The banking sector looked to be starting a maturing process in 2013 as it continued to record solid growth without overheating. Amid abundant global liquidity, a moderate revival of global growth and improving domestic confidence, lending grew at an annualised rate of 16% in the first two months of 2013, roughly matching the pace of growth in 2012, according to the Banking Regulation and Supervision Agency (BDDK). Most forecasters were expecting a moderate acceleration closer to 20% lending growth for the full year.

Ups & Downs

A more stable and sustainable growth pace would be a welcome break from the pattern of booms and lulls that have characterised Turkey’s banking sector. Since a severe domestic banking crisis in 2001 ushered in a broad reform of public policy, Turkish banks have been relatively conservatively managed and regulated, keeping them well insulated from the waves of banking busts that have hit developed markets since 2008. But, encouraged by loose monetary conditions in developed markets, Turkish banks have relied heavily on short-term funding from foreign banks to fund rapid growth. The availability of such funding has proved to be highly volatile, with periods of plenty interrupted by sudden droughts in 2008-09 and 2011-12. Those funding droughts sharpened depreciations of the lira and forced Turkish banks to curtail lending more than economic conditions otherwise would have dictated, heightening the volatility of the Turkish economy.

Turkish authorities were just beginning to tackle the problem when the last funding drought hit in late 2011. After developed countries slashed interest rates in the wake of the 2008-09 crisis, Turkish banks had feasted on cheap foreign funds and roared back with a stunning 34% pace of lending growth in 2010. As Erdem Ba flç› took over as governor of the Central Bank of the Republic of Turkey in April 2011, ratings agencies and other watchdogs were concerned about the risk of a hard landing. But just as Ba flç› set about trying to cool the overheating economy with a more complicated monetary policy, global markets started to slow for their own reasons. Second-half 2011 and first-half 2012 were a roller coaster ride, with alternating periods of crisis followed by big European Central Bank liquidity injections and powerful relief rallies. Ba flç›’s focus turned to stabilising the lira exchange rate.


It was not until late 2012, as the European crisis receded and the US increased monetary stimulus, that Ba flç›’s anti-overheating measures came to the fore. He said he wants to keep annual lending growth to around 15%, and has used various monetary policy levers to prevent it from accelerating far beyond that. Despite the effort to curb retail lending, however, commercial and project lending are crucial for the government to move forward with major infrastructure development plans. The BDDK does not want to restrict project loan growth, especially given the inability of European banks to help Turkey meet its funding needs.

The government has focused on long-term efforts to boost the national savings rate, which would allow Turkey’s financial sector to support rapid growth without relying on volatile foreign funding. These efforts include reform of the private pensions system (see Insurance chapter), and an effort to bring Turks’ large holdings of gold into the financial system by allowing banks to open gold-denominated bank accounts (see analysis). Global monetary stimulus was expected to continue driving down the cost of foreign funding for Turkish banks in 2013, effectively egging them on to boost lending faster. Some observers doubted Ba flç›could continue to hold back the tide of cheap foreign money and saw another boom in Turkish lending developing by the second half of the year. Yet at the same time, global markets remained jittery and particularly sensitive to signs of a possible new flare-up of the European crisis. The toughest test of Ba flç›’s moderate-but-steady growth strategy could be whether it holds up during the next episode when global markets turn risk-averse.

Size & Structure

Turkey has one of the more developed banking sectors among emerging European countries, with assets reaching 95% of GDP at the end of 2012. In absolute terms, with TL1.37trn (€591.56bn) of assets, according to the BDDK, Turkey’s banking sector was the second-largest in emerging Europe after Russia. Turkey’s banking system was also larger than any in the Middle East and North Africa, and was poised to overtake the ailing Greek banking sector to become the largest in South-east Europe.


Banks dominate Turkey’s financial system, accounting for 88% of total financial sector assets, according to BDDK figures from 2011. The Turkish banking sector is formally divided into three segments: depository banks, with 91% of banking sector assets; Islamic banks, known in Turkey as participation banks, with 5% of banking assets; and development and investment banks, with 4% of banking assets.

The depository banking segment is highly concentrated, with the 12 largest banks commanding 96% of depository bank assets, according to the Banks Association of Turkey (TBB). Multinational strategic investors have been a driving force in the past decade, but total foreign ownership of Turkish banks remains moderate relative to other emerging Europe countries. Foreign-local joint ventures account for 25% of sector assets, while majority-foreign-owned banks account for 16%.

The leading joint ventures are Garanti Bank, the third-largest bank with a 12% market share, and Yapı Kredi the fifth-largest bank with a 9% share. Spain’s Banco Bilbao Vizcaya Argentaria and Turkey’s Do ğuş Holding jointly control Garanti, while Italy’s UniCredit and Turkey’s Koç Holding jointly control Yapı Kredi. Ninth-largest Türk Ekonomi Bank, with a 3% market share, is controlled by France’s BNP Paribas and Turkey’s Çolako €lu Group.

Foreign Ownership

The largest majority-foreign-owned banks are eighth-largest bank Finans Bank, with a 4% market share as of September 2012, controlled by the National Bank of Greece, and 10th-largest Denizbank, with a 3% market share, which was bought in September 2012 by Russia’s Sberbank from the troubled Franco-Belgian bank Dexia. HSBC and ING were number 11 and 12, respectively, with own-branded Turkish banks each with 2% market shares.

Foreign banks continue to enter Turkey’s market, but their share of the market is unlikely to grow quickly soon. The European banking crisis has squelched the appetite of European banks for big acquisitions. Most new entrants are buying from weakened foreign groups, as in the Sberbank-Dexia deal, or starting new banks, which will take time to develop significant market share (see analysis). There are eight depository banks with majority local private ownership, accounting for another 29% of sector assets. Among them is the country’s largest bank, ‹fl Bank, with a 13% market share. Control over ‹fl Bank is shared between its pension fund and Turkey’s main opposition party, the Republican People’s Party. The bank is known for its aggressive commercial focus. The fourth-largest bank, Akbank, with a 12% market share, is controlled by Sabancı Holding.

The state is also powerfully involved in the banking sector, through active oversight and state-owned banks that accounted for 30% of sector assets. The largest is Turkey’s second-largest bank Ziraat Bank, with a 12% market share and a dominant position in agricultural lending. The sixth- and seventh-largest banks Halkbank and Vakıfbank each have 8% market shares.

The government appears reluctant to cede control of state banks, but it has been selling minority stakes through public offerings on the Istanbul Stock Exchange. A $2.5bn secondary offering of 24% of Halkbank’s shares in November 2012, which brought its public float to 49%, is expected to be followed by a secondary public offering of Vakıfbank in late 2013 and an initial public offering of Ziraat Bank in 2014.

Turkey has four Islamic banks, with the largest, Bank Asya, commanding 1.5% of banking sector assets. Bank Asya is locally and diversely owned with no single dominant shareholder. The other three Islamic banks in Turkey are owned by Gulf region Islamic banks: Kuveyt Türk Participation Bank by Kuwait Finance House, Türkiye Finans Participation Bank by Saudi Arabia’s National Commercial Bank, and Albaraka Türk Participation Bank by Saudi Arabia’s Albaraka Banking Group. Veysel Gü rerk, the CEO of Türkiye Finans, told OBG, “The Turkish participation banking industry offers great potential in terms of growth and return on investment and equity, provided that the required capital is injected.”

Turkey has six development banks, four of which are state-owned. The largest are both state-owned, with Türk Eximbank promoting exports and Iller Bank supporting local administrations. Of Turkey’s seven investment banks, five are locally privately owned and two are foreign-owned. The largest are locally owned Aktif Bank and a Turkish unit of Merrill Lynch.

New Entrants

Foreign interest in the markets has been growing to some extent. For example, Odeabank, a subsidiary of Lebanon’s Bank Audi, has set target dates for opening a number of new branches (see analysis). Hüseyin Özkaya, the CEO of Odeabank, told OBG, “As ties between Turkey and Middle Eastern countries continue to grow, more opportunities will emerge for banks in the region, which can provide financial support to exporters and help facilitate trade flows.”

As well, the use of bank accounts and bankcards is close to universal, and credit cards are widely used, with 31m distinct customers and 53m issued cards as of June 2012, according to the BDDK. Internet banking is also widely used and mobile banking is growing quickly, with 3.6m mobile transactions in the second quarter of 2012, up from 1.4m in the same quarter of 2011. There were about 11,000 branches, 35,000 ATMs and 200,000 bank employees as of the end of 2012.


Turkey’s banks have had a conservative and relatively stable regulatory environment since a severe banking crisis in 2001, when about half the country’s banks were closed or merged into others. After spending some $50bn righting the banking system, the government implemented relatively strict regulations. “The 2001 crisis changed the whole way of thinking in Turkey about how to run a bank. The public authorities and bankers became very conservative,” Emre Alpan ‹nan, the manager of TBB’s research division, told OBG.

Turkey follows the international standard of requiring that banks maintain a minimum 8% ratio of total capital to risk-weighted assets, called the capital adequacy ratio (CAR). But, unusually, the BDDK requires banks have at least a 12% CAR to receive permission to open new branches. Also, in 2008 the BDDK announced temporary anti-crisis measures that required banks to have higher CARs to be permitted to pay dividends: at least a 13% CAR to pay a dividend of 10% of profits, at least a 16% CAR to pay a 15% dividend, and at least an 18% CAR to pay a 20% dividend, the maximum payout. The dividend restrictions have been extended repeatedly and as of early 2013 there was no sign the BDDK was planning to loosen them.

The sector’s average CAR stood at 17.8% as of the end of January 2013. Ratios were slightly boosted by Fitch’s upgrade of Turkey to investment-grade in November 2012, which lowered the risk weightings of some Turkish assets. “The strength and stability of the Turkish banking industry, which has proved resilient in the face of adverse external conditions, is evident in the fact that average capital adequacy ratios are well above international requirements,” said Cem Mengi, the head of commercial banking at ING Bank.

The large capital buffers not only insulated Turkish banks during the global financial crisis, but also give Turkish banks an advantage in the global banking reform process following the crisis. The main thrust of those reforms, coordinated through the Basel III accord, is to strengthen minimum capital requirements. Highly leveraged European banks will be especially challenged to meet Basel III standards, and bankers there argue that doing so will dampen the continent’s growth over the coming decade. But for Turkish banks, Basel III mostly tells them to keep doing what they have been doing.

Basel III set a schedule for increases in minimum capital ratios, which were supposed to begin in January 2013 and be completed by 2019. Minimum capital relative to risk-weighted assets is set to rise in stages up to 7% for core capital, 9.5% for Tier 1 capital and 10.5% for total capital. These won’t change much for most Turkish banks, as they’re already complying with a 12% floor for total capital and more than 80% of their capital is core equity, built up mainly through retained earnings.

Basel III will introduce minimum ratios of liquid assets from 2015, but the BDDK already applies similar rules. Turkish banks’ still substantial holdings of sovereign bonds give them greater liquidity buffers than are implied by their loan-to-deposit ratios, which averaged 98% at the end of 2012, according to BDDK data. The most important aspects of Basel II for Turkish banks will be the changes it brings to how risk-weighted assets are counted, which could slightly lower Turkish banks’ CARs and perhaps put a few banks near the BDDK’s 12% floor for opening branches. ‹nan said he could not speak for every individual bank but he was confident the sector overall would have no trouble meeting Basel III standards, especially in leverage ratio. Like most countries, Turkey was slightly behind schedule adopting Basel III’s first stage. By March 2013 the government had published and solicited public comment on three draft laws that would implement Basel III norms.

Other Spheres

On a different regulatory front, Turkey strengthened its controls on financing of terrorism in February 2013, after coming under heavy pressure from the international Financial Action Task Force (FATF), which had threatened to blacklist Turkey’s financial system if no reforms were adopted before an FATF meeting that month. The FATF and especially the US government have long been unhappy with the way Turkey’s laws and regulations against terrorist financing focus on domestic threats and less clearly address international terrorism. The FATF also insisted that Turkish authorities be given the power to freeze suspected terrorist assets before a court ruling, something Turkey’s parliament had been reluctant to allow.

Parliament finally succumbed and adopted a law ahead of the meeting that satisfied the latter demand, convincing the FATF. However, the FATF kept Turkey on a list of countries with “strategic deficiencies” in anti-money laundering and controls on financing of terrorism and said Turkey had promised to present a plan for further action by June 2013.

Recent Pressure

Meanwhile, Turkey’s banks came under pressure from the Competition Board, an anti-monopoly regulator and consumer watchdog. In March 2013 the board found Turkey’s 12 largest banks guilty of colluding in the setting of interest rates and fees in the consumer segment. The 12 banks were fined a combined total of around TL1.12bn (€483.6m), or about 5% of the banking sector’s 2012 profits.

The banks denied having colluded and were planning a court appeal. But the tough ruling played into the hands of those in parliament pushing for tighter regulation of consumer banking fees and interest rates to be included in a new Consumer Protection Law that was expected to be adopted later in 2013.

Martin Spurling, the CEO of HSBC Turkey, said, “Bank regulators in Turkey have promoted strong growth in the industry through wise policymaking. However, they are now coming under pressure from consumer watchdog agencies that want to eliminate a wide variety of banking fees. These proposals are fine where warranted, but there is always a balance in everything – and by reducing bank profits, they will only risk reducing bank lending and hurt economic growth.”

Turkey’s central bank also plays an important regulatory role, using an unorthodox mix of monetary policy levers to control bank behaviour. The most notable is its practice of alternating ad hoc between high and low policy lending rates. The latter policy is meant to discourage foreign, short-term carry traders by showing them the lower rate, while maintaining discipline among domestic players by showing them the higher rate. For similar reasons, the central bank sometimes lowers interest rates while simultaneously raising banks’ reserve requirements (see Economy chapter).


The banking sector’s rapid growth in the past decade has been part of a broader transformation, driven by public policy reforms that reduced fiscal deficits and tamed inflation. In the high-deficit, high-inflation environment prior to the 2001 crisis, banks preferred to invest in sovereign debt, which was relatively safe and paid high real returns. Large volumes of public debt issuance satisfied most of banks’ investment needs and crowded out lending to the private sector.

As public deficits, inflation and real interest rates fell, banks rediscovered the private sector and came alive as lenders. In 2004 40% of depository bank assets were sovereign bonds and bills and only 27% were loans to the private sector, according to the central bank. But by late 2012 those ratios had reversed, with loans to the private sector accounting for 56% of bank assets, while sovereign bonds and bills made up only 18%. “In previous decades banking sector portfolios in Turkey were dominated by government bonds,” Ufuk Uyan, the CEO of Kuveyt Türk Participation Bank, told OBG. “Over the last several years this balance has shifted convincingly in favour of lending to SMEs and the real economy.” Meanwhile, banking sector assets ballooned from 50% of GDP in 2004 to 95% of GDP by late 2012, even as real GDP grew by a cumulative 41% over the period.

Turkish banks focused initially on lending to larger companies. More recently, consumer lending, especially in the forms of credit cards and small consumer loans, have been growing rapidly, driven by Turkey’s young, consumption-oriented demographics and the rising and increasingly stable incomes of urban professionals. The biggest potentials for growth lie in underutilised longer-term varieties of lending, and in the low penetration of business and consumer lending in less developed parts of the country (see analysis).

Turkish banks have historically avoided longer-term loans due to the country’s history of volatility and the difficulty of securing long-term funding. In the business lending segment there are big opportunities ahead in project finance connected to the government’s many planned infrastructure projects, where it is looking at public-private partnerships to keep the burden of financing off the general budget. In the consumer segment, home mortgages and auto loans are little used.


To boost longer-term lending while minimising risks, Turkish banks need to secure more long-term funding and boost domestic deposits, the most stable variety of short-term funding. They have been making progress on both counts, especially since the second half of 2012. Mainly, lending growth has slowed to a pace closer to that of deposit growth, which has been relatively stable. The TL76bn (€32.8bn) of deposits that Turkish banks attracted in 2012 was little changed from 2011. But whereas in 2011 deposit growth covered only 50% of lending growth, in 2012 deposit growth covered 68% of lending growth. That allowed banks to reduce their reliance on other kinds of funding. Although Turkish banks remained active in the international syndicated loan market in 2012, they were mostly rolling over previous borrowings. In terms of net of repayments, Turkish banks raised only TL6bn (€2.6bn) in interbank credit in 2012, according to BDDK data, after raising TL45bn (€19.4bn) in 2011. Turkish banks reduced their repo funding by TL17bn (€7.3bn) in 2012, after increasing it by TL39bn (€16.8bn) in 2011.


Meanwhile, Turkish banks more than doubled issuance of Eurobonds. Gross issues were $8bn in 2012, according to CB onds, compared to $3.4bn of issues in 2011. More than half the 2012 issues ($4.05bn) were 10-year bonds, with the rest five-year ($3.2bn) or seven-year ($750m). Three-quarters of the 2012 Eurobond issuance came in the last four months of the year, as the European crisis receded and investor appetite strengthened. For example, Yapı Kredi had to pay a 7% coupon to place a $500m, five-year bond in February, but in December, the bank was able to sell a $900m, 10-year bond with a 5.5% coupon. Turkish banks continued to actively issue eurobonds into an eager market in 2013, with Yapı Kredi placing a $500m, seven-year bond at 4.078% in January and Halkbank selling a $750m, seven-year bond at 3.875% in February.

Eurobond issues are attractive to Turkish banks for the low interest rates and as a rare source of long-term funding. Due to the history of inflation and exchange-rate volatility, most term deposits in Turkey are for just one month. “The reason why Turkish banks were in the Eurobond market in 2012 was to address the maturity mismatch in our portfolios. Our liabilities carry lower maturities than our loans,” Süleyman Aslan, the CEO of Halkbank, told OBG.

However, dollar Eurobonds also add exposure to foreign currency risks. As an alternative, Turkish banks launched a new variety of Eurobond in 2013, called the “eurolira.” These are bonds dominated in lira but sold to foreign investors and traded on the Eurobond market. Akbank opened the market in February 2013 with a five-year, TL1bn (€431.8m) issue yielding 7.55%. Denizbank followed later that month with a five-year, TL550m (€237.4m) issue at 7.3%, and Garanti placed a five-year, TL750m (€323.8m) bond at 7.375% in March.

With eurolira bonds, Turkish banks have finally found counterparties who are willing to take long-term risk in lira for reasonable rates. The mostly US and European institutional investors who buy them judge the yields against their low domestic inflation rates, not against the higher Turkish inflation rates that Turkish investors need to beat to earn real yield. As of March 2013 Turkish banks were paying between 6.5% and 7% to secure one-month lira deposits. Aslan told OBG that Halkbank was preparing a eurolira issue and that other Turkish banks were also expected to make their debuts in the new market later in 2013.

Fx Risks

Turkish banks do a large portion of their business in foreign currencies, in both funding and lending. This aspect of Turkish banking creates particular risks, for banks and the overall economy, which are not addressed by international norms such as Basel III. Because of the lira’s history of volatility, many people prefer to keep all or part of their deposits in foreign currency or in gold accounts, even though such deposits earn low interest. Foreign currency and gold deposits came to TL252bn (€109bn) at the end of 2012, making up about a third of total deposits, according to BDDK data. Turkish banks’ total foreign exchange (FX) liabilities came to TL484bn (€208.9bn) at the end of 2012, or about 40% of total liabilities.

Turkish banks also do large amounts of foreign currency lending, but relatively less than their FX liabilities. Nearly all FX lending is to businesses, as most kinds of FX lending to consumers are banned. Outstanding FX loans came to TL206bn (€87bn) at the end of 2012, accounting for about a quarter of all lending.

The result is that Turkish banks carry large short positions in foreign currencies. The IMF called attention to this issue in its “Turkey: Financial System Stability Assessment” report, published in September 2012, noting that although Turkish banks hedge their FX short positions with currency swaps, those swaps are usually shorter-term than the assets they fund, which increases banks’ vulnerability to rising interest rates.

The new eurolira market could take some of the FX short position off banks’ balance sheets, and reduce Turkey’s FX risk generally by locking foreign investors into longer-term lira positions. Maintaining lira stability, which became a top priority for the central bank in 2012, could itself be a stabilising factor. In 2011, when the lira moved mostly downward and lost 18% of its value against the dollar over the year, FX deposits made up two-thirds of deposit growth. In 2012, when the lira traded within a narrow band for most of the year, FX deposits made up only 21% of deposit growth.


Turkish banks continued to enjoy strong profitability in 2012, but were expected to come under pressure in 2013 from two key fronts. Firstly, political pressure was building on banks to lower interest rates and fees in the retail segment. Secondly, while profits in 2012 were boosted by falling interest rates, that windfall was expected to taper off in 2013 as interest rates stabilised. When interest rates decline, Turkish banks’ net interest margins (NIMs) are temporarily boosted because their assets are longer in duration than their liabilities. However, over the longer run, lower interest rates as a rule bring lower NIMs.

After Turkish bank stocks returned a stunning 74% in 2012 in dollar terms, some equity research houses, including Credit Suisse and Russia’s VTB, lowered their recommendations for the sector in early 2013, seeing a worsening outlook for NIMs and a threat of political action in the consumer segment. Turkish research houses remained bullish on the sector, arguing that continued global stimulus would support NIMs in 2013 while an improving economy would lead to faster lending growth and a decline in non-performing loans (NPLs). This forecast is shared by Aslan, who said global stimulus would make 2013 a strong year for Turkish banks. “When you read in the news about global liquidity and QE and LTROs, remember that emerging market banks are the main beneficiaries of this environment,” he told OBG, referring to US and European monetary stimulus programmes. Due to the ownership structure that prevails in Turkey, many businesses will pay debts even in the midst of economic crises. For family-owned businesses, paying back debt is a matter of honour, which is why the banking sector did not see an increase in NPLs in 2012, despite a downturn in the economy.

The sector’s net income was TL23.5bn (€10.14bn) in 2012, up 19% from 2011, driven by a 33% increase in net interest income, according to BDDK. Sector NIMs, measured against average total assets over the year, rose to 4.1% in 2012 from 3.5% in 2011. Banks also saw a TL15.1bn (€6.5bn) gain on holdings of securities. Such gains are added to revaluation reserves and total capital, but not included in profits or Tier 1 capital.


Fees, commissions and banking services as a share of average assets were flat at 1.5% in 2012 as in 2011, a welcome stabilisation after the ratio had declined steadily since 2007. On the negative side, the ratio of NPLs to total loans increased to 2.86% in 2012 from 2.7% in 2011, a result of the economic slowdown after the rapid lending growth of 2010-11. The ratio of operating expenses to assets, which had improved steadily in 2009-11, stopped improving in 2012, coming in at 2.34%, compared to 2.31% in 2011.

Sector return on assets and return on equity (ROE) both improved slightly in 2012, to 1.84% and 15.7%, respectively, from 1.72% and 15.5% in 2011, according to BDDK. Those ratios were above 2.5% and 20%, respectively, for most of 2006-10. But Turkish banks remain very profitable compared to developed country banks, and especially to recent results from Europe. The average ROE of US banks was 8.7% in 2012, while EU banks had an average ROE of 2.7% in the first half of 2012.


The efforts that Turkey’s bankers and regulators are making to take the long-term view, when markets are putting little pressure on them to do so, bode well. Lower inflation, higher domestic savings, focus on SME lending and longer-term foreign financing will make Turkish banks more resilient and able to fund larger projects. But as Turkey enters a middle-income stage of development when economic growth usually becomes harder, banks will need to take care of loan quality to avoid the middle-income growth trap.