The outlook is bleak for Turkey’s banks, impacted by a combination of spiralling inflation, a plummeting currency, a sharp fall in economic growth and the knock-on effects from the war in Ukraine on the other side of the Black Sea.
It was no surprise when Fitch recently downgraded the credit ratings of 20 Turkish banks from B+ to B. At the same time, it announced that the banks’ credit ratings were largely on a negative outlook. This followed Fitch’s earlier downgrading of Turkey’s sovereign credit rating, which was a reflection, it said, of increased “vulnerabilities in terms of high inflation, low external liquidity and weak policy credibility”.
S&P has taken a similarly pessimistic view of Turkey’s banking sector. In a recent report on the exposure of Middle Eastern and African banks to the Russia–Ukraine war, it concluded that Turkey’s banking sector would suffer more than most.
“The conflict is likely to be significantly negative for Turkey’s banking sector due to effects on the economy, inflation and refinancing channels,” said the report. These effects include higher oil and commodity prices, a loss in tourism revenue from Russians and Ukrainians who accounted for 27% of foreign arrivals last year, and a further destabilising of the Turkish lira.
On the positive side, S&P expects lending to expand in nominal terms, “driven by deeply negative real rates and public sector banks’ commercial policy”.
Sustainable finance to the rescue
Another reason to be optimistic about lending is the amount being spent on environmental and social projects in Turkey.
Garanti BBVA — the country’s fourth-largest bank by Tier 1 capital, according to The Banker’s latest Top 1000 World Banks ranking, and part-owned by Spain’s BBVA — is one of the country’s leaders in sustainable finance.
“Sustainable development, with a focus on combatting climate change and promoting inclusive growth, has been one of our strategic goals for the past 15 years,” says Ebru Dildar Edin, Garanti BBVA’s executive vice-president for corporate, investment banking and global markets. It is a member of numerous organisations and working groups in the areas of sustainability, such as the UN Net-Zero Banking Alliance, the UN Working Group on Principles for Responsible Banking, the Turkish Business Council for Sustainable Development, the Banks Association of Turkey's Financial Sector Role in Sustainable Growth Working Group, and the Turkish Industry and Business Association's Environment and Climate Change Working Group.
The cumulative amount of financing [Garanti BBVA] has provided for renewable energy investments over the past few years exceeds $6bn
Garanti BBVA raised two syndicated loans last year, in May and November. The first was in two tranches worth $279m and €294m, respectively, with a maturity of 367 days, and included 34 banks from 18 countries. Under the terms of the deal, the bank committed to provide TL1.5bn ($101.7m) and to source at least 80% of its electricity consumption from renewable generation.
The second syndicated loan, in two tranches worth $365m and €247m respectively and also with a maturity of 367 days, was participated by 36 banks from 20 countries. Under this deal, the bank took on more challenging environmental targets and committed to augment its sustainable finance volume of TL1.5bn from year-end 2021 to TL2bn by August 2022, and to source all its electricity consumption from renewables.
Green assets accounted for 24% or $2bn of the bank’s project and acquisition finance portfolio at the end of last year. Some two-thirds of that has been allocated to electricity generation and one-third to infrastructure projects, such as airports and roads. “Garanti BBVA is the leading bank for financing Turkey’s operational installed wind power, where we have a 22.5% market share,” says Ms Edin. “The cumulative amount of financing we have provided for renewable energy investments over the past few years exceeds $6bn.”
Meanwhile, the bank’s lending to the fossil fuel sector has declined significantly. Coal, for example, now accounts for just 2% of its portfolio. The bank intends to abandon coal entirely and aims to have no coal-related activities in its portfolio by 2040.
ESG ratings
In April, Yapı Kredi, Turkey’s sixth-biggest bank, received a three-notch upgrade to its environmental, social and governance (ESG) rating, from BB to AA, by US index-provider MSCI. The rating measures a company’s resistance to financially material ESG risks. Yapı Kredi is the only Turkish bank to obtain an AA rating, which is just one notch below the top AAA rating.
Gökhan Erün, CEO of Yapı Kredi, says the dramatic improvement to its ESG performance was due partly to the implementation of a carbon transformation programme, and partly due to the start of a project to calculate the greenhouse emissions from its loan portfolio and the setting of targets for reducing those emissions. Other contributing factors include its adherence the recommendations of the Task Force on Climate-related Financial Disclosures, the Paris Agreement and the Science-based Target Initiative.
“Our meticulous work in the field of ESG is appreciated both nationally and internationally,” says Mr Erün. “We will continue to integrate sustainability into all our business processes.”
Akbank, the country’s third-biggest bank, bolstered its ESG profile last year when it pledged to provide TL200bn in sustainable lending and invest TL15bn in sustainable investments during by 2030. It also took steps to reduce its own carbon footprint.
“Thanks to sourcing our energy from renewable sources, we were able to decrease our operational emissions by 27%, helping us get closer to achieving operational carbon-neutrality by 2025,” says Akbank’s CEO, Hakan Binbaşgil.
“In line with our sustainability commitments, we also worked to support our people and communities, as well as improving the lives of our customers through enhancing financial health and inclusion,” adds Mr Binbaşgil. “Akbank became the first company in Turkey to join Valuable 500, which aims to enhance disability inclusion. We also launched the Akbank Academy in 2021, which aims to help young people gain new competencies to better prepare for the future of work. Reaching 40,000 youths in its first year, the academy exceeded its first-year target by 20,000.”
Rural banking
Şekerbank, one of Turkey’s many medium-sized banks, was set up 68 years ago to support rural economic development and agriculture. To this day, it continues to play an important role in supporting farmers and small and medium-sized enterprises (SMEs) online and through 238 branches spread across the country.
“The allocation of 52% of our loan portfolio to farmers and SMEs is twice that of the sector average, which is an obvious indicator of how the bank prioritises financial inclusion,” says Aybala Şimşek, Şekerbank’s executive vice-president for strategy, transformation and financial institutions.
Financing more food production would be a great opportunity for Turkey’s banks
“The bank defines its mission as sustainable banking, which is in essence a reflection of its founding philosophy,” says Ms Şimşek. “Şekerbank materialises this mission through its operations by supporting sustainable agriculture, energy efficiency, financial inclusion, production and employment.”
Towards the end of last year, Şekerbank received a €30m loan from FMO, the Dutch development bank, to provide sustainable finance to rural customers.
The war in Ukraine is affecting Turkey, not least in the reduction of imports of wheat from Ukraine. However, it also gives Turkey’s agricultural sector the opportunity to increase production. “We hope this devastating war ends as soon as possible, firstly for the sake of Ukrainians, and secondly for the entire region where food security has become a vital issue, but financing more food production would be a great opportunity for Turkey’s banks,” says Ms Şimşek.
Digitalisation
Last year marked marked a critical milestone in Şekerbank’s digital transformation programme, which was initiated in 2018.
“The financial results of the programme — which includes dozens of projects geared to improving asset quality, increasing productivity and service excellence — began to be clearly visible last year,” says Ms Şimşek. “A digital channel infrastructure was created enabling tradesmen, farmers and SMEs — whose needs for financial support understandably increased significantly during the pandemic — to apply for loans whenever and wherever they wanted.
“We put our newly structured loan evaluation and allocation processes into a tablet channel, which allows our employees to disburse loans to borrowers in rural areas where there is limited access to a bank branch,” she adds. “Tradesmen and farmers, who were visited by bank representatives in their fields and villages, were able to access the financial support they needed through this ‘Digi Branch’, while also adhering to the social distancing measures implemented throughout the pandemic.”
It is now six years since the launch of Akbank’s digital transformation strategy, ‘New Generation Akbank’, and its goals have been achieved.
“We aimed to redefine the banking experience in our country, to deliver value to our customers with our reliable, dynamic, simple, innovative and human-centric solutions,” says Mr Binbaşgil. “We have successfully transformed Akbank from a traditional bank into a technology-driven, innovative company.”
The bank has redesigned its mobile app to include artificial intelligence-based financial insights and chatbots, introduced a ‘digital-first’ credit card, brought in digital onboarding processes for new customers (which includes a short video call with the bank) and digitalised trade finance services by joining the blockchain-based we.trade network.
EBRD support
Turkey is the biggest recipient of finance from the European Bank for Reconstruction and Development (EBRD). Since it began operating in Turkey in 2009, the bank has invested €15.5bn in 371 projects in the country, 94% of which has been in the private sector.
Arvid Tuerkner, the EBRD’s managing director for Turkey, explains that the bank has four strategic priorities for the country: strengthening the resilience of the country’s financial sector and developing its capital and financial markets; fostering its knowledge economy and higher value-added activities; promoting economic inclusion and gender equality; and accelerating the transition to a green economy and regional energy connections.
“The banking sector is well developed, compared with other countries in our portfolio, but there is not enough depth, in terms of the segments of society it reaches, and there needs to be more focus on developing the capital markets,” says Mr Tuerkner.
As for the second priority, Turkey needs to move on from exporting basic goods and instead devote more effort to higher value manufactured and technology-based items, according to Mr Tuerkner.
The third priority is about increasing the participation of women in the labour force, dealing with youth unemployment, integrating refugees into the formal economy and facilitating economic growth in underdeveloped regions of the country.
“Then, there’s always ‘green’ — there’s no country where we don’t work on green topics,” says Mr Tuerkner. “Turkey is dependent on imported oil and gas for the bulk of its energy, which is why renewable energy is a priority, along with the decarbonisation of industry.”
About 85% of the EBRD’s financing in Turkey is in the form of loans, and 15% is equity investment. “With an ever-depreciating currency, pursuing equity is difficult because if you want to make a capital gain in dollars or euros you have to outpace currency depreciation as well as inflation,” he says.
The bank’s biggest commitment last year was arranging a €650m syndicated loan to Ford Otosan, the joint venture between Ford of the US and Turkey’s Koç Holding, to support the production of a range of all-electric and plug-in hybrid variants of one-tonne vans for the European market. EBRD’s share was €175m, with the rest coming from commercial lenders such as Akbank, Bank of China and BNP Paribas.
Another landmark deal last year was the EBRD’s €150m loan to household appliance manufacturer Arcelik, in support of a three-year environmentally sustainable investment programme. “The first €83m tranche was structured in line with the Loan Market Association’s Green Loan Principles, making it the first externally verified green loan to Turkish manufacturing,” says Mr Tuerkner.
Last year was a record one for the EBRD’s investments in Turkey, which amounted to €2bn across all products (loans and equity), accounting for 20% of the bank’s total commitments that year. The next-biggest recipients of EBRD’s investments were Egypt and Ukraine, with around €1bn each.
Russia’s invasion of Ukraine is also having an impact on Turkey’s imports of oil, gas and wheat. “Ninety-nine percent of gas and more than 90% of oil is imported — the only energy Turkey has is a bit of lignite and renewables, and this is why we are supporting renewables,” says Mr Tuerkner.
“The impact of the war on Turkey’s banks hasn’t been huge so far,” he says. “I would advise Turkey’s banks when dealing with Russia to pay utmost attention to international sanctions, including secondary sanctions because of the extra-territorial effects. We are watching the situation closely, but it hasn’t affected our business much and we continue doing business with Turkish banks.”
