Bernard Kennedy in Ankara -

For 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, Turkey is relatively confident its banking sector can withstand the current crisis that's battering its shores. A wave of consolidation also appears to be on the cards.

The good news is that Turkey's 50 extant banks (including four "Islamic" participation banks) are in better shape than ever. The Turkish banking watchdog, 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, referring to the crisis. "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 that the newcomers have invested in Turkey. Most of the banks that have made acquisitions in Turkey have strong deposit bases.

The largest banks are better positioned to weather the financial storm, as their economies of scale will help. Further down the pecking order, Akbank Chairwoman Suzan Sabanci Dincer said in a speech on November 12 that the financial crisis was creating consolidation opportunities for small- and medium-sized banks, as the smaller players are forced to merge to win market share.

Homegrown problems

Nevertheless, the problems of the global financial sector will do nothing to ease the risks that the country 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.

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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