Turkey’s banking system, bolstered by the elimination of weak financial institutions, an influx of foreign capital and a strong local currency, has been weathering the global economic slowdown relatively smoothly. But the nation’s financial sector could undergo severe punishment if the international liquidity crisis deepens over concerns of the US subprime mortgage morass and if political uncertainty increases in the country, warn credit rating agencies.
The agencies note that share prices on the Istanbul Stock Exchange (IMKB) plunged 26.2% in the first four months of this year after many jittery foreign investors, fearing a global economic downturn and wanting to stay liquid, sold their shares in Turkish stocks in a frenzy of profit taking. The IMKB took the worst thrashing among world bourses. Banking shares were among the hardest hit of Turkish equities.
Rating is cut
Standard & Poor’s (S&P) cut Turkey’s credit rating outlook on April 4 from stable to negative after the nation’s chief public prosecutor, Abdurrahman Kaya, demanded the closure of the country’s ruling Justice and Development Party (AKP). Mr Kaya said the pro-business AKP was pandering to the interests of Islamic fundamentalists and undermining Turkey’s secular state by lifting a decades-old ban on women students wearing Islamic-style headscarves at universities. The constitutional court began assessing Mr Kaya’s indictment against the AKP. The prosecutor also wants 71 individuals, including prime minister Recep Tayyip Erdogan and president Abdullah Gül banned from political life for five years.
“The negative outlook reflects our concern regarding the increasingly challenging political and global environment that Turkey faces,” says S&P analyst Faruk Soussa. “These factors raise the likelihood of a prolonged deterioration in Turkey’s financing conditions.”
New confidence
Yet bankers predicted that the Turkish banking system would be able to withstand any turbulence originating abroad because of its newly found confidence and built-in resilience. Shored up with an influx of foreign investment, the system has strengthened its capital base, become more streamlined and improved its asset quality.
“We have no mortgage crisis or any other financial emergencies in Turkey. The slowdown in the US economy may be of such a dimension that it could influence the global economy unfavourably. For this reason, the Turkish economy could be adversely affected. But Turkish banking is one of the nation’s strongest sectors,” Ersin Özince, president of the Banks Association of Turkey and chief executive officer of Türkiye Is Bankasi (Isbank), told reporters in Ankara on February 8. “The quality of our banking system is among the highest in terms of world standards. Our banks have been renewed and rectified. We need not worry about the situation.”
While many leading US and European banks were posting huge losses for 2007 because of the US housing loans debacle, Turkish banks reported record profits for last year, as the economy sloshed in an abundance of liquidity and basked under the blazing new Turkish lira, which gained nearly 33% in value against the US dollar and other Western currencies since October 2001.
In 2007, the banks had a record total net income of $12.73bn, an increase of 61.3% on 2006, when the banks registered a net income of $7.84bn, the Banking Regulation and Supervision Agency (BDDK), Turkey’s supreme banking authority reported.
“Turkey’s situation isn’t all that bad. In fact, our position is much better than most European countries. Turkish banking is going through one of its best periods in history,” Varol Civil, general manager of Turk Ekonomi Bankasi, a joint venture between France’s BNP Paribas and Turkey’s Colakoglu Group, said in a newspaper interview in March.
Turkish banking assets at the end of 2007 stood at $497.53bn, an increase of 43.4% on 2006, according to the BDDK. Bank assets represented 75.5% of Turkey’s gross domestic product (GDP) in 2007, compared with 65.7% in 2006.
In 2007, bank loans stood at $244.26bn, up 49.3% from the previous year. Bank loans accounted for 49.1% of bank assets in 2007.
But Turkey’s central bank governor, Durmus Yilmaz, was urging the country’s banks to be cautious in 2008. “We are in the midst of global turbulence. We can face surprises any time. All the economic units of Turkey must be cautious. Everyone must make their financial plans carefully,” he told a news conference.
Sector consolidation
As of April 9, about 50 banks operated in Turkey, down from 81 at the end of 1999, as a result of a consolidation in the sector. The country has 33 commercial banks, of which three – TC Ziraat Bankasi, Halkbank and VakifBank – are state owned, 11 are privately owned deposit banks, 18 are foreign banks and one is controlled by the Savings Deposits Insurance Fund (TMSF), a state banking receivership fund.
Turkey also has 13 development and investment banks, of which three are state owned, six are privately owned and four are foreign owned. There are also four small Islamic-style participation banks that are subject to the same cash and reserve requirements as other banks.
Yet the Turkish banking system remains tiny compared with those of the US and EU member countries. Total assets at the end of 2007 were equivalent to less than one-third of those of Bank of America, the biggest US bank.
Turkey’s banking system has grown nearly fourfold since the end of 2002, when its total bank assets stood at a mere $126.7bn. Growth has run parallel with the robust performance of the Turkish economy, the strength of the new lira, record foreign investment into the banking system, and an abundance of global liquidity, as the nation rebounded from the 2001 crisis (the worst recession the country experienced since World War II).
Since 1997, the TMSF has intervened in the affairs of 23 financially troubled banks, which have since been shut down, merged with stronger banks or privatised. A dozen other private banks have also merged with affiliate banks. Some bankers predict that consolidation will continue and that only 25 banks will remain in the country by 2015.
In terms of assets, the largest Turkish banks are state-owned TC Ziraat Bankasi and Isbank, the country’s biggest private bank. Other big top-tier banks include the privately owned Akbank, Garanti Bankasi, Yapi ve Kredi Bankasi, and state-owned VakifBank and Halkbank.
Akbank is owned by Turkey’s Sabanci Holding, the nation’s third biggest conglomerate, and Citibank. Turkey’s Dogus Holding and the US’s General Electric Finance own Garanti Bankasi. Yapi ve Kredi Bankasi is 57.4% owned by Koç Financial Services, a joint venture of Turkey’s Koç Holding and Italy’s UniCredit Group.
The number of bank branches increased from 6849 in 2006 to 7618 in 2007, and the number of employees in the banking system rose to 158,559 from 143,168, the Banks Association of Turkey reported. But the numbers are still far short of the pre-crisis period of 2000, when there were 7837 branches and 170,401 employees.
Foreign players
Foreign banks are playing a pivotal role in Turkey’s financial system by bringing in an infusion of much-needed capital, introducing new products and efficiency and healthy competition into the market. The total assets of foreign banks in the system increased to about 40% at the end of 2007, from just 5% in 2000, as more institutions rushed to snap up shares in Turkish bank assets after the country’s EU membership talks began on October 3, 2005.
Foreign players began entering the Turkish commercial banking sector in the early 1980s. Operating out of one or two branches, they came to dominate Turkey’s foreign trade and exchange markets with their expertise and lower overhead costs, capturing market share from the country’s overmanned, undercapitalised, big commercial banks.
Turkish banks responded by introducing automated systems and offering almost every foreign trade or exchange product and banking service available.
Foreign banks in Turkey began expansion in retail banking this century by acquiring shares in existing Turkish banks with extensive branch networks. In the past two years, seven foreign institutions have purchased Turkish banking assets. The National Bank of Greece acquired a 46% stake in Finansbank from Fiba Holding for $2.8bn in April 2006. In the biggest banking transaction in Turkey to date, Belgium’s Dexia Group’s acquired a 96.6% stake in DenizBank from Zorlu Holding and other shareholders for $3.16bn in 2006.
Citibank acquired a 20% stake in Akbank from Sabanci Holding for $3.1bn in January 2007. Greece’s EFG Eurobank Ergasias acquired a 70% stake in Tekfenbank from Tekfen Holding in March 2007 for $182m and renamed it Eurobank Tekfen. Kazakhstan’s Turan Alem Bank acquired a 34% stake in Sekerbank for $260m.
Lebanese Bank Med and the Jordanian Arab Bank, both owned by the family of former Lebanese prime minister Rafiq Hariri, purchased a 91% stake in MNG Bank and changed its name to Turklandbank. And ING Bank of the Netherlands acquired Oyakbank from the Oyak Group in December 2007 for $2.67bn.
Additionally, about 35 foreign banks have representative offices in Turkey, and are developing their correspondent relationships.
Consumer banking
Although corporate finance continues to be the major area of lending for most commercial banks, many banks have been shifting to consumer finance, private banking, lending to small and medium-sized enterprises, and financing agricultural companies and farmers in expansion moves. Consumer banking has become a major area of focus in recent years and, with all major banks jumping into the market, the competition is stiff.
In 2007, consumer loans stood at about $61bn – 25% of total loans. Nearly half of all consumer loans in 2007 were housing/mortgage loans. In 2005, consumer loans stood at only $16.5bn, accounting for only 16% of all bank loans. Bankers predict that consumer loans will eventually increase to 50% of all bank loans in the next five to 10 years.
In addition to direct consumer loans, credit and debit card use is on the rise. Turkey has been one of the fastest-growing markets in this area. Credit cards were first introduced into the market in the 1960s but usage did not catch on until the 1990s.
By the end of 2007, Turkey’s banks had issued a total 37,335,179 credit cards and 55,518,092 debit cards. This made the country the third biggest credit card market in Europe, after Germany and England, and ranked it 10th in the world, according to the Interbank Card Center (BKM).
The number of ATMs has also ballooned from 4656 in 1995 to 18,000 at the end of 2007. Banks operate proprietary networks but have yet to develop network sharing because of rivalries and different interest rates.
Major US and European networks have reciprocal arrangements with Turkey’s banks. ATM cards are now an accepted part of the consumer economy. Some banks have developed their ATM programmes so that cardholders can use them to give, sell or buy orders on the Istanbul Stock Exchange, to obtain gold prices, stock exchange indices and foreign exchange rates, and to buy and sell travellers cheques and mutual fund certificates.
The growth of points-of-sale (PoS) terminals has been heady in the past 12 years, growing to 1,453,877 on December 31, 2007 from 299,950 in 2000 and only 25,000 in 1995, the BKM reported.
The advanced nature of cash management common in the Turkish economy makes debit and credit cards attractive to Turkish consumers, who use PoS terminals at retail stores to debit purchases from their current accounts. An estimated 100,000 new PoS terminals are added to Turkey each year, growing at an 8% rate, bankers say.
