Finance sector sets sail into new year with good memories of 2009

Looking at 2009, a year when the damaging impact of a global financial crisis peaked, neither serious liquidity problems knocking on the door nor the domino-like fall of global finance giants was enough to disturb Turkish banks at home. With strong capital and equity, high profit levels and relatively fewer problems, banks in Turkey sailed safe and sound through the crisis in 2009, while the non-financial industry was struggling to keep its head above water under the heavy burden of shrinking demand.

Banks in Turkey saw 17 percent growth in total assets in the third quarter of 2009 over the same months of 2008, while they enjoyed a 42 percent rise in overall profit in the same period, the latest report released by the Turkish Banks Association (TBB) reveals. Having managed to exit the severe credit crunch unscathed, the Turkish banking sector is getting ready to bid farewell to a “happy old year” with concerns of a decline in profits in 2010. The assets and equity of Turkish banks increased by TL 109.7 billion between September 2008 and September 2009, with an increase in returns on assets playing a major role in the results.

End of rate cuts, end of high profits?

One of the few industries that Turkey can boast about, banks were buoyed by consecutive interest rate cuts implemented by the central bank in 2009. By December 2009, the central bank had cut interest rates by more than 10 percentage points over the past 13 months. The rate cuts were followed by banks’ move to bring their deposit and loan interest rates down.

Despite a severe drop in liquidity that led many giant banks to collapse, Turkish banks saw a 17 percent growth in total assets in the third quarter of 2009 over the same months in 2008. The banks also enjoyed a 42 percent rise in overall profits in the same period.

Determining that such stimulus impact is no longer needed, the central bank decided at its last meeting to leave its main interest rate unchanged at 6.5 percent. Following this latest decision, analysts speaking to Today’s Zaman argue, banks will find it harder to maintain profits as high as in 2009.

ING Bank chief economist Sengül Dağdeviren said they expected 2010 to be a tough year for banks both with regards to growth and profitability. “Whether interest rates remain low and stable fiscal discipline can be maintained will affect the profitability of the banks. It is a strong possibility that interest rates could increase rather than decrease through the end of 2010; however, we do not expect this development will have a negative impact on the banking industry so long as it is predictable,” she opined.

Ali İhsan Gelberi from Garanti asserted that banks in Turkey enjoyed high profits thanks to considerable declines in interest rates during 2009; however, it will be hard to see such a rosy picture in 2010. “Bearing in mind that the central bank halted interest rate cuts and that increases are expected in the second half of the coming year, the banks will find it difficult to maintain high profits in 2010.” He said under such circumstances the banks will seek new ways of keeping profits high and will intensify their promotion of loans. “We expect to see a competition to this end.”

Akbank chief economist Fatma Melek agrees with Gelberi that banks will embark on a “loan quest” in anticipation of a continuous growth in profits. “In line with overall economic recovery, we expect a 12 to 15 percent increase in loans extended, and this could help compensate for an anticipated fall in profits.” Melek said banks will maintain a heavy focus on risk management and “focus on steady growth in the long term rather than the short.”

One of the few things that threatened the sector in 2009 was an increase in nonperforming loans. The overall rate of nonperforming loans over the total amount of money lent by banks, which amounted to 1 percent of total loans by the end of the first quarter, had neared 4.5 percent by the end of the first half of 2009. Thanks to strict banking law regulations that require banks to hold in reserve an amount equal to that of delinquent loans, the sector has managed to overcome the debt in default problem; however, this does not mean the issue is entirely resolved.

Mergers and acquisitions possible in 2010

Mentioning possible mergers or acquisitions in the Turkish banking sector, Dağdeviren said there could be attempts to this end; however, it is too early to make any firm comments as concerns regarding the strength of the global recovery still remain. Gelberi said some foreign banks in Turkey may opt for mergers and that some Turkish banks may consider acquisitions of banks from abroad, particularly in some Central European countries. “We expect an increase in M&A activity in 2010 in countries whose banks suffered heavy losses during the crisis, and Turkey could be affected by such developments to some extent.”

Melek said it is hard to say whether there will be mergers and acquisitions in the Turkish banking industry in 2010. She said, however, that in the long term new mergers or acquisitions will remain on banks’ agendas.