The Banks Association of Turkey
Turkish Banking System
Ersin Özince
Chairman
London, October 2005
TBA
Turkish Banking System
October 2005
Outline
Economic outlook
•
•
•
•
Economic policy framework
Main features of the economy
Main targets of the economic policy
Short term outcomes
• Expectations for the near future
Turkish banking system
•
•
•
•
•
TBA
Main issues affecting banks
Operational environment
Towards stronger banking system
Short-term outcomes and selected indicators
Expectations for the near future
Turkish Banking System
October 2005
Economic outlook
TBA
Turkish Banking System
October 2005
Economic Policy Framework
•Turkey is an open economy
•Capital flows are free
•No exchange rate restriction, under floating exchange rate regime
•Signed the “Customs Union” with the EU in 1995
•The EU’s economic criteria regarded as the nominal anchor
•Turkey is closer to EU membership
•The stand-by agreement with the IMF extended until 2008
TBA
Turkish Banking System
October 2005
Main features of the economy
•Population of 72 million with GNP USD 325 billion and income per
capita USD 4,500
•Long term average growth rate is about 5 percent
•Domestic consumption with 70 percent of total demand is the main
force behind the growth
•Services and industry have shares of 58 percent and 30 percent
•Unemployment rate is about 10 percent
•Foreign trade volume amounts to 55 percent of GNP. Exports and
imports amount to USD 70 billion and USD 110 billion
•The main trade partner is EU with 50 percent share
TBA
Turkish Banking System
October 2005
Main targets of economic policy
•Setting stable rules and institutions eliminating discretionary
measures for well functioning market economy
•Undertaking fiscal responsibility, focusing to reduce debt to GNP
ratio through primary surplus
•Channelling sources to private sector, sustaining stable growth at
annual rate of 5 percent, focusing on reducing inflation and
reaching price stability
•Improving fiscal transparency and ensuring better management in
the public sector, increasing role of private sector and foreign
capital inflows
TBA
Turkish Banking System
October 2005
Main targets of economic policy
•Strengthening financial sector
•Reaching sustainable stability through structural reforms; social
security, widening tax base, bankruptcy law, central bank and
regulatory and supervisory institutions’ autonomy
•Meeting EU main economic criteria by 2008
•Leading Turkey to become a global player
•Stronger institutions and rules for market economy
TBA
Turkish Banking System
October 2005
Short-term outcomes
•Quick recovery in growth led by private sector
•Strong fiscal adjustment, sharp decline in inflation
•Less pressure from the Government on the financial markets due to
decline in gıvernment deficit
•Stability sustained in money and capital markets; a substantial fall
in the cost of borrowing and real interest rates
•Strong TL demand and strengthened financial institutions
TBA
Turkish Banking System
October 2005
Short-term outcomes
•Rapid growth in CB reserves and improvement in fx position
•Jump in lending to private sector and consumer loans
•Expanding volume of foreign trade
•Widening current account deficit
•Foreign investors’ interest on TL assets as well as the banking
sector
•Acceleration in privatisation
•Strengthening rating outlooks from B- to BBTBA
Turkish Banking System
October 2005
Expectations for the near future
Should current program successfully implemented,
macroeconomic aggregates are likely to approach to
Maastricht criteria in a few years.
Thus, an atmosphere for well functioning of market
economy is likely to be further improved.
TBA
Turkish Banking System
October 2005
According to the Government programme public sector
deficit targeted to receed to 3% of GDP by 2008
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
-10
-11
-12
-13
-14
-15
-16
-17
-18
-19
-20
95
.
.
.
.
'00
.
Turkey
TBA
.
.
.
'05
.
.
'08
EU-15
Turkish Banking System
October 2005
Inflation is down 4 percent in 2008
Inflation
100
75
50
25
0
95
.
.
.
. '00 .
Turkey
TBA
.
.
. '05
'08
EU-15
Turkish Banking System
October 2005
Government debt is likely to meet EU level
in 2008
120
110
100
90
80
70
60
50
40
95
.
.
.
.
'00
.
Turkey
TBA
.
.
.
'05
.
.
'08
EU-15
Turkish Banking System
October 2005
Turkish Banking System
TBA
Turkish Banking System
October 2005
Main issues affecting banks
•Since 2002, banks have been operating in a considerably less risky
atmosphere
•Decline in inflation and strong demand for TL stimulated the
competition and restructuring the balance sheet
•Governments pressures on financial markets lessened
•Regulation likely to meet the international standarts, notably to EU
directives
•Supervision strengthened
•Better expectations and vital activity stimulated consumer business
•Foreign investors’ interest intensified
•Basel II road map was announced
TBA
Turkish Banking System
October 2005
Operational environment
•Banks subject to Banking Act in their universal activities and to
Capital Market Act in capital market activities
•Banking Regulation and Supervisory Board is an autonomous
authority of the banking sector since 2000.
•No discretionary regulation for foreign banks operating in Turkey
•Regulatory capital for establishment of a bank is currently about
USD 15 million
•Financial sector is small and has low degree of deepening
•Despite gradual improvement, deposits have very short term
maturity
TBA
Turkish Banking System
October 2005
•Traditionally banks occupy majority, 95 % of financial
sector
•Financial services subject to various heavy tax burdens
increasing intermediation cost dramatically, although
some positive steps taken recently
•The share of fx or fx denominated items in the balance
sheet still high albeit shrinking recently
•High techonology utilization on services
TBA
Turkish Banking System
October 2005
Towards stronger banking system
•An independent regulatory and supervisory body was founded
•Weak banks were eliminated, remaining banks were recapitilized
and restructured
•Regulation changed in line with the international standards;
Reporting, auditing and transparency improved
Prudential regulations on related party loans, fx position
and equity participations, provisioning tightened
Supervision incorporated market risk
•Banking Act is on the pipe-line
TBA
Turkish Banking System
October 2005
Banking Law No. 5387
(adopted by the Parliament )
General Legal Grounds
• Enhanced legal structure for changing and
developing banking activities and risks
• Dynamic structure for bank supervision and
auditing activities
• Harmonization of the Banking Law with
EU directives, international principles and
standards
TBA
Turkish Banking System
October 2005
Scope of the Banking Law
•
•
•
•
deposit banks
contribution banks
development and investment banks
financial holding companies
•
•
Title of special finance institutions is changed as contribution banks,
The scope of the Banking Law is enlarged to cover financial holding companies, Banks
Association of Turkey, Turkish Association of Contribution Banks, Banking Regulation
and Supervision Agency (BRSA), Saving Deposits Insurance Fund (SDIF) and their
activities,
Provisions related to supervision and audit of support services institutions and valuation
and rating institutions by BRSA are brought .
•
TBA
Turkish Banking System
October 2005
Definitions
• In harmony with international banking
terminology the definitions in the Law are
redefined, the new definitions added
TBA
Turkish Banking System
October 2005
Permissions for
establishment and operation
- fields of banking activities are classified in line with the EU
directive
- the principles and procedures that are applicable for permission
applications and granting permissions are determined
extensively as a part of prudential supervision
- the conditions sought for the bank founders are harmonized
with EU directives and BIS principles
- principle is brought to give legal reasons for refusal of
applications for authorization
- the paid-up capital requirement is increased to min. TRY 30
million for credit institutions, TRY 20 million for development
and investment banks.
TBA
Turkish Banking System
October 2005
Corporate governance
• In parallel to international principles,
the provisions related to corporate
governance principles are set out
TBA
Turkish Banking System
October 2005
Supervision and Audit
• integrity of on-site supervision and audit activities
• independent audit, internal audit, internal control and risk
management in line with the international practices
• principles of on-site supervision and audit to be determined
by Banking Regulation and Supervision Agency (BRSA)
• all activities including IT systems subject to audit process
• risk-based approach in bank supervision
• audit performed in a consolidated and coordinated manner
TBA
Turkish Banking System
October 2005
Protective Provisions
• All the limitations and standard ratios shall be considered on
a consolidated basis
• Shareholders equity shall not be less than the paid-in capital.
• In case the limits and standard ratios set in the Law are
reached or exceeded, the relevant bank shall promptly
inform the BRSA
• Provision related to the minimum liquidity regulation to be
set by BRSA is brought
• Loan definition is broadened (bails, avals, receivables
incurred from reverse repurchasing transactions, financial
leasing receivables)
TBA
Turkish Banking System
October 2005
Legal Obligations
• Banking secrecy
• Customer rights
• Ethical principles
TBA
Turkish Banking System
October 2005
Limits
• Limits on loans to a real person or legal entity or a risk
group are fully harmonized with the EU directives
• Banks are prevented to transfer their funds to close the
budget deficits of their funds and foundations
• Provisions dealing with donation limits and hidden transfer
of earnings are added
TBA
Turkish Banking System
October 2005
Deposit Insurance
In conformity to the practices in the EU;
the deposit banks are required,
• to take out insurance cover only for the part
of the deposits held with them subject to
insurance.
• to pay saving deposits insurance premiums
over the sum insured as above
TBA
Turkish Banking System
October 2005
Measures against systemic risk
• In case of determination of a systemic risk danger
as a result of joint evaluation by the Fund (SDIF),
the Treasury Undersecretariat and the Central
Bank under coordination by the BRSA, the
Council of Ministers is authorized to identify, take
and impose extraordinary measures and actions
TBA
Turkish Banking System
October 2005
Exclusion from
the banking system
• BRSA has administrative and financial
autonomy so as to ensure exclusion from
the banking system of the institutions which
fail
TBA
Turkish Banking System
October 2005
Short-term outcomes
•Strengthened confidence in the banking sector and rating outlooks
•Banks gradually adopting to changing environment; disinflation
and recovery are likely support the sector
•Full quarantee on deposits limited
•Improvement in asset quality; NPLs’ contained and highly
provisioned
•Regulatory capital requirements met, economic and working capital
began to rise
•Earnings less dependent on windfall and inflationary gain from the
Governmet securities as interest margin and income from fees and
commission increased
•Improving return on equity is likely to encourage capital growth
TBA
Turkish Banking System
October 2005
Short-term outcomes
•Higher lending tendency to private sector
•Risks arising from fx and interest rates lowered but maturity gap is
still important
•Foreign banks’ share increasing
•Concentration rise
•Risk management improved
•Foreign borrowing accelerated
•Banks’ market capitalisation jumped
TBA
Turkish Banking System
October 2005
Reduced pressure on financial sector; demand from nonbanks investors, notably from foreign investors
As % GNP
Domestic debt
Domestic debt/M2YRF
Deposit banks G-securities
Non-banks residents G-securities
Foreign investors G-securities
2002
2003
2004
2005*
55
106
14
11
1
54
118
27
14
1
52
110
27
15
3
52
104
27
13
5
* As of August
TBA
Turkish Banking System
October 2005
Upward trend in TL deposits and loans,
notably to households
27.12.02 26.12.03 31.12.04 02.09.05
As % of GNP
Deposits
TL deposits
Loans/deposits
Loans
Consumer loans
Credit cards
TBA
52
22
38
20
1
1
Turkish Banking System
45
23
43
20
4
4
46
26
52
24
4
4
October 2005
48
29
59
28
5
3
Substantial change in the structure of financial assets;
share of TL monetary assets and equities up
Financial assets
As % of GNP
2002
Monetary assets
TL
Fx
Securities (private sector)
Equity
Securities (public sector)
Bonds
Treasury bills
Investment funds
Total
TBA
2003
2004
2005 II
50
23
26
21
21
55
41
14
2
43
24
19
27
27
55
47
7
4
43
25
18
31
31
53
45
7
4
44
28
16
31
31
53
45
7
4
127
128
131
132
Turkish Banking System
October 2005
Total assets grew rapidly in USD terms but remained
almost the same as % of GNP
300
Total assets
USD billion
%
250
80
200
60
150
40
100
20
50
0
0
99
'00
'01
Total assets
TBA
'02
'03
'04
'05 J
As % of GNP
Turkish Banking System
October 2005
Dramatic decline in number of banks
Number of banks
85
80
75
70
65
60
55
50
45
40
35
30
25
20
15
10
5
0
80
85
90
95
Total
TBA
99
'00
'01
'02
'03
'04 '05 J
Private dep banks
Turkish Banking System
October 2005
Number of branches began to rise in private banks
Number of branches
8000
7500
7000
6500
6000
5500
5000
80
TBA
85
90
95
99
'00
'01
Turkish Banking System
'02
'03
'04
'05 J
October 2005
A steady increase in number of employees, notably
in private banks
Number of employees
200
thousands
180
160
140
120
100
80
TBA
85
90
95
99
'00
'01
Turkish Banking System
'02
'03
'04 '05 J
October 2005
Asset size getting larger
Bank total asset size
USD billion/number
40+
30-40
20-30
10-20
5-10
1-5
0,5-1
- 0,5
Total
TBA
99
'01
'02
'03
04
05 J
1
1
1
6
19
11
43
82
1
5
2
10
4
28
50
Turkish Banking System
1
5
1
12
5
26
50
1
2
4
1
13
3
26
50
2
4
4
11
1
25
48
October 2005
1
2
2
2
5
10
2
24
48
Large banks increase their market share
Concentration
80
First five*
Asset
Deposits
Loans
First ten*
Asset
Deposits
Loans
* according to asset size
TBA
90
'00
05 J
63
69
71
54
59
57
48
51
42
61
65
54
82
88
90
75
85
78
69
72
71
84
89
78
Turkish Banking System
October 2005
Structure of the banking system
Market structure
June 2005
Banks
Emloyment Brances
Assets
Loans Deposits
% share % share % share
Deposit banks
State owned
Private
Fund
Foreign
Non-deposit taking banks
35
3
19
1
12
13
125.416
39.080
79.870
401
6.065
4.471
6.034
2.039
3.786
1
208
19
96,5
32,5
60,1
0,5
3,4
3,5
94,1
19,9
69,3
0
4,8
5,9
100
39,5
57,1
0
3,4
0
Total
48
129.887
6.053
100
100
100
TBA
Turkish Banking System
October 2005
Higher share of loans in the total assets
Breakdown of assets
100%
80%
60%
40%
20%
0%
'99
'00
Liquid a
TBA
'01
'02
Securities
Loans
'03
Permanent a
Turkish Banking System
'04
'05 J
Others
October 2005
Breakdown of loans (%)
Exports
Working
Consumers
Housing
Automobile
Credit cards
Investment
Others
Total
TBA
2002
2004
19
16
5
1
1
9
8
41
100
14
19
13
3
4
14
6
27
100
Turkish Banking System
October 2005
Rising shares of TL deposits and equity in liabilities
Breakdown of liabilities
100%
80%
60%
40%
20%
0%
'99
'00
'01
TL de p.
Share holde rs e quity
TBA
'02
'03
Fx de p.
Othe rs
Non-de pos its funds
Turkish Banking System
'04
'05 J
October 2005
Increase in TL assets in total assets and..
TL, fx assets in total assets
100%
80%
60%
40%
20%
0%
'99
'00
'01
'02
TL
TBA
'03
'04
'05 J
Fx
Turkish Banking System
October 2005
...TL sources in total liabilities
TL, fx liabilities in total liabilities
100%
80%
60%
40%
20%
0%
'99
'00
'01
'02
TL
TBA
'03
'04
'05 J
Fx
Turkish Banking System
October 2005
Rather stable fx position;
met the requirements
Fx position* (Fx assets-fx liabilities)
5
USD Billion
0
-5
-10
-15
-20
88
90
95
Sector
'00
'01
'02
'03
'04 '05 June
Including fx indexed
* excluding fx indexed assets and liabilities
TBA
Turkish Banking System
October 2005
Stronger capital; thanks to the restructuring
program and economic recovery
Shareholders' equity
40
USD billion
%
20
30
15
20
10
10
5
0
0
'99
'03
Shareholders' equity
TBA
As % of t assets
State-owned
Turkish Banking System
'04
05 J
Private
October 2005
Working capital improved rapidly
20
Free capital*
USD billion
15
10
5
0
-5
99
'00
'01
Sector
'02
State-owned
'03
'04
'05 J
Private
* Shareholders' equity+current year net income-permanent assets
TBA
Turkish Banking System
October 2005
More radical reporting for NPLs, higher provisions
and strong demand for loans
NPLs
7
USD billions
%
6
6
5
5
4
4
3
3
2
2
1
1
0
0
92
93
94
95
Before provisions
TBA
96
97
98
99
After provisions
'00
'01
'02
'03
'04 '05 J
As % of total assets (net)
Turkish Banking System
October 2005
Permanent assets share in total assets coming down
Permanent assets*
As % of total assets
%
16
14
12
10
8
6
4
2
0
'99
'00
'01
'02
Sector
State-owned
'03
'04
'05 J
Private
* Fixed assets+equity participations+subsidiaries+NPLs
TBA
Turkish Banking System
October 2005
Recovery in profitability
Return on assets (%)
6
4
2
0
-2
-4
-6
-8
'99
'00
'01
Sector
State-owned
'02
'03
'04
'05 J
Private
Figures in 2001-2004 are according to inflation accounting
TBA
Turkish Banking System
October 2005
From losses to sustained profitability;
likely to encourage investors
60
Return on equity (%)
%
40
20
0
-20
-40
-60
-80
-100
-120
'99
'00
'01
Sector
'02
'03
State-owned
'04
'05 J
Private
Figures in 2002-2004 are according to inflation accounting
TBA
Turkish Banking System
October 2005
Sustained improvement in efficiency
Selected efficiency ratios, sector
2002
2003
2004
2005 June
Net interest margin/total assets
Expenses/total assets
Retun on banking activities
%2.75
%4.56
-%1.81
%3.90
%4.27
-%0.36
%4.87
%3.59
%1.27
%4.38
%3.42
%0.96
Expenses/Income (ecluding divident)
Expenses/Income (including divident)
%65.35
%63.23
%53.36
%52.45
%48.70
%47.55
%50.34
%49.02
%1.65
%1.11
%3.22
%2.25
%2.97
%2.11
%3.56
%2.50
%13.66
%9.17
%22.65
%15.79
%19.81
%14.05
%25.58
%17.96
Return on assets (before tax)
Return on assets (after tax)
Return on shareholders' equity (before tax)
Return on shareholders' equity (after tax)
* 2005 June simply annualized
TBA
Turkish Banking System
October 2005
Selected ratios
Sector
03
02
Capital adequacy
Share holders' equity
As % of risk weighted assets
As % of total assets
Free capital
As % of total assets
TBA
04
05 J
24
12
2
31
14
6
29
15
8
26
14
7
Asset quality (%)
Securities portfolio
Loans/total assets
Non performing loans (ap)/total loans
Provisions for NPL
Permanent assets/total assets
41
27
6.6
64
10
43
28
1.4
89
8
40
34
0.7
88
7
39
37
0.6
88
7
Liqudity (%)
Liquid assets/total assets
Liquid assets/short term liabilities
34
75
39
81
37
84
38
80
Turkish Banking System
October 2005
Positive developments in the banking system
positively reacted by the investors
Market capitilization of financial institutions
(shares are traded ISE, (USD million)
45,000
40,000
35,000
30,000
25,000
20,000
15,000
10,000
5,000
01
TBA
02
03
04
05
Turkish Banking System
June
October 2005
Rapidly growing numbers of credit and debit cards
Selected inditacors
Thousands
2002
ATMs
POS machines
Credit cards (1000)
Debit cards (1000)
TBA
12
496
16
35
Turkish Banking System
2003
2004
13
662
20
40
14
912
27
43
October 2005
Expectations for the near future
•Larger and deeper financial markets
•Lengthening the maturities
•Higher lending to private sector
•Sufficient earnings to feed capital
•Decline in margin with widening business activity
•Positive atmosphere for foreign investors
•Intense competition on behalf of depositors and borrowers
•Improvement in transparency and accounting rules for
better financial system
TBA
Turkish Banking System
October 2005
250
Total Assets
USD billion
%
100
200
80
150
60
100
40
50
20
0
0
80
TBA
85
90
95
'00
'01
'02
Total assets As per. of GNP
Turkish Banking System
'03
'04
October 2005
Substantial growth during the last years
Selected figures of deposit banks
80
USD
Shareholders' equity per bank
Assets over branch
16
2.854
Assets over employees
TBA
00
136
Turkish Banking System
05 II
101
873
18.963 40.427
898
2.044
October 2005
Still low degree of banking on the basis of
inhabitants
Selected figures of deposit banks
(for inhabitants)
80
00
05 II
Number of banks (for 1000 inha)
1.111
1.105
2.051
Number of branches
7.471
8.636 11.899
Number of employees
356
409
602
Assets (USD)
382
2.196
3.397
TBA
Turkish Banking System
October 2005
Approaching the emerging markets average,
substantially low compared to developed
countries
Selected financial indicators
(2003, as % of GDP)
World avg.
Bank assets*
Capital markets
Shares
Bills and bonds
State
Private
Total
112
230
86
144
56
88
342
EU
Emerging
markets
173
233
74
159
60
99
405
78
84
47
37
23
15
162
Turkey
72
86
29
57
57
0
158
Source: Global Financial Stability Report, Spt 2004
TBA
Turkish Banking System
October 2005
High growth potantial compared to EU-15
EU 15 and Turkey; selected indicators
As % of GDP, 2003
EU-15*
Banking system
Assets
Deposits
Loans
Housing loans
Total consumer loans
Income per capita (euro)
Assets per capita (euro)
Capital markets
Equities
Bonds and bills
Turkey
281
98
128
40
8
73
47
20
1
4
24.324
68.361
2.999
2.010
74
159
29
57
* Average
TBA
Turkish Banking System
October 2005