Turkey’s banks have benefited from the country’s economic success in the last couple of years, and increased their lending by focusing on consumers. The prospect of EU convergence is already attracting foreign banks to the market, providing a great opportunity for those with a Turkish bank to sell, but bringing the threat of greater competition for those local institutions that do not. Paul Farrow reports.
For two years now, the story in Turkish banking has been one of loan growth. In IFR’s April 2004 Turkey special report the article on banking was entitled “Go forward and lend”, and that is exactly what the country’s banks have been doing.
Loan growth increased strongly in 2004, to represent 32% of total assets (according to data from the banking regulator, the BRSA). That is up from just 18% two years ago, and there is real confidence in the sector that this proportion will steadily increase. And in some cases, the percentage of loans on the balance sheet is much higher. At Garanti Bank (one of Turkey’s big four banks) net performing loans accounted for 39% of the balance sheet at the end of 2004, up from 30% in 2003.
The growth in lending during 2004 was concentrated on retail customers, whose share of total lending has increased. Credit cards and consumer loans, including car loans, have been the key products here. For 2005, bankers are hoping that mortgage lending will be one of the drivers, although this is dependent on the passing of a Mortgage Act to regulate the sector. (See the article on legal developments in this report.)
And so far this lending growth has been achieved without an increase in non-performing loans. Bankers say that consumer lending is relatively good from the NPL perspective, as the default rate is low and the risk widely spread. Across the Turkish banking system the NPL ratio is currently 6.3% (according to the Banks Association of Turkey, which represents the industry).
The government is sufficiently concerned about the fast rate of credit growth that it is planning to cap credit card limits at three times an individual’s monthly income. However, given that individuals can hold various cards, such a measure seems unlikely to have any affect. In addition, according to a representative of the Banks Association of Turkey, Turkish standards in terms of the protection of consumers are already in line with international ones.
Bankers also seem sanguine about such measures. “Economic growth and the increasing number of employed people in the economy will provide further credit card growth despite these attempts by the government to control it,” said Tolga Egemen, executive vice-president of Garanti Bank.
While consumer lending has shown strong growth, there has been only limited credit demand from corporates and smaller and medium-sized enterprises (SMEs). However, demand from those sectors is growing, according to Riza Kutlusoy, head of capital markets at Is Bank, another of the big four domestic banks. He also believes that after the first half of 2005, companies will increasingly need to borrow. Others, however, caution that many SMEs have poor accounting standards, making them unattractive to lenders.
As they have increased their lending, Turkish banks have reallocated assets from both securities (domestic T-bills) and have reduced their cash positions. However, T-bills continue to play an important role in generating profits for Turkey’s banks, and in 2004 these holdings produced big windfall profits. Furthermore, given the banking sector’s role in financing the government, Turkish banks are likely to maintain a relatively high percentage of their balance sheets in T-bills in the medium term, although analysts do expect that figure to decline steadily in coming years. At the end of 2004, government securities accounted for 40% of total assets.
According to Garanti’s Egemen, his bank aims to have T-bills representing 20% of average total assets in three to five years, down from the current 33%. At the same time, loans should grow to account for around 60% of the bank’s balance sheet.
Another important development has been the increase in banks’ fee income. Is Bank’s Kutlusoy notes that the banking sector is now charging for services in a way that was not feasible or necessary when inflation was high.
At Garanti, net fees and commissions were up 36% in 2004, and across the sector, fee income now covers approximately 50% of operating costs, according to Yavuz Uzay, banks analyst and head of research at local brokerage Global Securities.
Broader economic trends are being reflected on bank balance sheets. The decline in inflation and increasing confidence in the currency have encouraged a shift towards local currency deposits and loans, although the banking sector is still highly dollarised – about 40% of liabilities are FX denominated. In the short term, this trend towards a larger proportion of the balance sheet being TL-denominated has benefited the banks, as the spreads on TL lending are wider.
Another positive development for banks’ margins has been that as interest rates have declined, deposits have been repriced faster than loans, as the average maturity of deposits is still only six weeks , while most TL-denominated loans are fixed rate. However, this is a short-term advantage that will end when rates stabilise.
Threat of competition
Overall, Global analyst Uzay is far from alone in arguing that the Turkish banking sector is far healthier today than it was a year ago. However, he can see potential threats to this positive scenario.
“The biggest danger is the usual one, namely that overly aggressive lending will lead to higher NPLs and so to lower margins. In addition, if there isn’t some significant consolidation, the environment could become excessively competitive, especially as more foreign banks are targeting Turkey for corporate lending,” he said.
On the domestic side, the sale of Yapi Kredi Bank to a joint venture between Italy’s Unicredito and Koc Holding – a transaction that should be completed in 2005 – will see active management installed once again at what remains Turkey’s leading bank in terms of deposits. But the greatest threat comes from abroad, as foreign banks have shown themselves increasingly keen to invest in the Turkish banking sector.
In 2004, France’s BNP Paribas bought 50% of TEB for US$217m, and Dutch bank Rabobank is buying another second-tier bank, Seker Bank. With foreign banks now accounting for 10% of the total sector, up from 5% just a few years ago, it seems that former nationalist opposition to foreign banks owning Turkish banks has been overcome or neutralised.
Italian bank Intesa, had a look – for the second time – at Garanti Bank last year, but once again decided to pull back from taking a stake. But the view in the industry is that Intesa’s decision to withdraw should not be taken as a comment on the attractiveness of the Turkish banking industry. Instead it is explained as due to a combination of factors including price, indemnities, tax and the valuation of real estate assets.
Given this amount of interest, there is general agreement among both analysts and bankers that the country’s top, second-tier banks are likely to be bought up in the next few years. Finans Bank and Dis Bank are often mentioned by analysts as likely targets – four banks are rumoured to be interested in Dis Bank.
But does that level of interest in acquisitions make sense? It is true that many second-tier Turkish banks have been growing faster than their larger peers, but they generally still lack retail penetration – one banker described them as “more like hedge funds than banks” – and it is debatable how far owning such institutions would allow foreign banks to access the Turkish market.
However, the foreigners seem determined to get involved, and with 48 banks in Turkey, there are a lot of possible target acquisitions. David Nanson, resident partner at lawfirm Denton Wild Sapte which has an office in Istanbul, says that while foreign banks do not need a formal presence in the country to lend or to take deposits, many do want a retail presence and an operation to sell other banking products.
“Foreign banks are now lending to Turkish corporates as well as to banks,” confirmed Garanti’s Egemen.
Easier funding
The foreign interest in the Turkish banking sector is also reflected in the ability of Turkish borrowers and issuers to tap international capital markets.
Turkey’s banks have punched above their weight in the syndicated loan market for years, and the combination of short tenors and huge bank groups has allowed them to achieve fine pricing. (See loan article in this report.)
That highly competitive pricing has meant that the Eurobond market has little appeal, although Vakif Bank was planning a deal until the recent market reverse. However, banks have found that securitisation deals can provide attractive funding.
As well as its regular two syndicated loans each year, Garanti completed a future flows securitisation in 2004. Both tranches of the US$325m deal were wrapped. Local bankers expect securitisation issues from the domestic banks to total US$2bn–$3bn in 2005. Most of them will probably wrapped as the all-in cost is attractive. However, Finans Bank completed an unwrapped transaction through Merrill in March.