As the IMF and others have noted, the Turkish banking system’s non-performing loan (NPL) ratio is relatively low, despite the recent economic slowdown and foreign exchange risk. The ratio varies across the sector, however, with some banks more susceptible than others. While NPLs are not high by regional standards – and even by those of some eurozone members – and are well-provisioned, analysts and sector players have become increasingly aware of the risks of a rising ratio to balance sheets. After several years of rapid credit growth, a number of factors could drive NPLs upwards, including slowing economic growth, the fall in the lira, and cooling investor sentiment.

Under Control

As of late April 2015, the system-wide NPL ratio stood at 2.8%, down slightly from 2.82% at the end of 2014, according to the Turkish Banking Regulation and Supervision Agency. The ratio has been fairly steady in recent years, standing at 2.7% at the end of 2013 and 2.84% at the end of 2012.

NPLs have been brought down since the turn of the millennium, from as high as 17.5% in 2002, and remain at levels below those seen just before the international financial crisis. System-wide NPLs rose from 3.04% in March 2008 to 5.41% in October 2009 as the economy slipped into recession, before falling back below 3% by June 2011. The ratio rose to 3.01% in November 2014, then once again dropped.

While Turkey’s NPL ratio is impressive, it has been reduced partly by the sale of bad loans to management companies by banks. In December 2014, for example, Akbank sold its NPL portfolio, which totalled TL250.5m (€88.2m), to Efes Asset Management for TL41m (€14.4m). The month before, ING Bank Turkey had sold TL47.86m (€16.9m) in NPLs for TL7.25m (€2.55m) to an unnamed buyer.

International Comparison

The NPL ratio compares very favourably to many European countries. In Central and Eastern Europe, a region in which Turkey is sometimes included by financial institutions, NPLs have reached as high as 20% in the wake of the crisis. As of April 2015, the NPL ratio stood at 5.6% in Russia and 8% in Poland; Turkey has also been compared to these two other sizeable emerging markets.

As of 2014, NPLs in the eurozone stood at 7.8%, according to professional services firm EY, reaching 14.6% for Italy and 13.3% for Spain. Turkey’s ratio was comparable to that of Germany – a historically debt-averse society – where the ratio was 3%. NPLs across emerging markets are more variable – in China, for example, the ratio stood at 1.2% in 2014, according to the IMF, while in India it was 4.3% and in Pakistan it was 12.3%. In some countries, authorities have acted to write off or restructure NPLs, keeping the level down. In some – and to an extent this applies to Turkey in recent years – the rapid growth of loan books has helped “dilute” NPLs, which are rising in value terms.

In Turkey, credit growth averaged over 25% per year between 2010 and 2013, according to Bloomberg. Though it has been trimmed since regulatory measures were introduced in 2013, the expectation is for double-digit growth up to 2018. With Turkey’s economy cooling, this has increased the risk of NPLs.

Risk Rising

In November 2014 Garanti Bank warned that bad loans would grow “across the board” in the Turkish banking sector, as Bloomberg said that NPLs posed the greatest risk to banks’ profitability for over a decade. The same month, DenizBank’s general manager, Hakan Ateş, said that tackling NPLs would have to be a priority for the sector in 2015.

This followed Halkbank’s announcement that it had cut its end-2014 profit forecast by 15%, saying that it was facing NPLs totalling TL1.08bn (€380m). The overall sector’s profit in the first nine months of 2014 was TL18.8bn (€6.62bn), down from TL19.8bn (€6.97bn) a year previously. Bad consumer debts grew by 41% in the 12 months to September 2014, the highest rate since 2010, when Turkey was still absorbing the impact of the global credit crunch and subsequent recession.

Analysts expect NPLs to rise in the coming years, weighing on earnings at a time when buffers have been reduced. Sensitive to inflation and unemployment, the consumer segment is particularly susceptible to NPL growth. A rise in NPLs can occur despite the slowdown in credit growth, as there is invariably a lag between lending and the build up of bad debt.

In April 2015 the World Bank cut its 2015 GDP growth forecast from 3.5% to 3%, due to domestic uncertainty, an unexpected inventory build-up and the strength of the dollar. This followed growth of 2.9% in 2014, below the government’s 3.3% target and down from 4.2% in 2013. The bank raised its forecast of inflation – which erodes spending power and consumer confidence – to 7% from a previous projection of 6.7%.

Building Blocks

Risks may also arise from exposure to the construction industry. Loans to the sector account for some 66% of GDP, and rose rapidly in 2014. The IMF noted in December 2014 that a substantial drop in construction employment might signal a downturn, but that there had not been a significant rise in NPLs in the sector. Many loans in the sector are foreign currency denominated, increasing risk.

As the IMF pointed out, construction – particularly residential property construction – does not always have a foreign currency hedge. Even with rents and purchase prices denominated in euros or dollars, incomes remain in lira: most end-users earn in local currency, leading to exchange rate risk for developers and those that lend to them. Furthermore, the fund warned that the flow of lending to construction may be depriving more productive sectors of capital.

Differing Views

However, in April 2015, Deutsche Bank said that the risks to Turkish banks should not be overstated, noting that the top five banks’ NPL ratios had not risen noticeably. This followed warnings that the lira’s depreciation would make it harder for Turkish companies to repay loans, despite regulations limiting foreign currency lending to businesses.

Kubilay Öztürk, an economist at Deutsche Bank, said that only an event similar to the 2007 collapse of Lehman Brothers would create a “serious problem” for Turkish banks. Reports noted that Turkish banks’ profitability in the first quarter of 2015 had beaten expectations. Deutsche’s note may not fully take into account the longer term outlook, with the effect of the depreciating lira still fully to feed through to the broader economy. Furthermore, with an election in June, investor uncertainty could push down the currency further, or trim growth with negative effects on employment and wages. However, banks should be able to cope with NPLs in any case.


A 2014 report by international investment bank JP Morgan revealed the variation in NPL ratios between different Turkish financial institutions. Finansbank posted an NPL ratio of 6.5% in the first quarter of 2014, higher than the average, while Akbank’s was just 1.5%. İşbank’s stood at 1.8%, Garanti’s at 2.8%, Halkbank’s at 2.7%, Vakıfbank’s at 4% and YapıKredi’s at 3.5%. Perhaps due to regulatory imperatives, Tier 1 capital adequacy ratios (CARs) showed a tighter range, from 11.3% for YapıKredi and Vakıfbank to 13.5% for Akbank. Finansbank and İşbank’s Tier 1 CAR stood at 12.3%, Halkbank’s at 12.5% and Garanti’s at 12.3%.

The Turkish Banks Association has highlighted the risk to state-owned banks in particular. In January 2015, it noted that the volume of NPLs in the segment had grown by 131% between 2009 and 2014, compared to an increase of 62% in the private sector.

The total volume of NPLs on public banks’ balance sheets hit TL10.22bn (€3.6bn) in the third quarter of 2014, almost double the TL5.48bn (€1.93bn) five years before. Of the TL12.34bn (€4.34bn) increase in sector-wide NPLs in 2009-14, the state segment accounted for TL5.8bn (€2.04bn), despite having only 30% of overall sector assets. Ziraat Bank was particularly affected, seeing its NPL volume rise 224% over five years, while Halkbank’s rose 131% and Vakif’s 93%. However, Ziraat’s rise came from a lower base: by September 2014, the bank’s bad loan book totalled TL2.64bn (€930m), compared to TL3.67bn (€1.29bn) for Halk-bank and TL3.91bn (€1.38bn) for VakifBank.

The rise can partly be attributed to the structure of public tenders. Ramazan Taş, professor at and chair of Turgut Özal University’s department of economics, told local press that the NPL ratio of state banks had been driven up by lending to firms executing public projects, some of which have struggled to repay loans. Restructuring of loans before they reach maturity has helped government-owned institutions in bringing down NPL ratios, if not necessarily improving their balance sheets. The NPL ratio did not rise as expected in the first few months of 2015 – indeed, it dropped very slightly – reinforcing the argument that bad debt remains under control, and that currency risk and the effects of political uncertainty to the banking sector should not be exaggerated. Public banks may be more exposed, but they also enjoy exchequer backing.

Regulatory changes have helped reduce credit risk, and banks look well-positioned to absorb shock in all but a severe crisis. However, banks are aware of the growth in NPL volumes after years of rapid credit expansion, and are right to look to address the issue.