Turkey's banks ready, kind of, for Lehman test

By bne IntelliNews September 18, 2008

Bernard Kennedy in Ankara -

"Turkish banks have no exposure to Lehman Brothers," declared Tevfik Bilgin, president of the Turkish banking watchdog BRSA, this week as the Wall Street giant bit the dust and financial institutions worldwide felt the tremors. True, but the problems of the global financial sector will do nothing to ease the risks which banks here are already facing.

Bilgin's swift statement sought to dispel any potential alarm in a country still littered with the corpses of dozens of banks that have been swept away over the years by a combination of imprudence, lax supervision and financial market turmoil.

"We have checked with all the major banks and they say they have no material counterparty risk exposure to Merrill Lynch or Lehmans," banking analyst Sevgi Onar of Global Securities in Ä°stanbul confirmed, adding that, "Nevertheless we are living in a world of integrated financial markets and it is possible that some such risks exist."

The good news is that Turkey's 50 extant banks (including four "Islamic" participation banks) are in better shape than ever. The BRSA, set up in 2001, has overhauled the regulatory environment beyond recognition. Capital adequacy ratios are at least 12% and in some cases much higher. The banks' foreign liabilities are put at only about $60bn, half of which is covered by deposits held abroad.

Banking sector assets are today dominated by corporate and consumer credit instead of government debt, while liabilities consist largely of residents' deposits rather than loans from abroad. Derivative and secondary mortgage markets are thankfully minute. Banking sector assets amount to only 66% of GDP, leaving ample scope for expansion. These opportunities have attracted considerable foreign investment in recent years. As a result, over 40% of the sector is in foreign hands. Citicorp, GE Capital and UniCredit Group have taken stakes in three of the big four private banks: Akbank, Garanti Bank and Yapi Kredi Bank, respectively. Several smaller institutions are controlled or entirely owned by Europeans.

"There will obviously be an impact on the economy and the banks," says banking expert Senol Babuscu of Ankara's Baskent University, with reference to the Lehman affair "But it won't take the form of sudden failures." Babuscu does not consider foreign ownership a handicap, given the relatively small share of their capital which the newcomers have invested in Turkey. Most of the banks which have made acquisitions in Turkey have strong deposit bases. Citicorp's stake in Akbank is only 20%.

Homegrown problems

Nevertheless, the problems of the global financial sector will do nothing to ease the risks which banks are already facing - such as the potential impact of slowing domestic and global demand on credit quality, and the likelihood of lower capital inflows to finance Turkey's external deficit. "Although oil prices are still going down, we will still have a significant current account deficit and it might be difficult to go on finding fresh money, so that might cause the lira to devalue perhaps towards 1.4 [liras to the dollar] at some time in the future," says Tugrul Belli of Turkish Bank, Ä°stanbul.

While currency risk is strictly limited by the regulator, a weakening lira could push up interest rates and expose banks' maturity mismatches. As Central Bank Governor Durmus Yilmaz has repeatedly pointed out, it could also undermine the finances of corporate customers who have been borrowing heavily abroad as well as at home.

Since 2006, soaring corporate credit growth has decelerated as banks become choosier and companies shelve investment plans. Lower asset prices and higher provisioning caused aggregate profits to rise by only 2% on year in the first half of 2008, compared with a windfall 31% (to TRY14.3bn, or $12.4bn) for the whole of 2007. Third-quarter figures are awaited with some trepidation. There is a limited pool of fresh capital available, whether domestic or foreign, for covering any losses - let alone for buying out the three remaining state banks.

Meanwhile, banks have this year continued to open hundreds of branches and taken on thousands of new staff in their battle for market share. Should any of the smaller or medium-sized banks eventually prove unable to withstand the twin pressures of global turmoil and local competition too much, it will be the task of the experienced Bilgin to decide whether to keep them afloat, with the help of central bank funds, or whether to wind them up.

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