Why Turkish Banking Sector?


The Turkish banking sector is strictly regulated and highly monitored by two powerful agencies; Banking Regulation and Supervision Agency (BRSA) and Central Bank of the Republic of Turkey (CBRT).

According to the BRSA sector data as of December 2017, there are 49 banks operating in Turkey (28 private commercial banks, 3 state banks, 13 development and investment banks, 5 participation banks). The top seven banks, three of which were state-controlled, are holding more than 70% of the banking sector’s total assets, loans and deposits in Turkey.

Turkey’s large and dynamic economy with attractive demographics definitely contributes to the banking sector's growth prospects. The Turkish banking sector had a cumulative average growth rate of more than 13% since 2002. Despite this outstanding performance, Turkish banks still have significant room for growth. The penetration rates for banking products increased significantly since 2002. Yet, they are still low compared to figures in Euro area. More importantly, the unbanked population is quite high in Turkey. More than 40% of the adult population is unbanked1 which means they do not have an account at a financial institution.

Unlike many other banks around the world, liquidity risk is not a big threat for Turkish banks. With 55% of the total assets funded with customer deposits, the sector remains solid with its highly stable funding structure.

BRSA has been monitoring the liquidity position of the banks closely. Liquidity Coverage Ratio requires banks to carry high quality liquid asset reserve sufficient to cover their net cash outflows and the ratio is well-above required levels indicating Turkish banks’ solid liquidity position.

In terms of capital, Turkish banks are also in an advantageous position. After introducing a recommended Capital Adequacy Ratio (CAR) level of 12% on the top of 8% required level, within the scope of Basel-III alignment, BRSA introduced new capital buffers such as SIFI Buffer, Capital Conservation Buffer and Counter-Cyclical Buffer. A deeper analysis of the capital structure of Turkish banks indicates that the banking sector capital is mainly made up of Tier I capital (as high as 86%), namely paid-up capital, legal reserves, profit for the period and retained earnings.

Unlike European banks, high leverage is not an issue for Turkish banks. While delivering mid-to-high teens Return on Average Equity (ROAEs), Turkish banking sector operates with as low as 8x leverage where Eurozone is around 12x while South Africa operates with higher than 10x2 .

Touching upon asset quality, Turkish banks also stand out for their sound asset quality. Thanks to the established and prudent underwriting procedures, 3.0% NPL ratio is one of the lowest in the region and the specific coverage is 79%.

State banks have significant presence in banking sector assets and deposits. Three state banks hold one third of the sector’s total assets, loans and deposits.

Deposits are very short-term in Turkey, their maturities are mostly 1 to 2 months. As Turkish banks do not fund their longterm loans (such as project finance loans or mortgages) with short-term funding sources, loan to deposit ratio of the sector fairs way above 100% (117% as of December 2017). In that sense, the dependence to international markets to diversify funding sources and manage duration mismatch, increases the sector’s sensitivity to external developments and investor sentiment. Nevertheless, Turkish banks have continuous access to international funds. The banking sector managed to roll-over around 70% of its long-term foreign currency debt even in the dire moments of the global crisis.

Moreover, the deposit market is not fully liberalized. Privileged status of state banks in collecting low-cost state institutions’ deposits allows them to offer higher deposit rates in the market. This pricing behavior distorts the competition. Additionally, scarcity of TL funding in the absence of well-developed capital markets makes the pricing competition more fierce.

Source: BRSA monthly data as of December 2017

1 Per World Bank’s “Turkey: Financial Inclusion Conference” notes dated June 3-4, 2014.
2 IMF-FSI databases. Most figures are based on 2Q17 figures