Turkey is rapidly recovering from the global recession and its 49 banks, riding high from record profits in 2009, are preparing to stoke economic growth. The banks are bolstering loans and planning to expand in the Balkans, the former Soviet Union, the Middle East and north Africa, with new branches and bank acquisitions. However, a proliferation of non-performing loans to consumers and small and medium-sized enterprises (SMEs) in Turkey are forcing the country's banks to be more vigilant in lending at home.
After declining 4.7% in 2009, Turkey's economy is bouncing back, according to the Turkish Statistical Institute. The country's economy grew 6% in the final quarter of 2009 and growth in the first quarter of 2010 is robust. Turkey's three big industries - automotive, textiles and chemical products - hit hard by the crisis, are booming once again, while overall exports in the first three months of the year were up 22.4% to $25.68bn, according to the Turkish Exporters' Assembly, a trade group representing the region's 59 export associations in 23 business sectors.
Exports were up in most categories in the first quarter of 2010, and fell only in steel, tobacco and in some agricultural products. "I won't be surprised if we have double-digit growth in the first quarter of the year," deputy prime minister Ali Babacan told the NTV News Channel.
The resilience of Turkey's economy has encouraged Fitch Ratings in December 2009 to upgrade Turkey's long-term foreign currency issuer default rating, to BB+ from BB-, and Moody's to raise Turkey's government bond rating one notch to Ba2. Both cited the country's financial shock-absorption capacity at a time when the credit ratings of about 35 regions were downgraded. "The ability of the government and the country more generally to regroup when faced with a very significant financial challenge indicates that Turkey has reached a higher level of resilience," Sarah Carlson, an analyst with Moody's in London, wrote in a note on the upgrade.
Crucially, the credit rating upgrades allowed Turkey's major banks to renew syndicated loans in 2010 at lower interest rates than in 2009. In March, for instance, commercial bank Akbank obtained a total $1.2bn syndicated loan - the biggest by a Turkish bank in 2010 - from a group of 55 banks from 21 countries. The loan consisted of €584.5m and $437.5m at Euribor plus 150 basis points (bps) and Libor plus 150bps.
The government also announced on March 10, 2010, that it would be able to finance its growing current account and budget deficits, and roll over its foreign and domestic debts without resorting to International Monetary Fund (IMF) borrowing, effectively ending 18 months of talks.
"We don't need the IMF. We are proceeding with our own resources. We overcame the distressed times of the economic crisis without the fund," says M Rifat Hisarciklioglu, president of the Union of Chambers of Commerce, Industry, Maritime Trade and Commodity Exchanges of Turkey, the nation's biggest business organisation.
In April, the Republic of Turkey issued a €1.5bn 10-year bond - its largest ever deal and the first in euros for three years - in what is being seen as a nimble piece of timing. Led by Credit Suisse, Deutsche Bank, Commerzbank and DZ Bank, the deal was priced at 190 basis points over mid-swaps, coming in flat to the sovereign's dollar yield curve.
Balancing the accounts
In 2009, Turkey had a current account deficit that stood at $13.85bn, which the government was able to bridge with foreign direct investment, privatisation revenues and a big cash inflow of cash. Since the 'asset peace plan', which was introduced in October 2008 and continued until the end of 2009, in which Turks living and working abroad moved their money into the Turkish system, $31.6bn has been raised, says Mehmet Simsek, the country's finance minister. Some of the funds were held domestically and had not previously been registered in the economy.
One unidentified individual brought $6.67bn in cash to Turkey from overseas, making him the richest person in Turkey and one of the world's wealthiest billionaires. Under the plan, the government does not question the source of the funds and leaves them untaxed, as long as they remain in the country's banking system. The Ministry of Finance estimates Turks hold as much as $200bn in cash in banks outside the country - equivalent to 69% of the country's budget for 2010.
In the first two months of 2010 Turkey's current account deficit rose to $5.6bn, suggesting the government might need to extend the asset peace plan for another year to draw more funds from abroad.
More worrying has been the government budget deficit, which spiralled out of control in 2009 due to a fall in tax revenues, a series of temporary fiscal measures introduced to revive consumer spending and an explosion of outlays for public health and social security services. The budget deficit reached $34.84bn in 2009 - nearly six times more than had been predicted.
The administration plugged the gap in public finances by resorting to borrowing and introducing fees on previously free public heath services. The government also began privatising many health services, such as diagnostics, and is examining the possibility of selling more than 900 state and university hospitals to private investors.
Debt lowered
Officials at the Ministry of Finance have projected a more realistic deficit of $33.4bn for 2010. Turkey's foreign debt at the end of 2009 was $271.1bn, or 43.9% of its gross domestic product (GDP) - much lower than most EU countries. About $52bn of the debt is short term and must be repaid within a year, while the remainder is long term - ie, longer than one year. The private sector's foreign debt accounted for $174.1bn of the debt, while the state's foreign debt stood at just $83.45bn.
The foreign cash reserves of the Central Bank of Turkey were $71.28bn as of November 6, 2009 - enough to fund about five months worth of imports. The region's banks also controlled some $121.33bn in foreign currency deposits as of October 30, 2009, the latest date for when full figures are available.
Turkey's domestic debts (state debts to Turkish banks and debts of government agencies to other state agencies) totalled $206.76m at the end of 2009.
Aykut Demiray, deputy chief executive of Isbank
Ziya Akkurt, chief executive officer of Akbank
Growth story
While the economy picks up steam, some businessmen warn that Turkey's industrial output and record export levels of 2008 will not be reached or surpassed before 2011 at the earliest because of lacklustre growth forecast in the EU, its main export market, and Brussels' preoccupation with the sovereign debt problems of member states Greece, Spain and Portugal.
Nevertheless, good news coming out of Turkey has excited foreign investors and shares on the Istanbul Stock Exchange (IMKB), dominated by foreign buyers, are reaching dizzying new heights.
On April 9, 2010, the benchmark IMKB-100 index shot up to a record 59,185 points, as the stock market recouped most of its losses of the past two years and share prices advanced 12% since the beginning of the year. The market value of the companies listed on the bourse stood at $269.4bn, but was still short of the $290bn recorded at the end of 2007.
Declining interest rates allowed Turkish banks to collect deposits at lower rates in 2009 and reap one-time record profits from high-interest-bearing government bonds. "Each month the interest rates on our deposit liabilities fell in 2009," says Aykut Demiray, deputy chief executive of Isbank, Turkey's biggest private commercial bank.
The Central Bank of Turkey lowered overnight lending rates gradually, from 20.25% on October 22, 2008, to 9% on April 12, 2010, to ease the availability of funds for the country's banks during the height of the global economic crisis.
Interest rates on government bonds also dropped to 8.97% as of April 5, 2010, from about 25% in early 2008. Bankers predicted interest rates would remain stable throughout most of 2010.
In 2009, the Turkish banking system posted a record $13.47bn in net income, up from $5.34bn in 2008, according to the Banking Regulation and Supervision Agency (BDDK), the region's banking authority. Total assets of the banking system at the end of 2009 were $556.75bn, or 90% of the nation's GDP of $617.6bn. This reveals the banking system has grown 4.4-fold since the end of 2002, when total bank assets reached a mere $126.7bn.
Bank deposits totalled $344bn in 2009, up from $301bn at the end of 2008. Loans were $262.1bn, up from $243bn at the end of 2008.
But with interest rates down, the country's banks can no longer rely on government securities for profits, as they have done in the past, and will have to return to lending as the main source of returns.
"The situation indicates that in 2010, the propellant of growth of the Turkish banks will be loans," says Ziya Akkurt, chief executive officer of Akbank, a large commercial bank. "A 15% increase in lending is expected in the sector in 2010. We also expect a 16% to 18% growth in deposits."
The banks are focusing on corporate and consumer banking, as well as lending to energy projects, including the construction of hydroelectric dams, wind farms and thermal energy plants, and power and natural gas distribution.
Akbank, Isbank, Garanti Bankasi and the Industrial Development Bank of Turkey are all funding numerous energy projects. "The energy sector has the potential to affect all sectors [of the economy] and we approach this critical sector of the economy with sensitivity," says Mr Akkurt.
Thwarted ambition
Spearheaded by Isbank, several Turkish banks are preparing to expand in the Balkans, the former Soviet Union, the Middle East and north Africa, with new branches and bank acquisitions. Some 20 Turkish banks already have 500 bank representative offices or full banking branches overseas.
"Turkish banks have reached a stage where they can now acquire Greek and Austrian banking investments in the Balkans. The reason is very clear. The [Greek and Austrian] banks neither have the strength to carry out new bank acquisitions in the Balkans nor the funds to operate existing ones," Ersin Ozince, the chief executive officer of Isbank and president of the Banks Association of Turkey, told businessmen during a trip to northern Cyprus in mid-April.
Mr Ozince said Isbank was on the verge of acquiring an unidentified Russian bank, but gave no further details.
Isbank, which has representative offices or branches in major European cities, is also moving to open representative offices in Cairo and Damascus, and will also open a branch in Baku. Its subsidiary in Germany operates 11 branches, serving the country's 3.5 million Turkish citizens. Garanti Bankasi's Amsterdam-based subsidiary Garanti International operates 51 branches in Romania, 21 of which are situated in Bucharest.
Credit Europe Bank, owned by Turkey's Fiba Group, operates 93 branches in Russia, 118 in Romania and 13 in Ukraine. In February the bank acquired a 95% stake in Istanbul-based Millennium Bank from Portugal's BCP Group.
State-owned TC Ziraat Bankasi operates five banks in eight countries, including the Turkic republics of the former Soviet central Asia - Azerbaijan, Kazakhstan, Turkmenistan and Uzbekistan.
However, a growing number of non-performing loans at home - to consumers and SMEs - may thwart the banks' expansion plans. "Non-performing loans are causing a deterioration in the assets of Turkish banks," says Tanju Yüksel, deputy general manager of Vakifbank, a large, partially state-owned bank.
As of April 8, 2010, $14.47bn, or 4.88% of all $282.1bn in Turkish bank loans were non-performing, including 10% of all credit card receivables, says the BDDK. Some 2.6 million credit card accounts out of about 36 million card users are in arrears, according to the Interbank Card Centre. About $12.16bn of the receivables are provisioned against possible loan losses, unfavourably affecting bank profits.
In addition, some 15.3% of all bank loans in Turkey to the textile industry were non-performing as of the end of September 2009 - the highest rate for any industrial category, bankers say.
Although the sector - clothing, textiles, leather products and carpets combined - remains the region's biggest employer, its share in the country's exports has declined steadily over the past seven years, down from about 35% in 2000 to 20% in 2009.
Turkish producers of ready-to-wear clothing have been losing their competitive edge due to a strong Turkish lira against the dollar and the euro, and because low-cost Chinese and Indian products have been flooding into the EU and the US - Turkey's main export markets - since the lifting of global quotas against textiles in 2005.
Many large ready-to-wear and fabric manufacturers have gone out of business or relocated to cheaper countries, such as Egypt and the Palestinian Gaza Strip, to sell their products to the US without quotas and benefit from lower taxes and low energy costs.
The banks last year restructured about 2% of banking sector loans - mostly credit card receivables.
In order to monitor bad debts and better identify likely credit card arrears, the banks have established risk analysis units and founded the Interbank Card Centre.
