Global Business Reports on behalf of bne -

The financial crash following the collapse of Lehman Brothers in 2008 was the worst anyone could remember since 1929, but for Turkish banks the panic selling was all too familiar after going through a crisis that was almost as bad in 2001. Since then, the country's banks became extremely conservative and as a result they were among the least damaged in the world.

"When I experienced the beginning of the global crisis in the US it felt like a déjà vu, because the crisis we faced in the US in 2007-08 was exactly the same as the crisis we faced in Turkey in 2000-01," says Güray Günay, CEO of Metro Investment & Securities.

A series of reforms put in place in 2001 ensured Turkey's banking sector in 2008 had very little debt and almost no exposure to the "exotic" products that brought their US peers to their knees. Instead, most were focused on the traditional deposit-based banking; critics prior to the crisis complained the cautious stance was slowing Turkish growth, but no one is complaining now and Turkey is amongst the three fastest growing countries in the world.

After the central bank slashed its overnight rate to 10.25% and boosted net interest income, Turkish banks actually enjoyed a record-breaking year in 2009 - the total asset size of the banking sector grew by 6.9% in real terms to TRY834bn (€426bn), boosting the sector's asset/GDP ratio to 87.4% from 77.1% at the end of 2008.

The banks have extended their gains this year. Total assets in the sector were worth TRY879bn as of May and profits were up by 13.9% over the same period of last year. The unconsolidated capital adequacy ratio is also well above both the minimum requirement of 8% and the target ratio of 12%, standing at 19.8% as of May. To a large extent, the robust health of Turkey's banks is the reason why the economy is doing as well as it is now. "The banks have provided restructuring programmes to their clients, further strengthening their collateral, which is proving to be the right strategy. For those clients who had been negatively affected by the crisis, the banking system has been supportive and we are really seeing the benefits now," says Yapi Kredi Chairman Tayfun Bayazit.

Going bad

Still, the banks didn't escape the fiscal tsunami that swept the world entirely unscathed. Every bank has been hit by a rise in non-performing loans (NPLs), and Turkey's banks were no exception.

NPLs rose to a peak 5.3% of total assets in December from 3.7% the previous year. According to Fikret Comert, Director of Budgeting, Consolidation and Investor Relations at Akbank parent company, Sabanci: "During the crisis, [small and medium-sized enterprise] loans were problematic with around 20% NPL," he says adding that NPLs at Akbank only stood at 5% at the height of the crisis.

A 5% rate is a relatively modest level - analysts at Fitch Ratings estimate that NPLs have to rise over 15% to cause a bank crisis and force the government to start bailing out financial institutions - and overall rates have already started to decline. At 4.5% as of mid-July, the current NPL level lays testament to industry pragmatism and the country's economic recovery.

Today, there are 49 banks operating in Turkey, of which 32 are deposit banks and 13 development and investment banks. The remaining four are participation banks, which conduct their operations under the guidelines of Islamic law. Of the 32 deposit banks, 15 are classified as being locally owned, of which three are state owned.

Five banks dominate the sector - İş Bank, Akbank, Garanti, Yapi Kredi and Finansbank - all of which cover the full financial spectrum from credit cards, assets management, non-cash loans, leasing and factoring to private pension funds and non-life insurance. With extensive distribution networks and a wide geographical coverage, the big five enjoy a huge market share. İş Bank for example has over 1,100 branches, 10m customers and a market share of 10-15%.

Yet there is still much to play for. As İş Bank Vice-CEO Aykut Demiray points out: "With total assets in the banking system at around $600bn, while the system is still small there is a lot of growth potential. Turkey is still under-banked."

Yapi Kredi's Tayfun Bayazit similarly feels that the market is under penetrated, citing particular room for growth in retail banking. Aktif Bank's CEO Onder Halisdemir goes even further: "Turkey has one bank to serve each 10m people in the country. In Europe and the USA, each 1m people have five different banks to work with. There must be 400 banks according to our population in Turkey."

That growth potential has attracted many foreign banks and investors to the sector over the last decade. Of the 17 foreign players in the market, 11 are foreign banks founded in Turkey, whilst the remaining six are foreign banks operating branches in the country. Based on their share of paid-up capital, foreign stockholders' assets in the industry stands at 24%, although the figure rises to just over 40% when foreign participation in publicly held shares is included.

In addition to buying stakes, the sector has seen some high-profile partnerships as well. The oldest of these dates back to 2002 when the Koç Group, the largest holding company in Turkey, entered into a 50-50 partnership with UniCredit to create Koç Financial Holdings, whose Koçbank took control of Yapi Kredi in 2006. Another high-profile partnership was created when BNP Paribas purchased 50% of TEB in 2005.

According to TEB's assistant CEO, Levent Celebioglu, leveraging their partners' expertise has allowed TEB to achieve fast growth and penetrate the consumer market: "We enjoy their infrastructure and knowledge in this area and have adopted most of their risk management and scoring systems."

New world of business

Still, as the economy and the sector matures, making money has become harder. Most of the profits used to be made simply from the big margin between borrowing and lending rates, but as interest rates fall banks are having to think harder about their future.

With the big five dominating the market, there is a belief that size is becoming increasingly important. "With our reputation, extensive network and large customer base, the cost of funding for İş Bank is slightly less than for our competitors," explains İş Bank's Demiray.

The alternative to bulking up is to go niche and with the Turkish economy flourishing, boosting trade finance is an obvious niche to move into.

With Turkish companies adopting an increasingly global outlook, trade finance and international expansion are key focus areas for many banks. In 1999, TEB established a Dutch operation, specializing in short-term trade finance transactions to support Turkey's growing commodity trade with Europe. The bank has also expanded into Kosovo and currently has the third-largest banking operating in that country with an 18-branch network

İş Bank also has a European subsidiary and further branch openings are planned in Bulgaria and Romania. As Turkish-Russian trade becomes increasingly important, İş Bank is also in the process of buying a Russian operation. The company is also applying to open a branch in Azerbaijan and a representative office in Syria, in addition to their existing operations in Shanghai and Cairo.

Garanti has also embarked on a retail operation in Romania, their first foray into retail banking outside of Turkey. "We are testing our ability to do retail outside of Turkey, which is very new. Retail banking is not feasible in countries where there is no middle class. This is why we have focused on Romania, as we believe there is a middle class that we can make money from," explains Executive Vice President Tolga Egemen.

Becoming a regional bank is also high on the agenda for Aktif Bank, which has already purchased Albanian Banka Kombetare Tregtare, expanded into Kosovo and is looking to make further acquisitions in the Middle East and the Balkans.

With considerable growth potential and high returns in Turkey, however, the domestic market remains the core focus for the industry. "Turkish people did not begin utilizing their borrowing potential until two years ago. For example, we still don't have a developed mortgage market - there are considerable opportunities for consumer and mortgage loans," says Sabanci's Fikret Comert.

Low household debts and a growing population mean huge opportunities in the consumer credit area for the industry, but a potential challenge for the economy. "One of the areas that we need to monitor is credit market development," acknowledges Durmus Yilmaz, governor of the Central Bank of Turkey.