TURKISH BANKING SECTOR STRONG, BUT WARY

UNCLAS ANKARA 000442

SENSITIVE
SIPDIS

DEPARTMENT FOR EUR/SE MARSH, EEB/OMA SNOW, TREASURY FOR
PARODI, WEISS, VELTRI

E.O. 12958: N/A
TAGS: EFIN ECON TR
SUBJECT: TURKISH BANKING SECTOR STRONG, BUT WARY

REF: A. ANKARA 297

B. 2008 ANKARA 1982

C. 2008 ANKARA 1978

D. 2008 ANKARA 1744


1. (SBU) Summary. The number one concern of Turkish banks
today is credit risk from Turkish Lira (TL) and foreign
exchange (FX) loans made to the private sector. That risk is
manageable now, but all banks, the Central Bank, and the
Banking Regulator (BDDK) are all watching trends in
non-performing loans (NPL) carefully. Turkish banks
benefited from the painful reforms they made after the
financial crisis of 2000-2001. The number of banks declined
from 80 in 2001 to 56 today, and the BDDK expects to see some
additional consolidation. Across the board Turkish banks now
maintain high capital adequacy ratios (CAR) averaging 18
percent, which is well above the Basel II standard of eight
percent. Central Bank stress testing shows that even if
non-performing loans increase from the current average of
four percent to 13 percent, banks will still be able to
maintain an average CAR of 12 percent. To date, companies
have been able to roll over or repay their debts, and FX
loans are available, albeit at higher rates and from fewer
sources. End summary.

NPL Concerns and Auto Stimulus
--------------


2. (SBU) In February, BDDK President Tevfik Bilgin warned
banks against distributing dividends from 2008 earnings and
encouraged them instead to use profits to bolster their
capital base. BDDK has set 12% as the minimum threshold for
CAR. If a bank drops below that level, it cannot open
branches or acquire subsidiaries. Despite their healthy CAR
levels, banks are making few loans. Instead, they are
minimizing credit risk by using deposits to buy Turkish
Treasury bonds instead of lending to businesses or
individuals. Government bonds constituted just 27% of
banks, total assets at the end of 2008 and reached 52% in
the first two months of 2009, showing banks' aversion to
lending. Overall loan demand for new investment is down, due
to concerns about the economy and stagnant inventories, but
companies still need working capital. In past crises,
company owners took personal loans for working capital or
companies helped each other by extending receivable repayment
to 60 or 90 days.


3. (U) One reason for banks' aversion to lending is the
continuing growth in NPLs, which increased 1.3% per week in
the first two months of 2009. The banking sector's NPL ratio
was 3.6% at the end of 2008, and has increased to 4.21% as of
March 2009. While NPLs still constitute only four percent of
total loans outstanding, their continued increase makes banks
very cautious about lending. The heaviest NPL levels are in
credit cards (7.7%),loans to SMEs (4.3%),and auto loans
(7.5%). The first two categories are generally unsecured,
but auto loans are made on only 75% of the car's value and
secured by the vehicle. Meanwhile, NPL ratios for retail
loans were 3.68% at the end of 2008 and have grown slightly
in 2009. Defaults on housing loans (1.5%) remain manageable.
Turkey does not have a sub-prime mortgage problem because of
timing and luck. It took the Parliament years to refine the
mortgage law, so Turkey did not get into derivatives or
mortgage-backed securities and does not have a significant
secondary mortgage market.

Loan Volumes
--------------


4. (U) Total loans in the banking sector reached 368 billion
TL ($216 billion) in 2008, marking a 29% year-on-year
increase, with FX loans constituting 29% of the total. In
2008, banks in Turkey provided $45 billion in FX loans, and
an additional $25 billion in FX loans was extended by foreign
banks and Turkish bank branches outside the country. The
total FX debts of the non-bank corporate sector is $95.6
billion as of January 2009 according to the Central Bank.
According to the same data, total bank and non-bank debt as
of January 2009 is $138 billion. FX loans are supposed to be
restricted to borrowers who have foreign exchange earnings.
However, some individuals and non-exporting companies found a
way to circumvent the restrictions by putting up FX held in
Turkey or overseas as collateral. FX borrowing became less
attractive in late 2008 and early 2009 as the lira dropped in
value against the dollar and the euro. and made repayment of
FX loans much more expensive.

5. (SBU) The banking sector,s FX debt payments are less of
a concern in 2009. As of January 2009, total bank debt is
$29.5 billion, with $4.9 billion due within one year. The
sector's total foreign borrowings in 2008 were $60 billion.
Turkish banks managed to roll over 55% of that amount and
repaid the balance. BDDK's Vice President, Sabri Davaz, does
not expect banks to have significant problems rolling over or
repaying their debts in 2009.


6. (SBU) The lack of sophisticated monetary instruments in
the Turkish banking sector has been an advantage of late,
with public exposure to leverage lower in Turkey than in most
other countries. According to Akbank research, Turkish banks
have a low penetration of banking products to consumers,
which provides an opportunity for further growth when the
economy picks up. Turkish household debt is also relatively
small compared to EU levels. Turkish household debt to GNP
was 11% at year end 2007, compared to a ratio of 56% for EU
households. Selim Guray Celik, Vice President of state-owned
Ziraat Bank, says Ziraat has a low 1.6% level of NPLs,
because more than 50% of its loans are made to civil servants
and pensioners whose loan payments are automatically drawn
from their Government-deposited salaries or pensions held at
Ziraat.

Looking to the Post-Crisis Future
--------------


7. (SBU) Ekrem Keskin, Secretary General of the Banks'
Association of Turkey, said the main risks the banking sector
will face in 2009 and beyond are: uncertainties in the
international environment, reliance on external borrowing,
pressures on FX liquidity, contraction in economic activity,
rising costs of financing in the private sector, ownership
changes in banks in Europe, interest rate risk, and increases
in non-performing loans. We discussed each of these with our
contacts at BDDK, the Central Bank, and several of the
biggest banks in Turkey. None are unduly concerned about
these risks, and all are pleased that Turkey stayed out of
the muck experienced by American and European banks.


8. (U) Interest rates on loans have not declined much
despite Central Bank rate cuts, but CB Vice Governor Erdem
Basci expects rates to trend down slowly. The banks' strong
liquidity conditions will pave the way for decreasing loan
interest rates in the coming periods. The CB lowered its
benchmark overnight borrowing rate--now 10.5%--another 100
basis points on March 19. The CB has cut a total of 625
basis points from the overnight borrowing rate since November

2008.


9. (U) The Turkish Banking sector has long been suffering
from maturity mismatch with deposit maturity of approximately
32 days and lending maturities of one year or more. In
recent months, this problem seemed to stabilize as banks
bought government securities with various maturities instead
of extending loans. Once the economy starts to recover,
maturity mismatch will again be a problem if banks cannot
find ways to attract longer term deposits.


10. (SBU) Comment: Turkish banks have been both lucky and
smart. Industry reforms after the 2000-2001 crisis were
painful and expensive but the industry is well situated now
to withstand some shock. High capital adequacy ratios and an
effective banking regulator are good buffers against industry
problems. We and everyone in the industry will closely watch
NPL trends, which remain the most significant risk for the
industry. We will also watch for renewed signs of normal
banking operations and the lending needed to jump-start the
economy once the world starts to recover from its economic
recession. According to BDDK data, the number of branches in
the banking sector increased by 1,108 in 2008, with a nine
percent increase in the number of employees. Turkish banks
opened a total of 268 branches in the last three months of
2008, and hired 1,140 new employees. This significant growth
just as the Turkish and world economies were slowing remains
unexplained. It should, however, position Turkish banks to
expand lending quickly as soon as business conditions
improve. End comment.

Visit Ankara's Classified Web Site at
http://www.intelink.sgov.gov/wiki/Portal:Turk ey

Jeffrey