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Turkey 2013 | FINANCE | INTERVIEW

TBY talks to Adnan Bali, CEO of İşbank, on the influx of foreign lenders, GDP growth expectations, and Istanbul's potential as a financial center.

Adnan Bali
BIOGRAPHY
Adnan Bali was born in 1962, and began his banking career in 1986 by joining the Board of Inspectors as an Assistant Inspector after graduating from the Middle East Technical University with a degree in Economics in 1986. After working in various managerial positions at İşbank, Adnan Bali was promoted to the post of Deputy Chief Executive in 2006, and became the CEO of İş Bank on April 1, 2011.

Turkey's banking sector has seen an influx of foreign lenders in recent years. Is this a trend you expect to continue?

Foreign investors' acquisition of shares in existing institutions has been exceptional over recent years. Turkey continues to offer higher returns on capital compared to developed markets, and it remains a significant growth opportunity. Therefore, it will not be surprising to see that foreign investors' interest in the Turkish banking sector revives as stability in the global financial markets is gradually re-established. Recent market entries by Sberbank, Bank Audi, Burgan Bank, Bank of Tokyo-Mitsubishi UFJ Ltd., and the Commercial Bank of Qatar prove that interest in the Turkish banking market continues. Foreign banks' interest in the Turkish banking sector gained pace in the second half of the 2000s such that, today, the share of foreign capital rose above 40% when the foreign share of banks listed on the Borsa Istanbul (BIST) is also taken into account. Today, 10 of the 28 commercial banks established in Turkey, excluding participation banks, are classified as foreign banks, where foreign owners' shares are more than 50%. Some of the foreign investors have been in Turkey for more than 30 years, either in the form of representative offices, foreign branches, or established banks. Foreign players have significant shares also in our major competitors. However, we all operate on a level playing field, subject to the same governing laws, under the same regulations. Foreign players and possible new entries in the Turkish banking system definitely intensifies the competition. We believe that increasing competition within Turkey, strengthening cross-border business relations, integrating and aligning the financial systems of different countries, and familiarizing ourselves with different cultures and ways of doing business serve to better position Turkish banks.

In late 2012, İşbank entered into a cooperation agreement with the Bank of Tokyo-Mitsubishi UFJ Ltd. How will this agreement enhance the services that both banks can provide to their customers?

The Memorandum of Understanding (MoU) that İşbank and the Bank of Tokyo-Mitsubishi UFJ Ltd. signed during the IMF World Bank Meetings in Tokyo on October 12, 2012, aims to mutually provide a comprehensive range of banking and financial services for our clients. The MoU allows for the provision of banking services to those companies who have direct investments in Turkey or set up joint ventures with Turkish companies or consider making investments in Turkey, as well as business cooperation between the two firms in areas of mutual interest such as corporate and trade finance. There is great interest shown by Japanese firms in Turkey through the level of direct Japanese investments in the country, even in the aftermath of a global crisis. This and the existence of a large sum of Japanese investments in Turkey is a testament to the depth of Japanese-Turkish relations. We believe that the cooperation between the Bank of Tokyo Mitsubishi UFJ Ltd. and İşbank will ensure vast opportunities for our clients.

“Financial institutions need efficient facilities that provide high-quality living standards and security."

Is the government's 5% GDP growth target for the medium term feasible, and what steps should be taken to ensure that it is met?

The Turkish economy continued to grow in 2012, though at a slower pace compared to 2010 and 2011. Thanks to the measures taken by the authorities such as the Central Bank of Turkey (CBT) and the Banking Regulation and Supervision Agency (BRSA), concerns about the current account deficit were eliminated significantly. Regarding 2013, it is expected that Turkey will continue to diverge positively and growth will accelerate compared to 2012. In 2013, we expect that the composition of economic growth in Turkey will shift gradually away from net exports to consumption and investment expenditures. The government's growth targets for 2014 and 2015 are set at 5%. The medium growth target of 5% is in fact a conservative target when the Turkish economy's potential is considered. Excluding the years of the global financial crisis of 2008 and 2009, the Turkish economy grew by an annual average of 7.8% during 2002-2011. What differentiates the Turkish economy from other emerging market economies is the diversity of its economy. Turkey is neither too reliant on exports nor domestic demand; it has a balanced economy. Also, unlike most emerging markets, Turkey is not a commodity exporter; thus, its economy is not dependent on commodity prices. In order to exploit the above-mentioned advantages and achieve an annual average growth rate of at least 5% in the coming period, Turkey needs to improve several weaknesses. Turkey must focus on improving its human resource base through better primary education, health care, higher education, and training, increasing the efficiency of the labor market, and reinforcing the efficiency and transparency of public institutions. In addition, reducing the informal economy and developing active labor policies, improving income distribution, and reducing regional disparities are critical factors for achieving the medium-term growth target.

How would you assess Istanbul's potential to become an international financial center, and what changes, regulatory or otherwise, could be made to facilitate the process?

The shifting of the dynamics of economic growth from advanced economies to emerging markets after the global financial crisis led to a new way of thinking about international financial centers. Istanbul is the “natural financial center" of Turkey, and our achievements in the last decade point to the fact that Istanbul has the potential to become an important international financial center. Istanbul is home to 18% of Turkey's population and the city is referred to as the “third largest metropolitan area in Europe," after London and Moscow. The Istanbul International Financial Center Project aims to make Istanbul a regional financial center in the next 10 years and then a global financial center in the next 30 years. Turkey has a huge growth potential, combining a large and fast-growing economy with a relatively underpenetrated financial services market. There are numerous growth opportunities in many areas of financial services, focusing on a strong banking market and other markets that require fast development such as the equity market. Stock market capitalization is relatively weak compared to mature countries, but it is consistent with other emerging economies. The government bonds market is relatively developed. Meanwhile, the corporate bonds market, which was virtually non-existent due to the crowding-out by sovereign debt issues in the past, has begun to develop gradually. In addition to the full range of domestic and regional commercial requirements, specific product opportunities, such as derivative instruments, insurance classes, asset management, Islamic finance, and environmental “green" financing are on the agenda of the Turkish financial system. According to the Global Financial Centers Index, the main areas of competitiveness for international financial centers are listed as business environment, taxation, reputation, infrastructure, and market access. Policymakers should focus on these main areas of competitiveness in order to be recognized as international financial centers. Despite the significant improvement registered in the last decade in Turkey, there is still a lot of room to improve the tax regulation and legal infrastructure, as well as reduce intermediation costs in the financial sector. Financial institutions need efficient facilities that provide high-quality living standards, high-tech service capacity, comfortable transportation, and security. Progress in these areas should also be accelerated.

What trends do you foresee in Turkey's banking sector over the medium term?

The high economic growth potential of Turkey and the strong financial structure and dynamism of the banking sector promise huge growth performance in the long term. The demographic features of Turkey also indicate high growth potential in the banking sector. The number of households with an annual income between $25,000 and $50,000 is expected to reach 4 million in the medium term, far from its previous level of 1.5 million in 2005. In parallel, it is expected that the penetration rate will increase and the branch network will continue to widen until the 2020s, while branch and personnel efficiency improvements will also proceed. In the long term, İşbank will continue to enhance its market shares parallel to profitability, efficiency, and risk-focused strategies. The young population creates a dynamic economy with significant prospects for further development in the real sector. Under these circumstances, there is huge potential to grow in both retail and corporate banking, given that household indebtedness is significantly below that of developed countries.