Turkey’s new supreme banking supervisory board, the Banking Regulation and Auditing Institution, began operations on September 1, while the financial sector faced increased pressure for consolidation because of declining interest rates, lower profit margins, falling inflation and the ending of universal insurance on bank deposits.
The seven-member institution, which has sweeping powers to shore up financially ailing banks, has pledged to protect all bank deposits and vowed to crush banking fraud.
It can audit all 81 banks in Turkey at any time and recommend the issue or cancellation of bank licences to the cabinet. It can also propose to the government the transfer of ownership of a shaky bank to the Central Bank’s Savings Deposits Insurance Fund (SDIF) or the merger of two or more troubled banks.
It may even close down a bank’s operations with cabinet approval. “Those who are responsible for bank failures won’t go unpunished,” Zekeriya Temizel, president of the institution and former finance minister, warned at a news conference.
Concern about the health of the Turkish banking system heightened last year when the SDIF took over the affairs of six private banks after they failed to meet their obligations to depositors.
The six banks are Egebank, Sümerbank, Yurtbank, Yasarbank, Interbank and Esbank. This brought the number of private banks under the SDIF’s control to eight – the other two are Türk Ticaret Bankasi and Bank Ekspres. Only Türk Ticaret Bankasi recorded a profit in 1999.
The other seven banks’ total losses in 1999 were $4667bn, more than the total income of the remaining 74 banks in Turkey, according to the Banks Association of Turkey. Gazi Erçel, governor of the Central Bank of Turkey, said the government had injected $2.6bn into the eight banks and would spend up to $8bn to keep them afloat.
But the government does not have a clear strategy of what to do with the eight. Some bankers have suggested they be merged into a larger state bank. Others have suggested they be privatised or sold to foreign banks. Isin Çelebi, deputy leader of the Motherland Party, junior member of the coalition government and former economics minister, told reporters: “These banks should be immediately privatised.
Foreign banks should be contacted as potential buyers.” In 1999, the Turkish banking system registered a net loss of $56m as a result of the banks’ losses under the SDIF, although banking assets grew 14 per cent to $133.5bn. Chronic high inflation – it has averaged between 50 per cent and 130 per cent in the past two decades – and high lending rates have taken a severe toll on the banking system, causing a build up of non-performing loans, bankers said.
The Banks Association reported that non-performing loans in the Turkish banking system rose from 7.2 per cent in 1998 to 10.7 per cent in 1999. One-third of the loans of the eight banks were non-performing, it reported.
The banks failed because of the mismanagement of assets and lending to affiliate companies beyond legal limits. Some 70 board members and executives of the eight, including several former cabinet ministers and top politicians, have been charged with fraud. “In the past, obtaining a banking licence has been a convenient way of collecting deposits ... and funneling these funds to group companies, which would have little or no access to these loans elsewhere,” says Ercan Uysal, a bank analyst at Yapi Kredi Yatirim, the brokerage arm of Yapi ve Kredi Bankasi, Turkey’s third biggest bank.
“Recent bank failures did not come out as a surprise at all, as all of these banks were plagued with risky group lending.”
A steep decline in interest rates on government bonds and Treasury bills (T-Bills) and an expected drop in inflation since the International Monetary Fund (IMF) approved a $4bn, three-year standby agreement to Turkey in December 1999 have been rocking Turkish banks.
Interest rates on government paper have fallen from nearly 100 per cent in December to 35 per cent in September 2000. The IMF accord is aimed at pulling Turkey out of its worst economic slump since World War II, beating back inflation to single digits by the year 2002 and rehabilitating the country’s financial sector.
No longer able to invest in government securities for a steady high income, banks are being forced to turn to real banking – lending – as a way of making money. Many are shifting to retail banking, investing in automated teller machines, plastic card payments systems and consumer finance.
Others have established brokerage houses, insurance firms, asset management companies and investment banking units. The government’s elimination of full guarantees on deposits is also likely to cause investors to shift their bank deposits from small and medium-sized banks to the bigger commercial banks, bankers say. Universal deposit insurance was lifted to foster a more competitive and fair banking environment.
The Turkish government introduced full guarantees on bank deposits during the 1994 financial crisis after three banks and eight finance houses failed. Under this scheme, all deposits, with the exception of commercial and off-shore deposits, were covered 100 per cent in case of bankruptcy or insolvency.
Under the new ruling, the government will guarantee up to Tl100bn ($170,000) until the end of 2000 and only Tl50 bn in 2001. In 2002, the insurance scheme will be brought into line with European Union standards, which limit the amount of guarantee to E20,000 ($17,196).
In a report published this summer, HSBC Yatirim Menkul Degerler, the Turkish brokerage arm of HSBC, said: “It will be extremely difficult for small banks to survive with the abolition of the 100 per cent deposit insurance at a time when they can no longer make good returns by investing in government securities.”
Mr Uysal at Yapi Kredi Yatirim estimates that 20-25 per cent ($18bn to $22.5bn) of all bank deposits will shift gradually from weaker banks to more financially sound and bigger commercial banks, hastening the pace of consolidation in the banking sector. Total deposits in Turkish banking stood at $89.4bn at the end of 1999.
He also warns that three or four of Turkey’s 20 biggest banks, which he will not name, could be targets to a run on their deposits and could require the Central Bank to take them over. Other bankers agree.
“There will be a big consolidation in the banking system now that interest rates are down,” says Suzan Sabanci Dinçer, managing director of Akbank, the highest rated bank in Turkey. “In the next seven years, four or five banks will come to control a big share of the market and be able to give widespread retail and corporate banking services. Akbank will be one of these. Ten or 12 niche banks will also exist.”
Mrs Dinçer expects a flurry of mergers and acquisitions in the Turkish banking system, starting in 2001. Foreign banks will increase their presence in the Turkish market by acquiring shares in Turkish banks or establishing their own branch networks, she says. Led by Citibank, HSBC and ABN Amro, several foreign banks are rapidly expanding their branch networks in Turkey and investing heavily in the retail business.
Société Générale and Deutsche Bank were reportedly shopping around for banks in Turkey. At least 10 Turkish banks are holding talks with foreign banks to form partnerships, bankers say.
“We would welcome acquiring Turkish banks or forming strategic alliances with international banks if it adds value to Akbank,” says Mrs. Dinçer.
Too many banks are operating in the banking system and weak banks will be eliminated, she says. Tanju Oguz, president and chief executive officer of Iktisat Bankasi, a medium-sized bank that specialises in foreign trade finance and consumer banking, has a different point of view.
“There may be too many banks in numbers. But the banking system itself is small and has room to grow,” he says. Total assets of Turkey’s banks at the end of 1999 accounted for only 65 per cent of the GNP. In Portugal and Greece, he notes, the assets of the banks were about 130 per cent of the GNP.
In England, the Netherlands and Switzerland, bank assets accounted for 200 per cent of the GNP. “Deutsche Bank alone is five or six times bigger than the entire Turkish banking sector,” says Mr Oguz. “Even two Israeli banks together have more assets than the combined assets of Turkish banks.”
Other bankers share Mr Oguz’s view. Cüneyt Sezgin, deputy general manager of the Ottoman Bank, says: “I don’t believe the Turkish banking system is overbanked. There aren’t that many private Turkish commercial banks when you’ve taken out state and foreign banks and development banks.
The problem is that every bank is seeking out the same customers – the big banks as well as the small. “No niche banks exist. Turkey doesn’t have any regional banks. Different banks offer the same products. Extraordinary competition exists in the banking system.”
