With strong capital adequacy and negligible NPLs, Turkey's banks are the fortress of the economy. As international investors clamor for exposure, lenders are focusing on innovative structures to extend their funding bases.

In the wake of the global downturn, many countries have been forced to acknowledge banks as the culprit. In Turkey, however, robustly capitalized financial institutions were a buffer, protecting the country's real economy from the shockwaves of the global financial crisis.

The current strength of Turkey's banking system is due in large part to the lessons learned from its own banking crisis in 2001. That currency calamity resulted in the creation of the Banking Regulation and Supervisory Agency (BRSA), and the system emerged with strengthened regulation, strong capitalization, and more controlled risk taking. Sustained economic growth since that time furthered bolstered balance sheets.

Although there was a liquidity squeeze in the last months of 2008, the system needed no rescue package and recorded profits throughout the period. Today the banking sector maintains its asset quality and profitability. Return on assets (ROA) and return on equities (ROE) ratios increased in 2009 and remained stable during the first six month of 2010. Net income grew by 20.2% in 2009 compared to 2008.

According to the BRSA, the asset size of the Turkish financial services sector is TR1,122.6 billion as of June 2010. The banking sector itself achieved a compound annual growth rate (CAGR) of 21.6% between 2004 and 2009. Banking assets, totaling TR905.7 billion, constitute approximately 92% of GDP, up from 57% in 2002.

Flush with liquidity, Turkish banks post particularly enviable capital adequacy figures. In August 2010, the BRSA reported an average capital adequacy ration of 19.34, putting Turkey firmly ahead of most European countries and well above the 8% required by Basel II norms.

Further strengthening this capital structure advantage, the BRSA made bank profits subject to permission in 2008. During the first six months of 2010, 81% of the equity was used in core banking activities.

There are currently 49 banks in Turkey comprising 32 commercial banks, 13 development and investment banks, and 4 participation (sharia-compliant) banks. The total number of people employed by the sector is 188,472 across 9,800 branches. The number of banks has dropped by two since 2005, while the number of branches has increased 32%, and the number of ATMs has increased by nearly 90%.

Despite this hearty growth, the total ratio of financial assets to GDP was only 141% by the end of 2009, which is low compared to developed and even many developing economies. A whopping 51% of the adult population in Turkey remains unbanked. These figures, in concert with surging per capita GDP and a sophisticated banking structure, signal sound future growth potential.


The period of 2002 to 2010 saw loan growth surge from 27% to 51.2%, with consumer loans and credit card balances leading the way for the first time in the Republic's history. Consumer loans were driven significantly by housing credits following the 2007 Mortgage Law, which enabled banks to extend mortgage loans for the first time. Housing loans jumped 91% in 2009 compared to 2006, while automobile loans contracted by 34.8% in the same period. General-purpose loans (borrowed for durable and semi-durable consumer goods, education, marriage, and health purposes) grew by 142.4% in 2009 compared to 2006.

Meanwhile, SME loans have declined significantly due to tightened criteria and lower demand. Corporate loans have continued steady growth throughout the decade. Non-performing loan (NPL) ratios remain within reason. After a slight jump in 2009, NPLs declined to 4.9% in 2010.

As of July 2010, there were 46 million credit cards and 67.4 million debit cards in Turkey. The country now follows only the UK and Spain in Europe for number of cards and is 10th in Europe in terms of money spent through credit cards.

Loan-to-deposits also reached an all-time high last year of 82%, up from 46% in 2002. In order to restrain this growth, the Central Bank of Turkey (CBT) raised the banks' short-term lira reserve requirements by 500 basis points to 15% on deposits in March 2011. The controversial move, which sought to drain TL19.2 billion of liquidity from the market, is hoped to control credit volumes in a bid to cool down the economy without increasing benchmark interest rates, which the CBT has held at a record low since January 2011. With bank lending fueling the demand for imports, the ultimate aim of controlling loan growth is to reign in Turkey's yawning current account deficit.


Turkey's participation banks, similar in lending and depository practices to Islamic banks in other countries, are experiencing growth and may outpace the industry as a whole this year. According to Osman Akyüz, the Secretary General of the Turkish Participation Banks Association (TKKB) and the former General Manager of Albaraka Türk Participation Bank, the total assets of participation banks in 2010 increased by 25% reaching $28.1 billion. Deposits increased by 22% to reach $21.9 billion, of which 66% were in Turkish lira and 34% in foreign currencies. Financing grew by 25% to reach $20.8 billion. Total shareholder equity increased by 19% to $3.5 billion. Net income came in much more moderately at 4% to reach $491.6 million, as branch numbers grew 8% to reach a total of 607 with 12,694 employees.

However, baseline figures for Turkey's participation banks remain low at 6%. While the sector has a long way to go to reach Saudi or Malaysian levels (38% and 21%, respectively), it is targeting a moderate goal of 10-12% market penetration over the next few years.


This year will most likely be remembered as the time when Turkish banks of all stripes break the binds of their deposit-only funding structures. The soft underbelly of Turkey's otherwise heavily protected financial system is a precarious asset-liability mismatch. Historically, banks lend long-term to their corporate clients by borrowing short-term from their depositors, usually with maturities under three months. With lending requirements from government and corporates growing longer in tenor, it is becoming increasingly important for banks to extend the maturity profile of their liabilities.

With that in mind, Turkey's leading banks are now looking to the bond market for funding. In 2010, Akbank became the first Turkish bank since 2007 to activate the Eurobond market. Two of Turkey's other major players—Yapı Kredi and İşbank—quickly launched road shows and confidently waited two or three months before completing their own Eurobond issues. Garanti—the last remaining link among Turkey's “big four"—has followed suit by registering a $1.5 billion shelf application which will allow it to issue up to that amount in the next 12 months. These deliberate delays show that the international appetite for Turkish bank paper remains unsatiated. And, at least thus far, rightly so—Yapı Kredi and İş Bank improved their pricing by up to 25 bps following their delays. It appears that international investors see Turkish banks as a proxy for overall growth, and given subscription rates the market appears to be clamoring for exposure. Şekerbank—a mid-sized lender that focuses on SME business lines—is currently taking the innovation one step further by structuring Turkey's first covered bond, comprised by a pool of the bank's strongest SME loans.

Turkey's participation banks are also diversifying their funding base. In late 2010 Küveyt Türk issued the country's first sukuk, or Islamic bond. In March 2011, Bank Asya, Turkey's largest participation bank, raised a one-year $171 million murabaha syndicated loan from a consortium of 26 international banks.

Thanks to a decline in interest rates and a lifting of regulatory safeguards, banks are now turning to the domestic market for funding, driving the lira-based corporate bond market beyond its embryonic stage. Starting in 2011, most of the biggest banks have issued bonds ranging from 6 to 18 months. Akbank was the first bank to issue local corporate bonds when it sold a TL1 billion six-month issue in December 2010, pricing it at 60 bps above the relevant Turkish government security.

In January 2011 the three biggest banks all notified the Istanbul Stock Exchange that they would be issuing lira-denominated bonds. Once again leading the field, Akbank announced that it would be selling TL500 million worth of six-month paper at 7.56%. Garanti announced that it would issue TL1 billion of one-year paper at 7.68%. And İş Bank, the largest private bank, sold TL500 million of six-month notes at 7.5% and TL600 million of one-year notes at 8.43%. Şekerbank entered the market in March, selling TL350 million in two deals, one with a one-year tenor and one with an 18-month tenor. These deals were largely subscribed to by retail investors, many transferring money from deposit accounts into bonds.

Driven by investor confidence, these products are cracking open a new world of financing and helping to stabilize a precarious asset-liability mismatch, arguably the only weak link in a sector that can rightly be seen as a proxy for Turkish growth.