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Western EuropeMay 2 2004

Assets expand

Revaluation, consolidation, privatisation, economic revival and access to foreign markets all affected the banking sector in 2003.
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Improvements in Turkey’s economy in the second half of 2003, ending months of uncertainty caused by the war in Iraq, and the continued fight against inflation, coupled with national budgetary discipline, helped to preserve market stability in the country. The expected economic revival allowed the country to achieve a healthier asset-liability structure and to register higher profits and stronger growth in the banking system.

The economic revival bolstered demand for financial services and increased national production and investment. Demand for consumer and institutional loans rose and the foreign trade expanded. The Turkish lira was revalued against foreign currencies. Turkish lira investment instruments also became more attractive. And an influx of capital into the economy prevented the growing current account deficit from turning into a financial problem.

The currency revaluation affected the rates of balance sheet growth in banking system. The high amount of foreign currency held by the banks had a limiting effect on growth and affected their structure. The banking sector accounted for 67% of gross national product in the third quarter of 2003, down from 78% at year end 2002 as a result of a decline in the first half of the year.

Market size

Financial consolidation continued: the number of banks operating in Turkey declined to 50 in 2003 from 81 at the end of 1999 and 54 at the end of 2002. Four banks were closed in 2003: banking authorities cancelled Imar Bankasi’ licence; Fiba Bank merged with Finans Bank; and ING Bank and Credit Suisse Boston Bank liquidated their activities.

Public sector banks that were privatised closed 48 branches last year. The number of public sector bank employees has declined in the past three years by 18,114 to 37,994 as efforts were made to strengthen their financial structures. In the past five years, the number of public sector bank employees has decreased by 34,013. These developments affected the balance of state banks in costs and profitability last year particularly.

The number of employees in the banking system as a whole increased in 2003, however, as a result of growth among the country’s 18 private commercial banks. The number of commercial banks has declined in the past three years but the number of employees has risen by 6233 to 70,613. The increase was due to an increase in the number of staff in the risk management, product development and segmentation departments at bank head offices.

Asset size

Due to the fall in interest rates and lower exchange rates for foreign currencies, the percentage of loans and securities held in the Turkish banking system increased. The total assets in the banking system rose 12.9% in January-November 2003 to E136.6bn. Assets of deposit banks, which held a 95.7% share of banking system assets, reached E130.8bn. State banks held 33.6% of deposit bank assets, while private banks held 56.3%. Banks under the Central Bank’s Saving Deposits Insurance Fund held 3% of deposits and foreign banks held 2.9%. The assets of the two banks under the insurance fund, Bayindirbank and Pamukbank, fell 32.3% in the first nine months of 2003.

The big banks that have found it easier to access funds from foreign markets have increased their share of total assets in the banking system. At the end of September 2003, the top five banks’ assets increased from 58% to 60%. The top 10 banks controlled 83% of all bank assets at the end of September 2003. Although this was a rise, their share of loans declined.

Listed deposit banks

At the end of 2003, 10 deposit banks listed on the Istanbul Stock Exchange – Akbank, Alternatif Bank, Finansbank, Sekerbank, Tekstil Bankasi, Turk Dis Ticaret Bankasi, Turk Ekonomi Bankasi, Garanti Bankasi, Turkiye Is Bankasi and Yapi ve Kredi Bankasi – controlled 32% of assets and 47% of Turkey’s bank branches and employees at the end of 2003. Their total assets rose 17% in 2003 to E69.7bn. The quality of their assets improved as a result of slower growth in non-performing loans (NPLs) following an increase in special funds set aside to cover these.

These banks’ assets have grown in favour of the Turkish lira: following revaluation, lira assets accounted for 52% of their total assets. The total savings deposits of these 10 banks increased 9% due to a rise in lira deposits, while their total equity climbed 38% in 2003. The increase in equity capital was the result of improvements in income. Equity capital to risk-based assets rose from 20% to 24%.

At the end of 2003, total lira sources in total liabilities of these banks rose 12% to 47%. Their foreign currency liabilities are more than E3.4bn higher than those in foreign currency assets. The banks’ operational income in 2003 declined 12% from 2002 to E8.2bn.

Seven of the 10 banks are included in the 100 companies whose shares make up the Istanbul Stock Exchange (IMKB)-100 Index. Their total market value was E13.8bn at the end of 2003 and accounted for 27% of the E49.5bn market value of the exchange.

Loan performance

The revival in economic activity, the decline in interest rates and restructuring of many industrial companies’ debts under the so-called “Istanbul approach” financial bail-out has resulted in the growth of loans and securities in the banking system. In the first nine months of 2003, the amount of deposits turning into loans increased 9% from the same period in 2002 to 48%. Industrial companies received 51% of all banking loans in the period January-September 2003, while 30% went to services. NPLs from both sectors in the banking system accounted for 9% of total loans. The biggest recipient of bank loans in Turkey in the first three quarters of 2003 was the textiles industry with 11.5% of all credit. Wholesale commerce, retail trade and the processed food industries followed behind.

At the end of September 2003, deposit banks controlled 92.6% of all loans. Private commercial banks provided 70% of all loans in the sector, followed by state banks with 17.1%. Foreign banks increased their loan volume 3% in 2003. Turkish lira loans of foreign banks, which have traditionally approached lending in the currency with caution, rose 22%, indicating that their inclination to lend in lira has increased. The top five banks’ share of loans decreased by 1% to 54% while those of the top 10 increased 1% to 78%.

In the first three quarters of 2003, gross NPLs fell 13% and their share in assets dropped one percentage point to 4%. The banks’ decision to agree to postpone the repayment more than 200 companies’ debts, after the firms were severely affected by the February 2001 economic crisis, have also helped to reduce NPLs (loans under follow-up) in the banking system.

Total gross NPLs in the banking system at the end of September 2003 fell four percentage points to 14.8% of all loans. The biggest drop in NPLs came in the private commercial banking: 7.9% of all loans, down from 26.8% at year-end 2001 and 9.1% at the end of 2002. About 42% of state deposit banks’ loans were non-performing at the end of September 2003, down 6.6% from year-end 2002. Bank provisions for loans under follow-up also increased to 77.5% from 64.2% at year-end 2002.

Turkish banks gave special attention to consumer loans last year. Export loans, export guaranteed investment credits and business operational loans, which together made up the largest segment of banking loans, declined 2%. The most striking development took place in consumer loans and in credit cards, as economic activity picked up, interest rates dropped and spending rose. The banks encouraged credit card use: consumer loans in the banking system rose 7% to 23% of all loans.

While bank loans and the securities portfolio grew, total liquid assets declined. The securities portfolio rose 3% to 43% of assets, due to the strength of the Turkish lira, but the composition of the securities changed. The share of securities purchased for trading ballooned 33% while securities held until the maturity dates declined 2%. About 96.3% of the banking securities portfolio is composed of state debt paper.

Liquid assets as a share of total banking assets declined 3.6% to 9.9% from year-end 2002. This was because banks improved their liquidity management, increased their profitability as values of foreign exchange declined and they needed to transfer funds from other banks, and money markets fell as the Central Bank maintained sufficient liquidity.

Changing liabilities

The structure of liabilities of the Turkish banking system underwent an important change in 2003. Deposits in the system declined while funds from repurchasing agreements (repos) increased in liabilities due to the decline in value of foreign currencies against the lira. Due to the rise in liquidity, the banking system and the decline in debts to money markets and other banks, debts to money markets and banks in the consolidated liabilities fell. The percentage of equity capital in bank liabilities also rose as a result of the effects of banks raising their equity capital within the year and having strong profit indicators.

At the end of September 2003, 88% of lira deposits were short-term with maturities of less than three months. The short-term based structure of the Turkish banking system makes the average maturities of liabilities sensitive to interest rate fluctuations. For this reason, interest rate falls have favourable effects on the banking system, while rising interest rates affect it adversely.

Deposits continued to be the main source of funding for the banking system, reaching E90.6bn at the end of September 2003. In the first nine months of the year, total deposits increased 3%. Lira deposits rose 24% while foreign currency deposits fell 12%. As a result, deposits within total liabilities shrank by 2% to 65%. Lira deposits grew 5% as a proportion of total liabilities to reach 33%, while the share of foreign currency fell 7% to 32%. The top five banks raised their share of total deposits in the first nine months of 2003 to 63% from 61% at the end of 2002. The top 10 banks, which controlled 88% of total deposits, expanded their share in total deposits by 2% in the same period.

While state banks’ share of deposits has been declining in recent years, they controlled 38.4% in the first nine months of 2003. Turkish lira sources in deposits rose 9% to 51% in 2003. Lira deposits rose 4.6% as a proportion of total liabilities to 32.8%. State banks played a key role in this development. In foreign exchange accounts, euro accounts rose 10% to 33% while US dollar accounts sank 7% to 62%, due to the strength of the euro against the dollar.

Non-deposit sources of funding rose 3% in 2003 and accounted for 12% of sources of liabilities. The return of confidence in Turkey’s economy enabled domestic banks to obtain syndicated loans from international money markets once again. Loans from foreign banks, international organisations and funds, which make up an important segment of the non-deposit funds, displayed a striking increase at the end of September 2003 from the end of 2002.

Capital

Capital in the Turkish banking system rose 27% in 2003 to E20.1bn. All banking groups registered increases in equity capital. Money held in reserve and increases in paid-in capital were the determining factors in the rise. The capital of non-deposit banks rose 30% to E2.4bn. Capital in liabilities rose 2% to 14% in the banking system through September 2003, and free capital (equity capital minus subsidiaries and participations and minus fixed capital) total liabilities rose from 2% to 5.5%.

These developments have had favourable effects on profitability. The net income of the banking sector at the end of September 2003 stood at E2.7bn. Return on assets (ROA) rose to 2.2%, the highest level in three years. The ROA for private commercial banks rose 0.5% to 2.1%. The return on capital recorded a similar performance: that of deposit banks increased in the past three years to reach 14.6%.

Income

In the first nine months of 2003, banking sector interest income stood at E16.4bn while interest expenses were E12bn. Commercial income (net interest income minus net banking and commission income and minus dividend income) for the same period was E2.9bn.

Factors that contributed to the rise in commercial income were the favourable developments in the economy, capital market transactions and the revaluation of the lira against foreign currencies, which led to losses on foreign exchange transactions being turned into profits, and the high increase in the rediscounted items of assets. Operational income in the period January-September 2003 remained the same as at year-end 2002. A fall in operational expenses also contributed to the commercial income level.

Off balance-sheet

The increase in loan and credit card limits, and the banks focus on guarantees for letters of credit and rise in foreign exchange futures transactions were reflected in off-balance sheet transactions in 2003. In the first nine months of the year, off-balance sheet transactions rose 30% to E73.9bn, deposits for safekeeping and collateral held by the banks rose 32% to E112.2bn. Thus non-cash credits rose 30% to E186.1bn.

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