Turkey has been one of the
world’s most dynamic retail banking markets for the past five years
– and drawn in most of the world’s largest banking groups in the
process. But despite a relatively sound banking industry and very
well-capitalised banks, the country is unlikely to avoid the global
downturn.

Throughout much of the past decade, Turkey was one of Europe’s
most exciting emerging economies; a fast-developing bridge of 70
million people between old Europe and new Asia. HSBC was the first
Western bank to buy into the country, back in 2001, acquiring
Demirbank; others quickly followed, including UniCredit (with a 50
percent share of Yapi ve Kredi Bankası), BNP Paribas (a 50 percent
stake in Türk Ekonomi Bankasý), GE Capital (25.5 percent stake in
Garanti Bankasi) National Bank of Greece (46 percent of
Finansbank), Citigroup (20 percent of Akbank) and, finally, at the
end of 2007, ING, which bought 100 percent of eighth-largest
lender, Oyak Bank, for $2.67 billion (see RBI 586).

Of the main players, only state-owned Ziraat Bankasi, with
around 1,300 branches, and private sector Turkiye Is Bankasi
(Isbank) remain largely untouched by foreign investors. Ziraat has,
itself, pushed into markets outside of Turkey, and now has 11
branches in Germany, for instance.

The enthusiasm for big Turkish deals largely
stopped at the start of 2008, after ING’s Oyak acquisition. There
are unlikely to be any further deals in 2009: GDP growth in the
country peaked at 9.4 percent in 2004, but slipped to 6.9 in 2006,
4.6 percent in 2007, an estimated 0.8 percent in 2008 and is
forecast to contract by 1 percent in 2009.

Nevertheless, despite profit decreases for
many of the country’s banks in 2008 (Yapi ve Kredi Bankası stands
out with a 33 percent rise), the year was not as vicious as in
other markets. Moreover, all banks invested heavily in their retail
banking franchises across the year.

Garanti, for example, opened 138 new branches
and 727 new ATMs, lent TRY1 billion ($553 million) more in
mortgages, won 1.2 million new retail banking customers, saw its
demand deposits rise by 20 percent and total deposits up 33
percent, and issued 15 percent more credit cards to take its cards
in circulation to 7.5 million. Credit card balances rose by 23
percent to TRY7 billion.

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In a report published on 6 March, ratings
agency Fitch noted the Turkish banking sector’s funding profile
remains largely reliant on a “stable retail deposit base”, which
accounted for around 70 percent of non-equity liabilities at
end-2008. Despite more rapid loan growth than for deposits over the
last three years in particular, the low loan base meant that the
loan-to-deposits ratio remained at a comfortable 81 percent in
2008, it added.

Retail banking innovation

Retail banking innovation in Turkey
over the past two or three years has focused on two key areas:
selling credit cards/personal loans; and migrating customers onto
electronic distribution channels. Garanti, for instance, has
distinguished itself with a build-it-yourself credit card product
called Flexi, remotely located self-service loan terminals, and
transactional mobile phone banking (see case study, RBI
591).

Akbank said that 38 percent of customer
transactions took place at the branch in 2008, down from 50 percent
in 2005. Online transactions rose from 22 percent to 33 percent.
Yapi ve Kredi reported branch transactions at 30 percent in 2008,
down from 39 percent since 2007. It also said ATM usage was
skyrocketing: 159 percent growth in ATM usage for depositing cash
and an 84 percent increase for credit card payments.

But despite investment in their businesses in
2008 and growth in lending and deposit-taking, 2009 will be a
tougher year for Turkey’s banks. Non-performing loans are rising:
3.7 percent for personal loans and 6.7 percent for credit cards at
Garanti; 2.3 percent and 6.1 percent at IsBank. The proportion of
earnings is also shifting at many banks away from retail into SME,
commercial and business banking: retail loans as a percentage of
total loans fell significantly at both Garanti and Isbank in
2008.

According to the Fitch report, Turkey’s banks
have a relatively lower share of their loan book denominated in
foreign currency (29 percent) compared to most countries in Central
and Eastern Europe (see “The risks are less in the Czech
Republic”) – retail loans are almost all in Turkish Lira – and
this mitigates an immediate asset quality risk in case of a sharp
deterioration of the Turkish lira. Fitch also noted that an
adequate 17.4 percent total capital adequacy ratio for the sector
at end-Q308 (almost all Tier 1) provides a comfortable buffer for a
potential asset quality deterioration and drop in profitability.
And although it has steadily risen in the last six years, Turkey’s
financial leverage remains limited with a loan-to-GDP ratio below
40 percent.

“However,” concluded the agency, “the
operating environment is expected to deteriorate due to the
weakening economic outlook in Turkey and the world… The extent
and pace of the deterioration will largely depend on the ultimate
depth of the ongoing economic turmoil on a global and national
scale.”

Country snapshot
Turkey – selected four banks, ranked by group profit change
	Pre-tax profit (TRYm)		Total assets (TRYbn)		Retail deposits (TRYbn)		Retail loans (TRYbn)		Nos of branches	Retail banking customers (m)	Cost-income ratio (%)	Return on equity (%)
	FY08	% change	FY08	% change	FY08	% change	FY08	% change	Nos of branches	Retail banking customers (m)	Cost-income ratio (%)	Return on equity (%)
Yapi ve Kredi Bankası	1,614	33	70.9	26	13.36	22	5.36	22	861	5.1	52.7	24.1
Garanti Bankası	2,071	-9.29	99	30	27.26	27.3	15.17	16.5	730	8.1	53.6	22
Turkiye Is Bankasi	1,798	-14.5	97.55	22	n/d	n/d	9.85	19	1,028	10E	45.2	15.1
Akbank	2,152	-15	93.1	29.13	40.32	32.1	9.61	9.7	868	5.4	50.8	16.4
E=estimate. n/d= not disclosed Source: RBI