuz Yeter, head of financial institutions and international banking with Ziraat Bankasi, adds that underbanked segments of the population could also be a source of growth for the sector. 

“Some parts of the country are underbanked, which is another opportunity for financial institutions,” he says. “This is an emerging market and we have to look at the products offered to the clients and cross-selling ratios of the bank. It’s clear that in comparison with developed markets, we have ample room to expand. That is an opportunity for Turkish banks to take.” He adds that this is an opportunity that Ziraat is planning to capitalise on. In more than 400 towns the bank is the only available provider.

The banking sector still remains underpenetrated more generally, notes Mr Binbasgil, in terms of fundamental banking products compared with developed markets. Asset and loan penetration is about one-third of the EU average, deposit penetration about half, while mortgage and pension fund penetration are far lower. “All of these factors indicate the high growth potential of the Turkish banking sector,” he says.

Tough competition

Getting a piece of the action is difficult, however, according to Mr Vivaldi, who describes Turkey as the toughest market he has ever worked in. “The banking sector is the most competitive I’ve ever experienced… You mainly see competition on pricing of deposits, but also on the pricing of assets. Mortgage pricing is highly competitive too, as are car loans and short-term loans for companies,” he says.

Garanti’s Ms Tunaboylu says the market structure means that privately owned banks are assaulted on both sides. Typically, she says state banks are quite aggressive in consumer lending as they have access to deposits from state-owned enterprises and the like, which the private sector does not. “The state banks don’t have to pay competitively for those deposits, so it privileges them in terms of lower cost of funding which they’re probably using to provide lower cost lending for consumers,” she says, adding that mid-size and small banks, meanwhile, tend to be aggressive on deposit pricing to meet their liquidity needs.

Mr Vivaldi adds that it is not just competition for customers; the right staff are also hard to come by, particularly when it comes to finding experts or well-equipped technicians or engineers. “Staff turnover is pretty high. It’s easy for an employee to find another job with a much better salary in another bank. Retaining resources is much more difficult than in other markets," he says.

Tech lead

Turkey’s financial sector also has some natural growth advantages, partly due to its inbuilt demographic advantage. The median age is just 29.6, according to the Central Intelligence Agency’s World Factbook and if banks can catch customers young, they will be able to capitalise on that as they grow older, says Ms Tunaboylu. 

To do so, however, requires that Turkish banks compete at the cutting edge. There are 34 million Facebook and 12 million Twitter users in Turkey and it has the highest Twitter penetration rate of any country in the world. Smartphone usage, meanwhile, has quadrupled in the past three years. Part of the reason is that with a younger population, it is more important to leverage technology as a competitive differentiator. There is a very real customer appetite, according to Mr Binbasgil. “Our people are tech-savvy and adapt rapidly to new technologies... Hence there is an inherent growth potential for digital banking,” he says.

Almost two-thirds of Akbank's customers, he adds, complete their banking transaction via its alternative channels. Garanti’s Ms Tunaboylu, meanwhile, says one in six of its 12 million customers use its mobile banking services. The bank also has 36.2% of all financial transaction completed on mobile devices, something she sees as a significant first-mover advantage.

Technology has become a uniquely competitive point of the Turkish banking sector. The country’s banks are implementing the kinds of technology which would be the stuff of most Western CIOs’ dreams: from contactless payments, to mobile wallets, to ATMs allowing customers to pay utility bills, or even speak to tellers via video link.

“In terms of technology, Turkey is probably one of the best practices in all of the European market,” says Mr Vivaldi “Mobile and online services and call centres are all at the cutting edge of technology. We are at that edge both as a bank and as a system. It's all about speed of use. What you have to do is to find a way that makes technology easy to deal with. For example, withdrawing money from an ATM in 30 seconds not two minutes. Or cutting down on the number of passwords in internet banking or opening a current account faster. As soon as you put technology at the service of the customer, it’s positive. Otherwise, it doesn’t create a benefit.” 

Finansbank’s Mr Inan adds that the relatively late start made by the Turkish banking sector, especially in consumer banking, also made it easier to incorporate the latest technologies. “The beginnings of consumer lending here, for example, coincided nicely with the technology boom and we were able to take advantage of that too,” he explains. “If you’re building a consumer business from scratch and have the technology boom at your fingertips, then that helps a lot. This wasn’t a case for the banks in Europe. They had long-standing consumer businesses, so they had to change a lot of the things they were doing at that time.”

Technology is but one of many issues on the radar for Turkish banks in what is shaping up to be a tough year, albeit one shaped mostly by macroeconomic factors beyond their control. There are possible avenues for growth in 2014, however, although taking advantage of them will not be a given. Competition remains tighter than ever and outpacing a slowing economy will not be easy.  

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Read more about:  Digital journeys , Western Europe , Turkey