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Western EuropeOctober 4 2009

Lessons from the past

Turkish banks, cushioned by regulations implemented in the wake of the country's financial crisis of 2001, have been largely sheltered from the recent global crisis and the majority of those listed in The Banker's 2009 rankings posted double-digit profit on capital. Writer Geraldine Lambe
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As much of the rest of the world's financial system was being tested throughout the past year, Turkey's banks performed well and proved sheltered from the financial crisis. They are highly capitalised and mostly profitable - and of all the Turkish banks in The Banker's Top 1000 World Banks ranking, not one has made a loss in the past year.

Much of their success derives from the fact that the Turkish banking system took its medicine in 2001, when the country went through one of the worst financial and economic crises in its history. In the wake of the crisis, Turkey took bold steps to create a strong and resilient banking system.

The central bank was made independent and a new regulator, the Banking Regulation and Supervision Agency (BDDK), was created. More than 20 of the country's weak banks were taken over, merged, privatised or shut down by the government.

Regulatory tightening

The regulatory formula put together after the 2001 crisis has proved eerily prescient about the current crisis. Since Turkey's experience in 2001, when scores of senior bank executives from collapsed banks were imprisoned, the BDDK has kept a watchful eye on anything that smacks of moral hazard; bankers who break the rules can still end up in jail. Regulators ensured that lending growth was far more measured than in many other more developed jurisdictions.

More importantly, the BDDK hiked minimum capital adequacy ratios to 12% during the bull market of 2003/07. Many other countries' regulators may well be wishing they had done likewise.

As a result, despite annual inflation of more than 10% and a 30% drop in the value of the Turkish lira, the country's banks are largely profitable - this is certainly true for all of those in The Banker's 2009 ranking.

Top performers

The country's largest five banks made an average return on capital of 22.28% in 2008 and all but one of the 11 banks in The Banker's ranking made double-digit profit on capital. Two state-owned banks, TC Ziraat Bankasi, the country's second largest bank by assets, and Turkiye Halk Bankasi, Turkey's sixth largest bank, made returns on capital of 34.5% and 49.11%, respectively.

Banks in Turkey are still growing assets too. In dollar terms, their assets rose by an average of 9.74% in 2008. In liras, that growth was an even more startling 33.85%. If Turkish banks generally slipped a few places in the rankings, this is more to do with a weaker currency affecting the dollar value of their Tier 1 capital than a decline in their capital strength.

Industry struggling

Although Turkey's banks managed to sidestep many of the pitfalls that led to the financial crisis, the country has not been immune to the economic slowdown that followed. The global recession hit Turkey's economy with full force earlier this year, hobbling exports and triggering mass lay-offs across industry.

With domestic industries such as steel down by 28% and exports in all industries falling by nearly 33%, it is not surprising that the slowdown is having a knock-on effect on the financial sector. One analyst believes that non-performing loans could represent about 7% of all loans in the Turkish banking system by the end of 2009, up from about 3.5% at the end of last year.

Even so, according to The Banker's ranking, the average loan-to-deposit ratio for Turkey's banks is a modest 86.68%, compared with the EU average of 121.02%. Moreover, the analyst sees Turkey's experience in 2001 as a positive. At least banks have the financial wherewithal to restructure debt, he says.

Top 15 Turkish banks (at 31/12/2008)

Top 15 Turkish banks (at 31/12/2008)

Top Turkish Banks by Tier 1 Capital: Assets

Top Turkish Banks by Tier 1 Capital: Assets

Top Turkish Banks by Return on Capital

Top Turkish Banks by Return on Capital

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Read more about:  Western Europe , Turkey