How has Turkey managed to make its banking sector resistant against Economic Crisis

In comparison to many economies, the Turkish banking sector has remained resilient through the current crisis and has weathered fluctuations well. This was accomplished thanks to a robust capital structure, reliance on core banking activities, a healthy loan portfolio and a low-leverage structure. These conditions were achieved through:

Strong capital levels: The recent crisis has emphasized the importance of a strong capital structure. Global banks have been seeking to improve their capital base and deleverage their balance sheets. In this respect, the sound capital base of Turkish banking has acted as a significant advantage.

Capital adequacy ratio of the Turkish banking sector is currently around 19 percent. This is higher than the target ratio of 12 percent and the legal limit at 8 percent. This robust capital base has also acted as a buffer to absorb shocks.

Low penetration of risky assets: The penetration of off-balance sheet items and derivative products has always been low in the Turkish banking sector. Banking was pursued through the “traditional channel” and with a focus on core banking activities.

Healthy growth: Credit growth has been strong in the years following the 2001 crisis when Turkey experienced an average annual GDP growth of around 7 percent. However, it did not reach excessive levels. Average real credit growth in Turkey was around 30 percent whereas the level reached up to 40-50 percent for many other EM’s.

This relatively cautious expansion in the credit book helped keep the loan portfolio healthy. Although the non-performing loan ratio (NPL) rose, it was still only at 5.4 percent in November 2009. This marked an increase of two percentage points since the start of the crisis and indicated slower growth than many other emerging markets and developed countries. The NPL ratio currently stands at 4.4 percent.

Importance of core funding: The Turkish banking sector relies heavily on core funding. The ratio of loans to deposits is around 78 percent in Turkey. This is a relatively low level in comparison to many EM’s with ratios of above 100 percent. This level helped to support banking sector liquidity.

Low leverage reduced risks: Finally, on the back of robust risk management, leverage remained low in the sector. The ratio of assets to shareholders’ equity remains around eight, well below the international average of 30-40.

High profitability maintained: The sector sustained its profitability even through the crisis and at no point required a line of support from the government. Its strength will continue to support the economy through its path to recovery.

In Turkey, the allocation of bonuses and compensation packages has not been perceived as controversial as within other markets. This is because Turkish pay packages never reached excessive levels. However, on a global scale the subject of bonuses and remuneration/compensation continues to be widely discussed. Such bonus schemes are causing analysts and investors to seek higher RoE ratios, which are, in turn, pushing institutions to undertake higher risks to increase profitability.

However, as we have seen in the crisis, this contradicts the long-term wellbeing of both the financial sector and the economy as a whole.

We therefore believe bonus schemes should be rearranged so as to promote long-term, healthy returns rather than quick and risky gains.

Meanwhile banks have followed more conservative dividend policies to give priority to the long-term health of their balance sheets. We have seen first-hand the importance of retaining a strong capital structure.

Therefore, we believe it would be beneficial to allocate a larger proportion to the banks’ equity rather than distributing as dividends.

SOURCE: TURKISH POLICY