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The Banks Association of Turkey Recent Developments in the Turkish economy and Turkish Banking System Ersin Özince Chairman of the Board London, November 24, 2005 Outline Economic outlook Short term outcomes Expectations for the near future Turkish banking system

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The Banks Association of Turkey

Recent Developments

in the Turkish economy

and

Turkish Banking System

Ersin Özince

Chairman of the Board

London, November 24, 2005

Turkish Banking System


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Outline

Economic outlook

  • Short term outcomes

  • Expectations for the near future

    Turkish banking system

  • Main issues affecting banks

  • Operational environment

  • Short-term outcomes and selected indicators

  • Expectations for the near future

Turkish Banking System


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Economic outlook

Turkish Banking System


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  • Macro economic policies in conjunction with a positive international environment led to economic performance to improve considerably since 2002.

  • Disinflationary monetary and tight fiscal policies supported by the structural reforms created an environment for higher growth led by the private sector.

Turkish Banking System


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  • Succesfully implemented free market principles will further encourage private sector and foreign investment enabling to increase the international competitiveness.

  • The start of accession negotiations will further reinforce the dynamism of Turkey to complete economic reforms enhancing Turkey’s integration with the EU.

Turkish Banking System


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  • Short-term outcomes encourage private sector and foreign investment enabling to increase the international competitiveness.

  • Quick and sustainble recovery in growth led by private sector

  • Savings gap widened due to rapid increase in private sector fixed capital investments mainly in machineries while public sector savings gap continued to narrow

  • Strong fiscal adjustment led to dramatic decline in public sector borrowing to 1 percent of GNP in 2005 down from 13 percent in 2002

  • Less pressure from the Government on the financial markets while financial assets to GNP also rises

Turkish Banking System


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  • Short-term outcomes encourage private sector and foreign investment enabling to increase the international competitiveness.

  • Sharp decline in inflation

  • Stability sustained in money and capital markets; a substantial fall in the cost of borrowing and real interest rates

  • Strong demand for TL both from domestic and foreign investors

  • Rapid growth in CB reserves and improvement in fx position

Turkish Banking System


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  • Short-term outcomes encourage private sector and foreign investment enabling to increase the international competitiveness.

  • Jump in lending to private sector and consumer loans as well as housing loans

  • Expanding volume of foreign trade

  • Widening current account deficit due to increase in investments and energy prices

  • Foreign investors’ interest on the banking sector

  • Acceleration in privatisation

  • Strengthening rating outlooks

Turkish Banking System


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Improved economic performance positively reacted by the investors in the Istanbul Stock Exchange

Turkish Banking System


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  • Expectations for the near future investors in the Istanbul Stock Exchange

  • 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.

Turkish Banking System


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According to the Government programme public sector deficit targeted to receed to 3 percent of GDP by 2008

Turkish Banking System


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Inflation is down 4 percent in 2008 targeted to receed to 3 percent of GDP by 2008

Inflation

100

75

50

25

0

95

.

.

.

.

'00

.

.

.

.

'05 . .

'08

Turkey

EU-15

Turkish Banking System


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Government debt is likely to meet the EU level in 2008 targeted to receed to 3 percent of GDP by 2008

Turkish Banking System


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Turkish Banking System targeted to receed to 3 percent of GDP by 2008

Turkish Banking System


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  • As a natural outcome of new transition period, a new era of structural change has emerged in the financial sector. Transition of operational environment as well as regulations related financial institutions towards international standarts, a rapid increase in capital inflows and accelerated entries of foreign banks have stimulated competition in the banking the sector.

Turkish Banking System


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  • Main issues affecting banks structural change has emerged in the financial sector. Transition of operational environment as well as regulations related financial institutions towards international standarts, a rapid increase in capital inflows and accelerated entries of foreign banks have stimulated competition in the banking the sector.

  • 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

  • Government’s crowding out affect on financial markets lessened

  • Regulation likely to meet the international standarts, notably to the EU directives

  • Supervision strengthened further

  • Better expectations and vital activity stimulated consumer business

  • Foreign investors’ interest intensified

  • Basel II road map was announced

Turkish Banking System


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  • Operational environment structural change has emerged in the financial sector. Transition of operational environment as well as regulations related financial institutions towards international standarts, a rapid increase in capital inflows and accelerated entries of foreign banks have stimulated competition in the banking the sector.

  • 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

Turkish Banking System


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  • Operational environment structural change has emerged in the financial sector. Transition of operational environment as well as regulations related financial institutions towards international standarts, a rapid increase in capital inflows and accelerated entries of foreign banks have stimulated competition in the banking the sector.

  • Traditionally banks occupy majority, 95 percent 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

Turkish Banking System


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  • Short-term outcomes structural change has emerged in the financial sector. Transition of operational environment as well as regulations related financial institutions towards international standarts, a rapid increase in capital inflows and accelerated entries of foreign banks have stimulated competition in the banking the sector.

  • Strengthened confidence in the banking sector and rating outlooks

  • Banks gradually adopting to changing environment; disinflation and recoveryare likely support the sector

  • Full guarantee on deposits limited

  • Improvement in asset quality; NPLs’ contained and highly provisioned

  • Regulatory capital requirements met, economic and working capital began to rise

Turkish Banking System


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  • Short-term outcomes structural change has emerged in the financial sector. Transition of operational environment as well as regulations related financial institutions towards international standarts, a rapid increase in capital inflows and accelerated entries of foreign banks have stimulated competition in the banking the sector.

  • 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

  • Higher lending tendency to private sector

  • Risks arising from fx and interest rates lowered but maturity gap is still important

Turkish Banking System


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  • Short-term outcomes structural change has emerged in the financial sector. Transition of operational environment as well as regulations related financial institutions towards international standarts, a rapid increase in capital inflows and accelerated entries of foreign banks have stimulated competition in the banking the sector.

  • Foreign banks’ share is increasing

  • Concentration has risen

  • Risk management improved

  • Foreign borrowing accelerated

  • Banks’ market capitalisation jumped

Turkish Banking System


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Reduced pressure of Government on financial sector; higher trend for TL deposits and upward trend loans; notably from households

Government debt and selected financial assets

As % of GNP

2002

2005 Spt.

Public sector borrowing requirement

13

1

Domestic debt

55

52

Total deposits

48

44

TL deposits

21

28

FX deposits

27

16

Investment funds

2

4

Loans

18

28

Consumer

1

5

Credit cards

1

3

Turkish Banking System


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Total assets grew rapidly in USD terms but remained almost the same as percent of GNP

Total assets

USD billion

%

300

250

80

200

60

150

40

100

20

50

0

0

99

'00

'01

'02

'03

'04

'05 J

Total assets

As % of GNP

Turkish Banking System


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Dramatic decline in number of banks the same as percent of GNP

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

99

'00

'01

'02

'03

'04

'05 J

Total

Private dep banks

Turkish Banking System


Structure of the banking system l.jpg
Structure of the banking system the same as percent of GNP

Market structure

June 2005

Banks

Employment

Branches

Assets

Loans

Deposits

% share

% share

% share

34

Deposit banks

125.416

6.034

96,5

94,1

100

State owned

3

39.080

2.039

32,5

19,9

39,5

Private

17

79.870

3.786

60,1

69,3

57,1

Fund

1

401

1

0,5

0

0

Foreign

13

6.065

208

3,4

4,8

3,4

Non-deposit taking banks

13

4.471

19

3,5

5,9

0

Total

47

129.887

6.053

100

100

100

Turkish Banking System


Asset size getting larger l.jpg
Asset size getting larger the same as percent of GNP

Bank total asset size

USD billion/number

99

'01

'02

'03

04

05 J

40+

1

1

30-40

1

2

20-30

1

1

1

2

2

2

10-20

1

5

5

4

4

2

5-10

6

2

1

1

4

5

1-5

19

10

12

13

11

10

0,5-1

11

4

5

3

1

2

- 0,5

43

28

26

26

25

24

Total

82

50

50

50

48

48

Turkish Banking System


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Large banks increase their market share the same as percent of GNP

Concentration

80

90

'00

05 J

First five*

Asset

63

54

48

61

Deposits

69

59

51

65

Loans

71

57

42

54

First ten*

Asset

82

75

69

84

Deposits

88

85

72

89

Loans

90

78

71

78

* according to asset size

Turkish Banking System


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Assets and liabilities have been reshaped the same as percent of GNP

Turkish Banking System


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Breakdown of loans the same as percent of GNP

Share

NPLs

Selected sectors, July 2005, %

in total

share in total

Consumer loans and credit cards

18.1

0.7

Housing

6.0

0.1

Automobiles

5.6

0.2

Others

3.7

0.2

Credit cards

2.8

0.2

Wholesale and retail trade

12.9

0.8

Textiles

8.0

19.3

Food, beverage

5.3

7.0

Leasing and factoring

5.1

1.8

Construction

4.7

6.4

Communications and transportations

4.6

4.5

Metal

4.5

3.5

Manufactures of metal

4.5

3.5

Chemicals

3.2

0.1

Machinery

2.6

2.7

Tourism

2.6

0.1

Others

23.9

49.6

Total

76.1

50.4

Turkish Banking System


Rather stable fx position met the requirements l.jpg
Rather stable fx position; the same as percent of GNPmet the requirements

Fx position* (Fx assets-fx liabilities)

Milyar dolar

5

0

-5

-10

-15

-20

88

90

95

'00

'01

'02

'03

'04

'05 H

Sector

Including fx indexed

* excluding fx indexed assets and liabilities

Turkish Banking System


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Stronger capital; thanks to the restructuring program, recovery in economic activity and profitability

Turkish Banking System


Working capital improved rapidly l.jpg
Working capital improved rapidly recovery in economic activity and profitability

Working capital*

USD billion

20

15

10

5

0

-5

99

'00

'01

'02

'03

'04

'05 J

Sector

State-owned

Private

* Shareholders' equity+current year net income-permanent assets

Turkish Banking System


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From losses to sustained profitability; recovery in economic activity and profitabilitylikely to encourage investors

Return on equity (%)

%

60

40

20

0

-20

-40

-60

-80

-100

-120

'99

'00

'01

'02

'03

'04

'05 J

Sector

State-owned

Private

Figures in 2002-2004 are according to inflation accounting

Turkish Banking System


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Positive developments in the banking system positively reacted by the investors

Turkish Banking System


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Rapidly growing numbers of credit and debit cards reacted by the investors

Selected inditacors

2002

2003

2004

Thousands

ATMs

12

13

14

POS machines

496

662

912

Credit cards

16

20

27

Debit cards

35

40

43

Turkish Banking System


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  • Expect reacted by the investorsations 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

Turkish Banking System


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Growth in the banking sector accelerated after 2002 reacted by the investors

Turkish Banking System


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Substantial growth during the last years reacted by the investors

Turkish Banking System


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Still low degree of banking on the basis of inhabitants reacted by the investors

Turkish Banking System


High growth potantial compared to the eu l.jpg

Selected banking sector indicators reacted by the investors, 2004

MU 12

EU 25

Turkey*

Income per capita

Euro

24.681

22.508

3.401

Total assets per capita

Euro

65.520

63.027

2.361

Total assets to GDP

%

265

280

69

Loans to GDP

%

117

118

23

Housing loans to GDP

%

34

40

1

Consumer credits to GDP

%

7

8

2

Loans to deposits

%

121

123

52

Number of credit institutions

per inhabitants

48.689

54.965

1.513.872

Number of branches

per inhabitants

1.857

2.306

11.653

Number of employment

per inhabitants

143

151

560

* Figures fo banks

High growth potantial compared to the EU

Turkish Banking System


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Thank you. reacted by the investors

Turkish Banking System


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