TBY talks to Adnan Bali, CEO of İş Bank, on the eurozone crisis’ impact on Turkey, banking sector performance, and international expansion plans.
TBY What do you forecast will be the impact of the eurozone crisis on the Turkish financial sector?
ADNAN BALİ Turkey’s financial markets and banking sector had the ability to not only withstand the effects of the 2001 crisis, but to also recover fairly quickly in 2010 and 2011. Our financial performance made the country home to one of the world’s fastest-growing economies. Recently, concerns about debt sustainability in the eurozone have intensified, and there are increased risks regarding global economic activity. During a recession in Europe, the Turkish economy is adversely affected through various channels. The decline in risk appetite is thought to limit capital inflows toward emerging countries, including Turkey. Accordingly, we expect a growth rate of around 3.5% in 2012 for the Turkish economy, which grew 8.5% in 2011. The narrowing of economic growth is also reflected in the financial sector. However, Turkish banks are less reliant on foreign funding than many other emerging markets. As of 2011, customer deposits, the majority of which are domestic, constitute 57.1% of our total liabilities. Compared to 2010, the total funds raised by the banking sector via foreign banks increased by 20.3% in 2011 to $98.2 billion. The amount of loans from abroad increased by $5.8 billion, whereas funds from repo transactions, deposits, and syndicated loans grew by $5.7 billion, $3.7 billion, and $1.6 billion, respectively. However, the volume of securitization loans decreased by $0.9 billion, due to installment payments on principal balances. In terms of credits, the Turkish banking sector performed well thanks to its sound and stable structure, with high capital adequacy ratios. In recent years, long-term credit rollover ratios have stood generally above 100%, with the exception of 2009, when the Turkish banking sector achieved a rollover of slightly lower than 78% of its long-term credits. In 2011, the long-term debt rollover ratio for the Turkish banking system was 177%, which indicates that the problems in the international markets have not yet been reflected on the external financing channel. Considering the fact that countries with a major share in funding are relatively more stable, the rollover ratio of the banking sector is expected to remain at or above 130% in 2012. In terms of short-term funding, we have observed a downward trend in foreign borrowing in the form of syndication and securitization loans since 2008, due to the diversification of funding sources. On the other hand, fundraising via collateralized loans and non-collateralized bilateral loans has registered increases. In 2011, bond issuances in the international markets with maturities of five or more years have been another important tool for widening the funding base. We forecast that this style of financing will expand during 2012. International institutions have been another financing source for funding over the past couple of years. Since 2009, institutions such as the European Investment Bank (EIB), European Bank for Reconstruction and Development (EBRD), International Finance Corporation (IFC), and the French Agency for Development (AFD) have supported the private sector in Turkey, with an ongoing emphasis on promoting sustainable energy efficiency, renewable energy, and agribusiness. This funding mechanism has been mainly secured through Turkish local commercial banks. Bearing in mind the possible cost increases, we don’t anticipate a sudden stop in short-term funding. So far, İş Bank has not seen any funding difficulties or pressures emanating from eurozone concerns or deleveraging, although there are clear and present risks associated with global risk aversion and the lack of steady funding.
Growth in assets and loans in Turkey’s banking sector has been projected to slow down, and bank profits are set to decline in 2012. Do you support the unorthodox monetary policies of the Central Bank of the Republic of Turkey (CBRT)?
With the divergence between domestic and foreign demand conditions, the current account deficit has widened significantly over the post-crisis period. The CBRT stated that financial stability risks were evident as the rapidly increasing current account deficit was fueled by short-term capital inflows. The capital inflows toward Turkey have intensified as the developed economies’ central banks have continued their very loose monetary policies. Strong domestic demand coupled with relatively weak foreign demand put pressure on the current account deficit. The CBRT lowered policy rates in order to combat increasing short-term capital inflows, while differentiating the required reserve ratios for lira deposits. This was done according to maturities, in order to slow down credit growth by raising the funding costs of the banks. The CBRT has been following a very active policy in line with the increasing uncertainties in the global markets. The measures taken by the CBRT are effective in decreasing the fragility of the Turkish economy. With its tightening liquidity and financial sector policies, the CBRT aims to minimize risks regarding the current account deficit and inflation. At the same time, by keeping the policy rate low, the CBRT is preventing a potentially hard landing. Naturally, the hike in required reserve ratios puts pressure on profitability. However, we firmly believe that the measures being implemented to slow down the economy had several negative effects on the banking sector in the short term. In the long term, sustaining financial stability is much more important than a slight decline in profitability over the course of one year.
What is your view of the regulatory framework for banking in Turkey, and do you anticipate further significant changes in the near future?
Turkey has steadily improved its regulatory framework for banking by introducing new regulations in diverse areas since the 2001 crisis. The current regulatory framework ensures that the Turkish banking system complies with international standards. One of the most significant changes to be made in the near future is the transition to the Basel II framework. The change is set to occur in mid-2012, and will fundamentally alter the capital adequacy calculations of Turkish banks and may lead to the restructuring of balance sheets. Furthermore, the Banking Regulation and Supervision Agency (BRSA) has not yet announced its schedule for the implementation of Basel III, but a gradual transition is highly anticipated in order to achieve a stronger alignment with EU directives. The new Commercial Code in 2012 is also a major reform with many implications, particularly for corporate governance issues such as transparency, management accountability, and minority rights.
What is the appetite for financial services among foreign capital firms?
Although the Turkish financial sector is developing rapidly, when compared with EU figures such as total credits, household indebtedness, and total deposits to GDP ratios, we can see that there is still significant untapped potential in the sector. For example, an analysis in 2010 shows that the ratio of the total assets of the banking sector to GDP was 365% in the EU. In Turkey, the same ratio was 89%. Thus, in the long term we can expect to see significantly more bank penetration, owing to the sector’s dynamics, as capital markets continue to deepen and the informal economy comes under greater control. The growth potential in the financial sector also attracted significant FDI, especially in the pre-crisis period. Between 2005 and 2011, FDI inflows to Turkey totaled $105 billion, with $37 billion of this amount aimed at the financial sector. In the post-crisis period, FDI to Turkey slowed as a result of the problems in the European banking sector and rising capital needs—foreign interest in the Turkish banking sector also decreased. However, $8 billion in FDI still flowed into the financial sector between 2009 and 2011.
What are the bank’s growth targets in the international arena?
Our bank shapes its international presence according to the globalization of the Turkish economy, seeking to become a regional bank and positioning itself as a global player through the continuous expansion of its overseas network. In addition to our representative offices, affiliates, and branches abroad, our priority is to expand in markets with close economic and commercial ties with Turkey. In this context, we plan to take new initiatives in Georgia, Kosovo, Pakistan, and Iraq in the near future. We are also interested in launching initiatives in Azerbaijan and Egypt, where big potential for development is present in the economy, particularly in the banking sector.
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