The Banks Association of Turkey is optimistic that the central bank's decision to reduce interest rates will boost lending activity in the economy.

Hüseyin Aydın

Hüseyin Aydın serves as the Chairman of the Banks Association of Turkey and is the current CEO of Ziraat Bank. He is also a board member of the Turkey Wealth Fund. Aydın previously served as general manager and board member of Halkbank and worked in other capacities for Pamukbank, Halkbank, and Ziraat Bank. He graduated from the Ankara Academy of Economics and Commercial Sciences.

How has the economic slowdown impacted the banking sector?
Due to the slowdown in the economy, the banking sector saw slow growth in 2019. Total assets annually grew by 15% in nominal terms as of June 2019 and reached TRY4.2 trillion; however, in dollar terms, total assets fell by 9%. The ratio of loans to GDP was around 64% in mid-2019, while the loan-to-deposits ratio was 57%. TRY loan stock remained almost the same compared to June 2018, while FX loan stock increased by 23%—a 3% decline in USD terms. Commercial loans grew by 11% and individual loans by 1%. Commercial loans accounted for 78% of total loans, while loans to consumers took 22% of the total. SMEs' share of total loans was 25%.

Why has inflation fallen, and what stabilizing effects has this had on the economy?
Inflation started to decline in 2H2019 and is expected to level off around 12% in December, below the target. A slowdown in domestic demand and a rather stable trend in lira value pulled inflation down and had a positive impact on expectations. The government is targeting 8.5% inflation in 2020 and 6% in 2021. Demand for the lira increased in 2Q2019 mainly due to the reverse currency substitution of residents. This allowed the TRY rate against a USD/EUR basket to at about 5.8 in nominal terms, a considerable appreciation of the TRY from 6.6 in April.

How will the central bank's decision to reduce interest rates impact lending activity in the banking sector?
Better (lower) inflationary expectations allowed the central bank to lower policy rates below 20%, and the downward trend in inflation will support the decline in interest rates. Thus, it will contribute to a fall in loan interest rates along with a fall in the funding costs of the banking sector. With the falling interest rates, the contribution of banks to the real sector and economic growth will increase.

How well suited are banks to deal with increasing ratio of non-performing loans (NPLs)?
NPLs before special provisions to loans ratio is around 4.4%. The ratio was around 4.5% for corporate loans and 3.8% for consumer loans. The ratio of restructured loans to total loans is close to 6%. The banking sector is well suited to deal with these NPLs, as the capital adequacy ratio is 17.8%, well above the regulatory ratio. Annual profitability ratios declined to 11.8% in mid-2019, from 13.7% at the end of 2018, due mainly to slow growth in loans, a squeezed interest margin, and higher special and general provision for loans.