Turkey’s 50 banks posted a total net income of $6.7bn in the first half of 2008, an increase of 8.7% from January to June 2007. Despite a sluggish world economy, the nation continues to thrive, boosted by a new wave of foreign investment, increased industrial output and a strong Turkish lira, the country’s supreme banking authority reported. No Turkish banks took losses in the first half of the year.
Yet the international borrowing costs of Turkish banks have gone up, and foreign funds are not as readily available as they were in the past two years, due to the global liquidity squeeze. Growth in the Turkish economy also appears to be slackening. It grew by 6.6% in real terms in the first quarter of this year, but bankers warned that there would be fewer orders for Turkish exports from the country’s main market, the EU, which is sliding toward recession.
“The picture isn’t all that rosy. There will be a reduction of demand for loans,” says Tayfun Bayazit, president and chief executive officer of Yapi Kredi Bankasi, a large private bank.
“Borrowing costs have risen 30 basis points from Libor plus 0.47% to about Libor plus 0.77% for Turkish banks, but this is a small rise compared with what many Western banks are being forced to digest,” says Tanju Yüksel, assistant general manager of Türkiye Vakiflar Bankasi TAO (Vakifbank), a large state bank. “Foreign banks are seeing that Turkish banks are paying off their debts on time, so they are willing to provide more loans to the Turkish banks.”
Turkey’s banking system has been shored up by the elimination of weak financial institutions and the recapitalisation and strengthening by an influx of foreign investment. Some 40% of the assets of the country’s banking system are now under the control of foreign banks and investors, as a result of a flurry of mergers and acquisitions over the past seven years.
Banking resilence
Higher capital requirements and banking standards set by the Banking Supervision and Regulation Agency (BDDK), Turkey’s supreme banking authority, have made the Turkish banking system more resilient toward economic crises originating abroad, bankers say.
The assets of Turkey’s banks grew 7.9% in the first half of 2008 to $537bn from $498bn at the end of 2007, the BDDK noted in its mid-year report. Bank loans ballooned to $280bn, up 14.6% from the end of last year, and accounted for 52.2% of bank assets at the end of June 2008.
Branch expansion
While many international banks were writing off huge loan losses, scaling back operations and laying off employees because of vulnerability to the US subprime mortgage crisis amid signs of global economic contraction, Turkish banks were expanding, opening new branches, hiring new staff and introducing new products for the growing consumer finance business. The banks were also increasing lending to corporations and to small and medium-sized enterprises to finance growth.
ING Bank, formerly Oyak Bank, announced in July that it would increase its branch network from 352 to 600 and to raise the number of its employees from 6100 to 8600 by 2012 to capture a greater share of the Turkish retail market. The bank also intends to relocate its operational centre from Istanbul to the southern Turkish boom city of Kahramanmaras to cut staff costs and benefit from various government tax incentives.
Yapi ve Kredi Bankasi, owned by a joint venture between Turkey’s Koç Holding and Italy’s UniCredito Group, is carrying out an aggressive growth programme with a plan to open 334 new domestic branches by the end of 2009. It had 676 domestic branches at the end of 2007. The bank introduced more efficient cost controls and sold its non-core assets, including its 70% shares in financially ailing textiles companies Tumteks and Boyasan, to Lehman Brothers of the US.
Modernisation drive
Vakifbank hired international consultant McKinsey & Company and set aside $160m to redesign and modernise the bank between 2004 and 2009 – the first revamping of the bank, which is slated for privatisation, in more than two decades. The bank intends to hire 2700 new employees in the marketing of consumer products. Some $25m is going into the renovation of its information technology system. Vakifbank is also planning to move its headquarters from the national capital Ankara to Istanbul, the financial capital of Turkey.
Akbank, one of Turkey’s largest private banks, has been introducing innovative products in credit cards. In April 2007, it broke new ground with its SMS loan, allowing a large portion of Turkey’s population to make personal loan applications using mobile phones, just by submitting a citizenship number. This came after the bank launched a mobile loan in 2005, giving Akbank customers the opportunity to make quick car and mortgage loan applications, as well as other products.
Target the underbanked
“Our target is the man in the street and the people inhabiting the vast underbanked suburbs of Turkey’s big cities,” says Burak Tansan, executive vice-president for strategy and corporate communications of Akbank. Murat Güllü, division head of corporate communications at Akbank, adds: “Don’t underestimate Turkey. It is the most innovative country in credit cards.”
Akbank has also invested heavily in private banking, soliciting the funds and developing custom-made solutions for high wealth individuals.
“We estimate that Turkey has 50,000 dollar-millionaire families,” says Fikret Onder, executive vice-president of private banking at Akbank. “We hold the largest market share among banks in this segment. Akbank’s private banking department manages assets of $10bn.”
One reason why the Turkish banking system has been largely unaffected by the crisis up to now, bankers say, is that Turkish banks have not been exposed to the US mortgage chaos.
“We’ve learned from our financial crisis in 2001 [the worst recession experienced in Turkey since World War Two] not to take the kind of risks that many international banks took in financing US mortgages,” says Mr Yüksel of Vakifbank.
Domestic mortgages are a relatively new and fast-growing market for Turkish banks. However, banks require customers to pay 30% of the costs of a new home in advance before they can take out a mortgage. This vastly reduces the chances that these loans would become non-performing in troubled times.
In the first six months of 2008, Turkish banks provided $31bn in housing loans, or 11.07% of all bank loans, according to the BDDK. Only $256.6m in housing loans, or 0.83% of mortgages in Turkey, were non-performing in the same period.
Credit card woes
Credit card receivables, however, are more problematic. In the first five months of 2008, some 540,608 credit card owners were in arrears on $1.5bn in card payments, representing 6.18% of all credit card transactions, down from 8.12% in March 2007, according to the Interbank Card Centre. The country has 40 million credit card holders, one of the highest in Europe.
Sertaç Özinal, general manager of the Interbank Card Center, ruled out the possibility of a crisis in credit card receivables in Turkey.
“While the number of credit cards in the banking system is increasing rapidly, the number of problem loans is declining at the same pace,” Mr Özinal told reporters in August.
He noted that the rate of non-performing loans in credit cards in Turkey is much lower than the 10% in Europe, the US and Asia.
“The amount of debt per credit card in the US is about $5500. In Turkey it is only $639. This data shows that the Turkish card payment system is reliant and strong, and does not signal risks of a crisis,” said Mr Özinal.
Economy unscathed
Turkey’s banks have also displayed tenacity because of the strength of the Turkish economy. Driven by rising income levels, a boom in exports and growth in the fast-paced automotive, steel and chemical industries, the Turkish economy has remained relatively unscathed by the turbulence in international money markets.
In the first seven months of 2007, Turkey produced 846,605 motor vehicles, up 30% from the same period in 2007, according to the Automotive Manufacturers’ Association (OSD), a trade group representing the country’s top 18 motor vehicle producers. Turkey manufactured a record 1,132,932 motor vehicles in all of 2007, a 10% increase from 2006 and a more than five-fold rise from 1990. The country produced only 3000 vehicles in 1963 – all farm tractors.
The nation is the sixth biggest motor vehicle manufacturer in Europe and 16th in the world. The OSD has set a target to turn out 2 million vehicles annually. According to the OSD, the industry can employ 600,000 people, three times more than it does today, and earn $60m from exports annually. Turkey earned $19.27bn in 2007 from automotive exports, a jump of 34% from 2006.
The growth of the Turkish economy has not escaped the attention of foreign investors, who keep pouring funds into the country, but at lower levels than in the previous two years.
“Turkey is the viagra of Europe,” says Yilmaz Argüden, chairman of investment bank Rothschild Turkey and consultancy company ARGE. “Europeans are getting higher returns from their investments in Turkey than they are at home, and this is keeping their economies going.”
“Turkey’s young population and fast rising consumerism are whetting the appetites of foreign investors,” adds Mr Bayazit of Yapi ve Kredi Bankasi. “They are impressed by the quality of the country’s banks and the continued political stability of Turkey, anchored by the country’s ties to the EU and the IMF.”
In the first six months of 2008, Turkey attracted $6.68bn, according to the Central Bank of Turkey, the bulk in mergers and acquisitions. Economy minister Mehmet Simsek is predicting that $14bn in foreign investment will enter Turkey in 2008.
In addition to banking and financial services, Turkey’s automotive, energy, health services telecommunications, building materials and real estate development are attracting foreign investment.
Major foreign investments in Turkey in 2008 were:
- The British American Tobacco acquisition of Tekel Sigara, Turkey’s former tobacco monopoly, for $1.72bn through the country’s privatisation programme.
- The BC Partners-led consortium’s acquisition of a majority stake in retailer Migros Türk from Koç Holding for $1.7bn.
- France’s Axa’s purchase of the Turkish Armed Forces Pension Fund’s 50% stake in Axa Oyak Holding for $525m. The acquisition gave Axa complete control over insurance companies Axa Oyak Sigorta and Axa Oyak Hayat Sigorta, two of the biggest in their fields in general and life insurance.
Deloitte Turkey reported some 93 cases of mergers and acquisitions worth $11bn in Turkey in the first six months of 2008. Of these, 57 cases were carried out by foreign investors, worth a total of $7.3bn.
Political stability
Western bankers say that Turkey’s continued ability to attract foreign investment depends on the country’s political stability.
In July, the nation came back from the brink of a political chaos after the Constitutional Court voted not to shut down the ruling pro-business Justice and Development Party (AKP). The public prosecutor had demanded the closure of the AKP and the banning of 70 party officials, including prime minister Recep Tayyip Erdogan and president Abdullah Gul, from politics for five years, asserting that the AKP was pandering to the interests of Islamic fundamentalists and attempting to destroy the nation’s secular order by permitting women to wear Islamic-style headscarves at universities.
The court ruled six-five in favour of banning the AKP, but failed to reach the magic number seven that would have shut down the pro-private enterprise party. The court, however, voted to cut state aid to the party by half ahead of municipal elections in March 2009.
