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Banking in Turkey

Comparatively insulated from the global storm, and buttressed by reconstruction forced on it by the last domestic crash, the banking sector in Turkey seems to be well-placed to survive and recover. Özkan Genç reports.

Turkey is one of the top-20 world economies1. A major economic crisis at the turn of the century hit the country hard, plunging it into recession and causing nearly half of its banks to fail. But the recovery since then has been spectacular, in part because of the restructuring measures taken following the earlier crash. Over the five years from 2003, GDP growth averaged around seven percent annually, taking total GDP to around US$1 trillion in terms of purchasing power parity2.

In part, this is a result of a strong and reconstructed banking and financial system. Following the 2001 crisis, the central bank was made independent, and banking supervision was strengthened with new legislation and regulation. On the back of impressive performance in the economy as a whole, the banks recorded increased profits of 32 percent in quarter one 2009 compared with the previous year.

Turkey has 49 banks in three different sectors: 32 deposit banks, 13 investment and development banks and four Islamic finance banks. Of these, three deposit banks and five investment and development banks are state-owned. Foreign investors account for some 40 percent of ownership. Total capitalization of the sector is approximately US$470 billion3. Most of this total is represented by the deposit banks, which dominate the sector; by comparison, other institutions are very small. The deposit banks are also dominant in the wider finance sector, since most other financial services providers are their subsidiaries.

Asset quality in the banks is good, with little exposure to the exotic instruments which have caused such damage in other economies: investments in these are constrained by regulation. In the main, loans are held by the Turkish government or domestic companies. Interest rates remain high by international standards - although they have been reduced sharply over the last year - yielding good margins for the banks. With deposits typically on 1-3 month terms, and loans mainly fixed rate and over 1-2 years, the recent interest rate reductions should continue to underpin profitability over the next year or so.

Nevertheless, Turkey is not immune to the global financial crisis, and is suffering an economic slowdown. The banks are facing a steep increase in defaults ('non-performing loans'); around 4.8 percent of loans are currently in default, a figure which is likely to rise to 6-7 percent by the end of 2009. Liquidity is tight and corporate financing is being squeezed. However, banks remain well-capitalized, with strong balance sheets: the good profits made in the first quarter of the year have helped, and the Tier 1 capital adequacy ratio is currently around 18 percent. A government 'wealth amnesty' initiative has encouraged Turkish expatriates to bring money back into the banking system without intrusive scrutiny of its origins. This may result in some US$9 billion of deposits, which should go some way towards easing the flow of debt into the economy.

 

Looking ahead, the economic prospects are fairly encouraging. The comparatively high current account deficit leaves the country exposed to adverse currency moves and shifts in investor sentiment. But on the domestic front, growth is likely to continue, albeit at a slower rate. In the medium and longer term, Turkey's potential accession to the European Union would provide a welcome boost. In the banking sector itself, the current strong position should provide a good defense against this year's downturn. And there is significant growth potential: much of the population as yet has no bank account or access to the financial sector. As the economy strengthens, Turkish banks have everything to play for.

Article author

Özkan Genç
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KPMG in Turkey +90 212 3177 400 Özkan Genç View all articles by this author

1. World Development Indicators Database, World Bank, 1 July 2009.
2. Ibid.
3. Banking Regulation and Supervision Agency.