Turkey’s banks were set for a reasonably profitable year until the coronavirus pandemic and they have help up reasonably well so far on the back of sufficient capital and liquidity, sophisticated digital channels and effective business continuity plans. 

Turkey digs

Turkey’s banks were in buoyant mood in early March. They had largely recovered from the 2018 currency crisis, which hit them hard and suppressed gross domestic product (GDP) growth to 0.2% in 2019, and the International Monetary Fund was forecasting 3% GDP growth in 2020. 

Economic growth was being assisted by an expansionary fiscal policy, a cut in interest rates in the second half of 2019, increased credit provision by state-owned banks and more favourable external financing conditions. Meanwhile, the country’s banks – some of them among the world’s most technologically advanced – were swiftly progressing with their digital transformation plans.

Then Covid-19 hit and Turkey went into social and economic lockdown, like the rest of the world. But its banks were well prepared; they activated their business continuity plans and had high levels of capital and liquidity to fall back on.

Capital cushions

“The main strength of the Turkish banking sector is its strong capital base,” says Hakan Binbaşgil, CEO of Akbank, the country’s fourth largest bank by Tier 1 capital, according to The Banker’s latest Top 1000 World Banks rankings. “As of February 2020, the sector operated with a capital adequacy ratio of 18.4%,” he adds. “The core capital adequacy ratio is also high, standing at 14.2%. This has served as a vital cushion during the Covid-19 pandemic, and instilled confidence in investors.”

Akbank has always been managed “prudently with a long-term vision and never compromised on this approach”, says Mr Binbaşgil. The bank ended 2019 with an “optimised asset composition”, solid liquidity, low leverage and a capital adequacy ratio of 19.7%, well above regulatory requirements. 

Non-performing loans (NPLs) accounted for 6.6% of Akbank’s total loans at the end of 2019, “as a result of prudent and proactive NPL recognition in the third and fourth quarters”, says Mr Binbaşgil. “We are also leveraging our advanced analytics capabilities for lending and collection, which will sustain the resilience of the bank through different cycles.

“The immediate focus is ensuring the safety of our customers and our people while maintaining service continuity during the coronavirus pandemic. We have taken many precautions. The pandemic will no doubt cause a slowdown in the global economy. However, it is too early to quantify the impact.” 

Akbank has won awards for its digital approach and has invested about $400m in technology in the past two years, including a new data centre that opened in 2019. This was built with two priorities in mind, says Mr Binbaşgil: “To ensure the bank can continue its operations without any interruptions in the face of unforeseen challenges such as earthquakes, while utilising cutting-edge technologies to bring innovation to our sector.”

GDP down, risks up

In a coronavirus ‘crisis update’ from April, rating agency Fitch Ratings revised downwards its 2020 GDP forecast for Turkey from 3.7% to 0.8%. Risks to the country’s credit profile and those of Turkish banks have also increased. 

Huseyin Sevinc, a director in Fitch’s Turkish banks team, says the outlook for Turkey’s banks was already negative because of a “challenging operating environment”. “The impact of the lira currency crisis of 2018, a period of below-trend growth and heightened market volatility is still feeding through to banks’ financial metrics,” he says. On the other hand, “capital adequacy ratios and foreign currency liquidity have increased in recent years”.

Lindsey Liddell, Fitch’s senior director for Turkish banks, points out that although the overall outlook for Turkish banks is negative, the majority of its bank ratings are on stable. “The stable outlooks reflect the outlook on the sovereign – given the banks’ ratings are largely driven by support from the state, and Turkey’s sovereign outlook is stable – or, in the case of foreign-owned banks, from their overseas parents,” she says.

Ms Liddell says it is too early to forecast the long-term impact of Covid-19 on the banks. “The country is in lockdown and some banks have taken measures such as shortening branch hours and increasing withdrawal limits at ATMs. We were supposed to meet some of the banks in person two or three weeks ago but then conducted the meetings remotely,” she adds.

Digital transformation

Şekerbank, Turkey’s 17th largest bank by Tier 1 capital, was established 66 years ago to support rural economic development and agriculture, and still follows its founding mission. “The areas the bank seeks to grow in are small and medium-sized enterprises [SMEs], mostly micro and small businesses, agricultural banking at all levels, and some niche sub-segments in retail banking,” says Aybala Şimşek, executive vice-president, strategy, transformation and human resources (HR) at Şekerbank. “In line with the bank’s leading role in sustainable development, we also focus on financing energy efficiency investments and female entrepreneurs.”

Şekerbank embarked on a digital transformation programme in late 2018. “The Turkish banking sector is very competitive in terms of technology usage, due to its important geopolitical location spanning two continents,” says Ms Şimşek. “Our digital transformation programme, which I lead, consists of 20 projects aimed at strong growth in the bank’s strategic target segments, which are tradesmen, micro-enterprises, SMEs, farmers and rural female entrepreneurs.” 

The bank’s technological infrastructure and processes are being optimised from end to end. It is investing in key capabilities such as asset quality, risk management, data infrastructure and governance, digitalisation and process excellence, advanced customer analytics, HR capabilities and cost efficiency. 

The digitalisation programme has, for example, “mobilised 303 branch employees with tablets to enable on-site services to our target segments in rural areas,” says Ms Şimşek. “As a result, we have received loan applications from 4592 customers, 23% of whom are new customers, through the tablet channel in rural areas since December 2019.” 

Operational resilience has been put to the test during the Covid-19 crisis but “in line with our business continuity plans, we have ensured the health of both our customers and employees while maintaining seamless service”, she adds. 

The international dimension

HSBC Turkey, the country’s 16th largest bank, focuses on wholesale banking (large companies, financial institutions and public sector bodies) and premium retail clients. These sectors are where the best long-term potential lies, says chief executive Selim Kervanci, particularly because of their international connections including those stemming from China’s Belt and Road Initiative (BRI). 

“In retail banking, we continue to create value for our clients via our strong wealth management capabilities,” says Mr Kervanci. “Our premier wealth customer base grew 40% year on year in 2019. In wholesale banking, we continue to add value for clients through our international network and local expertise in different sectors, providing alternative sources of funding and solutions best placed to meet customers’ needs and offering risk management solutions to help manage exposures.”

In 2019, HSBC Turkey provided more than $6bn of finance to wholesale clients through Eurobonds, export credit agency-supported financing and murabaha (loans compliant with Islamic law). “We see significant opportunities for companies and investors coming from the BRI, and we will continue to introduce trade and investment products to help our customers capture those opportunities,” says Mr Kervanci.

Innovation leaders

Garanti BBVA, Turkey’s third largest bank according to The Banker’s Top 1000 ranking, was previously known as Turkiye Garanti Bankasi until Spain’s BBVA increased its shareholding from 40% to nearly 50% in 2017; the other 50% is listed on the Istanbul Stock Exchange. 

İlker Kuruöz, Garanti BBVA’s executive vice-president, engineering and data, says the vision is to progress from digital channels that offer transactions and products “to creating an experience that forms smart interactions with our customers at every point and builds up trust”. Artificial intelligence and big data will be used to develop these “smart interactions”, which will “add value to customers’ lives beyond mere product recommendations”. 

Garanti BBVA describes itself as “Turkey’s most technologically advanced bank”. “We have 8.5 million digital banking customers, of whom 7.8 million are mobile users,” says Mr Kuruöz. “Our focus has always been to make our customers’ lives easier by integrating the latest developments of technology into banking services. 

“For example, we were a pioneer in Turkey with our virtual assistant, which we call UGI, on our banking app, Garanti BBVA Mobile. UGI allows transactions or queries to be made through voice commands. Also, we put the stories feature [photos and videos that disappear after 24 hours], which users are familiar with from social media, on our mobile app. We are the first bank in Turkey to integrate this function in a banking app.” 

Disaster planning and business resilience are front of mind for all businesses right now. “The developments regarding Covid-19 that we have experienced in the past few months have revealed the effectiveness of the banking sector’s business continuity plans,” says Mr Kuruöz. “At Garanti BBVA, we took very fast action in coordination with BBVA Holding and made 80% of our employees in central roles, and 50% of our branch employees, work from home.”

Turkish banks’ commitment to innovation has created a sizeable market for technology service providers and Dell Technologies, for example, is an important provider of IT services. “Maximising convenience for the customer is a number one priority for [the banks] and they remain committed to rolling out digitally enabled services,” says Tarik Yenipazar, Dell’s sales director in Turkey. “These range from biometric authentication at ATMs to advanced in-built authentication features in credit cards and online banking. 

“Emerging technologies such as artificial intelligence aren’t widespread yet. But advances in big data analytics and machine learning are laying the foundations for new ways for banks to use their data.”

International loans

Turkey’s eighth largest bank, DenizBank, was sold by Russia’s Sberbank to the UAE’s Emirates NBD for $2.7bn in July 2019. DenizBank went on to raise $1.1bn in the international syndicated loan market in December. A bank spokesperson says: “The transaction was the largest fresh funding obtained by a Turkish bank in 2019. The majority of the loan is being used to finance our customers’ foreign trade transactions, but the €50m contribution from the European Bank for Reconstruction and Development [EBRD] is to support the working capital and investment needs of Turkish farmers.”

Digitalisation is a central part of the bank’s strategy. In the past seven years, the number of digital channels available to customers has increased from one to 10. 

“An important component of our digital strategy is the digital scorecard platform, which allows us to track how customers use branches and digital channels,” says the spokesperson. “Another is financial inclusion because 31% of Turkish citizens are unbanked. Our solution for them is fastPay, a mobile wallet that is the biggest in the country, with nearly 3 million users.”

EBRD activity

Meanwhile, the EBRD has invested €12bn in 302 projects in Turkey since starting operations there in 2009, which makes its Turkish portfolio the largest among the 38 countries in which the bank invests. There are 241 active projects valued at €6.9bn, of which 85% is in loans and 15% in equity. 

The EBRD has four key priorities for Turkey, one of which is “strengthening the resilience of the financial sector and developing domestic capital and financial markets”, says Arvid Tuerkner, EBRD’s managing director for Turkey. Financial institutions account for 23% of its current projects by value. 

Arthur Poghosyan, EBRD deputy director in charge of financial institutions, says about two-thirds of its Turkish financial institution portfolio is with Tier 1 banks, and the same share of the portfolio is in structured or secured products such as covered bonds. It also has some equity in two banks and two non-bank financial institutions. 

“Our loan products have various uses of proceeds, such as loans to promote women in business programmes, loans under energy efficiency frameworks and general purpose loans to support for SMEs,” says Mr Poghosyan.

Turkey’s banks have reacted quickly to the Covid-19 crisis, he adds, saying: “They have activated detailed business continuity plans and made staff security and health a priority. Customers are served through myriad digital channels, with limited personnel kept in branches. Some banks have a shift system whereby half of the personnel works in branches for two weeks, and half from home, and then they switch. So far, bank operations are proceeding and they are managing the situation under supervision of and in coordination with the Banking Regulation and Supervision Agency and the central bank.”

Banks have accumulated solid levels of liquidity over the past two years, with some having liquidity coverage ratios of 180% or more. “Currently, ample liquidity is also available from the central bank for on-lending at attractive rates, but most large banks report no concerns at this stage,” says Mr Poghosyan. “In terms of supporting Turkish businesses during the crisis, subject to demand, the EBRD will be ready to support our existing partner banks with additional short-term funding that may be needed.”


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