Restructuring Turkey's Banking Sector

Amongst the most important pledges from the Turkish government to the IMF, which is due to begin another review on May 15th, is that to complete an audit and re-capitalisation of private banks. However, the process has run into some trouble, with the chairman of banking regulator BDDK, Engin Akcakoca, noting on May 3rd that the audits had been delayed. These audits should finally give a clear picture of the state of the banking sector, with weaker banks forced to raise capital, merge or seek government capital. Much of this will come from the IMF loans. As the banking sector was key in the collapse of Turkey’s economy last year, investors have been eyeing the process closely. The central bank has said in early May that as public banks were now able to raise funds at market levels it considered the restructuring process for those banks to be over.

The senior representative of the IMF in Turkey announced on May 7th that a team from the fund would be returning to Turkey on May 15th for a review of the economy, prior to the expected approval of a further $1.1bn in mid-June. The statement said that the IMF would review Turkey’s fiscal and monetary policy, as well as the implementation of commitments made to the IMF. Aside from the audit and re-capitalisation of private banks, these include a reform of indirect taxes, a corporate debt restructuring plan, a revision of the public procurement law and an employment redundancy plan for state-owned economic enterprises. Many of these measures are behind schedule, with the audit and banks’ capitalisation increase plans to be completed by May 31st, some two weeks later than had originally been planned.

This process is part of a controversial plan to revive the Turkish economy by raising the capital ratios of banks to international standards, allowing them to be upgraded and significantly increase transparency. The fear amongst some analysts is that this process will lead to the banks being down-graded as hidden losses, over-valued assets and weak loans are revealed. The BDDK had ordered early this year that the audit be implemented, and completed by mid-May. The three-tier system sees an independent auditor appointed by the bank conducting a review, followed by an auditor of the BDDK’s choosing, and finally the BDDK’s auditor will go through all the files.

This should give the regulator, and the international community, a good idea of the state of the sector’s health in Turkey. Those banks that do not meet the capital adequacy ratio of 8% will be required to take steps to improve their status by raising capital themselves, seeking partners, or borrowing money from the government. This last option is expected to be financed by some $4bn from the IMF and should prevent any possible bank collapses resulting from any revelations that may emerge.

However, not all the banks seem committed to the plan, partially causing its delay. According to reports some banks are trying to seek special deals or immunity from the regulator, although the BDDK has said that no bank will be exempt from the process. Even once the audits are completed the BDDK is expected to face some resistance in its efforts to impose its re-capitalisation plans. Many in Turkey view the IMF-backed plan as a local sacrifice to foreign institutions, although economy minister Kemal Dervis has defended the plan by pointing out that it will help the local banks become stronger. Moreover raising additional capital can be expensive for a medium-sized bank, which may not wish to have foreign involvement through a merger, or the involvement of the BDDK, which would have to appoint a board member and become a shareholder in the bank.

The international rating agency Fitch warned in its report of early May that although most private banks met the 8% capital guidelines, they were still undercapitalised by international standards. The agency put the problem down to a high level of unreserved loans, excessive loans to related parties – one of the main issues exposed by the February 2001 crisis – but noted that the blanket government demand for an 8% capital adequacy ratio did not take into account differences in loan portfolio risk.

Authorities in Turkey have also been warning local banks about their foreign exchange positions, saying that the trend of switching from hard currency to high-yielding Turkish Lira assets may undermine progress made since last February. The lira collapse had left many overexposed, a situation Akcakoca of the BDDk has said that he is watching out for in the current review.

The auditing process has been watched carefully by investor, domestic and foreign alike, with movements on the Istanbul Stock Exchange largely concentrating on the banking sector. Analysts expect the market to be capped until the results of the audits are completed and for movement to continue to be slow until then. All the same banking stocks have been outperforming the ISE over the course of recent weeks as some investors have taken advantage of weak bank share prices.

Meanwhile the central bank began May on a positive note, stating that the short-term financing of public banks and those taken over by the Saving Deposit Insurance Fund (SDIF) had come to an end. In the aftermath of the February crisis the central bank had started to fund the liquidity needs of struggling banks, but now says that these banks are able to finance themselves at prevailing market prices. In the same week the chairman of the Public Bank Joint Executive Safa Ocak said that he believed the problems of the state banks to be almost over as well. The central bank also released figures on May 7th for the sector in 2001, which showed that private banks had managed to secure a TL1.1 quadrillion ($820m) profit last year, while public banks lost TL21 trillion ($15m at current exchange rates), and those banks taken over by the SDIF lost TL8.3 quadrillion ($6.19bn).