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Western EuropeApril 30 2015

Turkey's banks defy difficult conditions and continue growing

The Turkish banking sector is in good health, although the country's lower economic growth, political developments at home and abroad, and the continued impact of financial regulation on retail banking are acting as a brake on growth and profits.
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Turkey's banks defy difficult conditions and continue growing

Turkey’s banks are having to cope with a host of economic, regulatory and political challenges that are being thrown at them. These include the regulations introduced in 2013 and 2014 to dampen consumer credit growth, which have seriously dented retail banking profitability.

Yet, there is plenty to be optimistic about. Banks are still benefiting from the country's high economic growth rates that have prevailed in recent years, and gross domestic product (GDP) growth of between 3% and 4% is forecast for 2015. Banks have a large domestic market to tap into. Per capita income is expected to more than double in the next 10 to 15 years. On top of this, Turkish corporations expanding at home and abroad have a growing need for corporate banking services.

The International Monetary Fund (IMF) sums up the situation in a Turkey staff report published a few months ago. It says: “The ratio of non-performing loans [NPLs] to total loans currently stands at 2.8%, although NPLs are slightly higher in recent vintages. Banks were largely able to pass January’s [2014] interest rate increase on to their customers, thus their net interest margin remained at about 2%. Lower credit growth did dent banks’ profitability, bringing return on equity down to 12.5%.

“System-wide capital adequacy remains at more than 16%, well above the regulatory minimum. Moreover, capital is almost entirely Tier 1. Similarly, the banks’ liquidity adequacy ratios show liquid assets cover more than 100% of short-term liabilities, despite conservative assumptions on the amount of deposits ‘at risk of flight’.”

The IMF was particularly complimentary about measures taken by the Turkish authorities to slow consumer credit growth, not only to protect consumers but to reduce the amount the country spends on imports, in an attempt to reduce its current account deficit. This has been the main factor in reducing the profitability of banks, the other factor being lower efficiency, which has led to a worsening of non-interest income.

Corporate banking

Garanti Bank, the third largest lender in Turkey by Tier 1 capital, with $9.4bn at the end of 2013, according to The Banker's Top 1000 World Banks ranking, is optimistic about its prospects for this year, especially in corporate banking. “We envisage slightly higher growth rates in lending and funding in line with economic growth in 2015,” says Ali Fuat Erbil, the bank’s executive vice-president for financial institutions and corporate banking. “In loans composition, Turkish lira commercial loans will come to the foreground once again.

"For corporate banking, the main challenge is severe competition. In the past, a limited number of banks dominated the Turkish corporate banking market, whereas today there is increased competition, with a rising appetite from international banks.”

Another problem is disintermediation of banks through greater use of the bond markets. “Until recently, only blue-chip conglomerates had access to the international debt and capital markets, while today numerous corporate clients are raising bonds or syndications rather than utilising regular loan facilities,” says Mr Erbil. “These developments have lowered spreads throughout the corporate banking segment and forced us to be more selective, choosing transactions that provide the best potential for profitability and cross-selling.”

Shift in focus 

Finansbank, the eighth largest bank in Turkey with Tier 1 capital of $3.3bn, turned in a profit of TL877m ($325m) in 2014, 20% higher than the previous year. This came “despite all the negative conditions”, says general manager Temel Güzeloğlu. Those conditions included relatively high inflation, regulations to curb consumer lending and credit card expansion, lower than projected GDP growth and armed conflict in nearby Iraq, Ukraine and Syria.

Finansbank was founded in 1987, and acquired by the National Bank of Greece in 2006, which now owns 99.81% of its shares. However, it is still very much regarded as a Turkish bank with a strong domestic brand. Inan Demir, manager of the CEO’s office at Finansbank, says that, by 2020, the bank wants to be among the top three in Turkey in its “preferred fields of competition”, which are small and medium-sized enterprises (SMEs) and corporate banking. “These are the areas that the macroeconomic and regulatory environment dictates,” says Mr Demir.

“Until 2012, we were heavily a retail bank – 60% of our loan book was retail customers. That percentage is still large compared with our peers, but it has fallen to 43%. The reason is the change in the regulatory environment. Because of the large current account deficit, policy-makers have been discouraging retail lending in order to slow down imports. A series of regulations were put into effect that ate into the profitability of the retail segment. Finansbank took its cue from those changes, and we are now shifting the loan book composition away from retail to non-retail segments – SMEs and large companies.”

To tap into these customers, the bank increased its branch network by just less than one-third in 2012 and 2013, opening 150 new branches to bring its total to 658. “The objective is to get closer to SMEs and corporate/commercial clients, and we have done that by opening branches in designated industrial zones,” says Mr Demir.

Brakes on growth

Denizbank is the ninth largest bank in Turkey, with Tier 1 capital of $2.6bn. It is owned by Sberbank, Russia’s largest bank, which acquired it from Belgium’s Dexia in 2012. It has 758 branches, 15 subsidiaries, 15,000 staff and 8.2 million customers. Hakan Ates, its CEO, claims it has consistently outperformed its peers in growth and profitability. “Between 2007 and 2014, our asset growth was 406% compared with 243% in the sector,” he says. “Similarly, our average return on equity, at 18.2%, was well above the sector’s 16.2% [average].”

Mr Ates is bullish about the opportunities for banks in Turkey. However, he is also realistic about the downsides. “As a result of the slowdown in the world economy, the effect of Turkey’s macro-prudential measures on consumption, and the problems in our largest export markets – the EU, the Middle East and Russia – the Turkish economy has slowed down,” he says.

On the other hand, businesses and consumers are coping, adds Mr Ates. The NPL ratio in the Turkish banking sector, which rose from 2.7% to 2.9% in 2014, has remained stable since then. NPLs in the project financing sector are close to zero.

“Banks have been working with much higher capital by world standards in Turkey due to the regulations,” says Mr Ates. “Capital adequacy ratios [CAR] are at 16%, much above the legal limit of 12%. The profits of the banks are the biggest supporter of their higher capital levels. Banks are putting back their profits into the capital base and creating more risky assets to provide more loans to the economy.”

However, profitability in the sector has been falling, reducing shareholder returns. “The return on equity of the banking sector, which was 14.2% in 2011, fell to 13.1% in 2013 and to 11.6% in 2014. If the decline in profitability persists, a rapid decline in CAR will be inevitable,” says Mr Ates.

The recent fall in global commodity prices has been an opportunity that the Turkish economy has not yet been able to benefit from, due to the geopolitical situation and the uncertain political environment in the run up to Turkey’s June 2015 general elections. “We hope that after the elections, the political environment will become more predictable and make it easier to focus on the economy,” says Mr Ates.

Development finance

The European Bank for Reconstruction and Development (EBRD), the multi-lateral development bank based in London and owned by more than 60 countries, has elevated the importance of its Istanbul office by creating the new position of managing director for Turkey and central Asia, and basing her in the city. Natalia Khanjenkova took up the position in April 2015. It is the first time an EBRD managing director has been based in Turkey, and the appointment was in response to the growing demand for investments in the region.

Sule Topcu Kilic, the EBRD’s deputy country director for Turkey, explains that, last year, the EBRD invested €1.4bn in Turkey, making it the bank's main recipient, taking over from Russia, which is now subject to international sanctions. Turkey has received €5bn from the EBRD since it started investing there in 2009. The loans, and in some cases equity, have gone into more than 140 projects in infrastructure, energy, manufacturing, agribusiness, industry and finance.

“Following the guidance received from its shareholders in July 2014, the EBRD management has not submitted any new projects in Russia for approvals,” says Ms Kiliic. “Meanwhile, the bank was able to invest more strongly in the other countries it serves. We have considerably stepped up investment in Turkey in response to strong demand. In 2013, we invested €920m in Turkey, stepping up to €1.4bn in 2014, and we plan to invest even more this year. If this trend continues, Turkey will soon become the EBRD’s largest portfolio. It’s a big country with huge potential."

One of the most significant projects the EBRD has been involved in is the Eurasia Tunnel, which will run under the Bosphorus Straits, connecting the western and eastern parts of Istanbul by road at a total cost of $1.24bn. ATAS, a Turkey-South Korea joint-venture construction consortium, started digging in 2012, and the tunnel should be operational by 2017. The EBRD provided a $150m direct loan as part of the $960m financing.

Huseyin Ozhan, a senior banker at EBRD, says: “The deal was done in dollars not euros because the tariff mechanism is in dollars. There will be a $4 toll fee per car, so in order to avoid a currency mis-match between the project’s revenues and the financing, we had to put the whole financing in dollars.”

“Equity makes up 6% of the EBRD’s total Turkey portfolio,” says Ms Kilic. “We made a €125m equity investment in the largest glassware company, Pasabahce, in Turkey last year. Our strategy is to do more equity in Turkey. In three years, it will account for 20% to 25% of our portfolio.”

Challenging the status quo

ING Bank Turkey, a subsidiary of the Amsterdam-based banking group, is the 11th biggest in Turkey, with Tier 1 capital of $1.5bn at the end of 2013. “Our retail strategy is aligned to that of our parent bank, in particular ING Direct,” says Barbaros Uygun, head of retail banking at ING Bank Turkey.

“This means we are technology, mobile and innovation-oriented. We follow a customer-centric, transparent, simple, quick-to-perform and agile banking model, which is a challenging model in the Turkish market. We have about a 3% share of the country’s retail banking market, by deposits and assets. Our aim is to make it 5% by 2020.”

ING regards itself as a challenger bank in Turkey, with a communications strategy that it calls 'new habits in an old village'. “We’re challenging the current models and practices of banking here and introducing an alternative, more customer-centric model,” says Mr Uygun.

Perhaps the best example of this is its 'Orange Account', a savings account that the bank introduced four years ago. It does not require savers to make deposits for fixed terms but allows them to withdraw money overnight, and pays interest daily. “We introduced this type of account to the Turkish market, and although the other banks have followed us, we are the market leaders,” says Mr Uygun.

“Turkey has a population of about 77 million people, every year 1.2 million [of them] turn 18 and about 50% of the population is unbanked or under-banked,” says Mr Uygun. “The current per capita income is about $10,000, and in 10 to 15 years it could be $20,000-plus, so the percentage of the banked population will increase. This shows you the potential.”

Sweet spot

Providing services to large corporations is a relatively recent priority for ING in Turkey. “We are now integrating commercial banking in Turkey into our global commercial banking platform,” says Gerlach Jacobs, head of commercial banking at ING Bank Turkey.

Why is Turkey so attractive? “Europe is our home base but has been showing very limited growth over the past few years," says Mr Jacobs. "But Turkey has been showing very reasonable GDP growth rates, so it is an attractive market for us. I have seen a lot of Turkish corporations become more internationally focused and acquiring overseas companies. For example, Ulker, a Turkish confectionary company, acquired United Biscuits in the UK. That is our sweet spot where we can help corporations in their overseas ambitions.”

A drawback is the low level of savings among the populace, as retail savings are an important part of a bank’s funding mix. “There is a funding gap but it is currently well covered by international funding – in the capital markets with Eurobonds and with syndicated loans,” says Mr Jacobs.

As for the parliamentary elections, Mr Jacobs will be glad when they are over. “We had local and presidential elections last year, and we have the parliamentary elections this year. We’ll see what they will bring. In general, emerging market elections create volatility, but my hope is we will soon be in a more stable environment,” he says.

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