Indeed, in an interview with Sunday's Zaman last month, Economy Minister Mehmet Simsek said: "In the past, the banking sector was so weak that it usually exacerbated any problems in Turkey. This time around, it looks like the banking sector is actually going to help cushion the crisis."
Few men in Turkey have greater insight into developments in the Turkish financial sector than Yapı Kredi CEO Tayfun Bayazıt, who assumed leadership of the bank in 2007 after having resigned as chairman of the board at Fortis Bank. Holding a master of business administration degree from Columbia University, Bayazıt has been successful in steering the bank through turbulent waters and bringing in profits totaling YTL 640 million in the first three quarters of 2008.
Sunday’s Zaman had the opportunity to speak with Bayazıt earlier in the week. He shared his views on how the crisis is impacting the Turkish economy and his bank’s take on coping with the crisis.
What do you feel about the risk posed to Yapı Kredi, and the Turkish banking sector in general, as a result of drying up liquidity and foreign depositors’ “flight to security.”
What started as a sub-prime crisis in the US and evolved into a credit crunch and a liquidity squeeze is not only a threat for the banking sector specifically, but for all countries and companies in general. Turkey is no exception. Turkey’s growth depends on the continued flow of foreign savings in the form of either FDI [foreign direct investment] or financing because of the insufficient resources for domestic savings. So, in case of a slow-down in foreign capital inflows, we are bound to face a slowdown in economic activity.
So I think it should be evaluated from this perspective. It’s not only banking, the real sector is also being affected by the slowdown of inflows. So, actually, we are fortunate in many cases because the Turkish banking sector is the least leveraged, least exposed and least dependent in terms of foreign borrowing and, when the liquidity comes back to the system and when the foreign flows are sustained, it will be more manageable. I think what we are seeing is a slowdown that will curtail the lending appetite of the Turkish banks and will in turn require restructuring in the balance sheet of the real sector. But we see this as a temporary liquidity squeeze which will sometime next year return to normal conditions.
Do you see banks competing with one another to attract investors and do you see their rates shooting up to attract deposits, like we saw in the 2000-2001 crisis?
No, I don’t see that happening. The banks, in spite of the fact that we are starting to feel the liquidity squeeze, have acted responsibly.
A lot of comparisons are being made with 2001, but in 2001 we had a really weak public sector that had a great appetite for borrowing and a weak banking sector that was not able to meet this demand. So that’s why supply and demand caused rates to shoot up substantially.
Now we have a much more sound public sector that has less borrowing requirements, a much sounder banking sector that is still able to facilitate some growth, probably not as much as the past three or four years, but some growth, and then I think the private sector has also acquired abilities to cope with this kind of a slowdown. Now we have an independent central bank that is eyeing not only inflation, but also growth, and -- the key thing here in this equation, compared to 2001 -- we have much less appetite on the public sector’s side because of the successful fiscal restraint. So this process will not turn into much higher interest rates.
Can you provide figures on your amount of foreign holdings and how this has changed from several months ago?
Well, if the question is specifically about the share of foreign capital in the banking sector, there have been no changes in the last year. Also, in our case, one of the two major shareholders of Yapı Kredi is UniCredit and for UniCredit this has been a very strategic investment since 2001. UniCredit owns 50 percent of the shares in Koç Financial Services, which in turn controls 81 percent of the shares in Yapı Kredi. And UniCredit is firmly committed to its investment in Turkey and it has a strong belief in the Turkish economy. It was also evidenced in August, when we asked for a capital increase to strengthen our capital for our expansion activity. Both shareholders have contributed funds. We have successfully completed a YTL 920 million capital increase in cash with both major shareholders and also minority shareholders. So, regarding the backing of the shareholders for our original business plan, there is no change.
I think there’s a lot of discussion about the IMF, but I can give you the general framework. The IMF still plays an important role in the global financial markets. For many foreign investors, IMF approval of an economic policy package is important. It is seen as a benchmark. So, given the foreign debt repayments in 2009 and, obviously, all these difficulties in refinancing them in the global financial markets, a standby agreement with the IMF would play an important role and change the market sentiment for the better. So I think, for that reason, it is important.
About a month ago I had the chance to speak with Foreign Minister Ali Babacan and he said that, although Turkey was discussing possible scenarios with the IMF, by signing a standby agreement it could signal, in the eyes of international investors, that maybe there is a problem. Do you agree with this?
If the IMF endorses the right policies and provides financing with it; in a period where there are scarce resources for financing, I don’t really see what is wrong with it.
How much of a threat do you perceive as coming from risks posed by loan default, both from the perspective of Yapı Kredi and the Turkish banking sector as a whole?
I think in light of adverse global and local liquidity conditions, together with the acceleration of the international financial turmoil, there has been and there will be a slowdown in lending growth in the second and third quarter of 2008. The slowdown in the economy had grossly affected the cash flow of companies as well. So this has led to some slight deterioration in asset quality in the banking sector in general, and also specifically, Yapı Kredi is no exception to this. New non-performing loans are mainly driven by small business and credit cards, in line with our expectations. But in terms of overall asset quality, there has been no material deterioration.
As of September, for example, if I can give you Yapı Kredi’s disclosed figures as a public bank, net profit ratio [NPR] stands at 3.9 percent, which is stable compared to June second quarter results, but significantly down compared to the level in 2007. At the end of 2007, our NPR was 5.8 percent, so the decrease compared to the end of last year is partly due to better management of the NPR portfolio and sales of some NPR portfolios, but also at the same time, due to an increase in total lending activities. So, going forward we will see some deterioration in the NPR, because of the fact that the banking sector will lend at a slower pace, but we will see more asset quality deterioration, more NPR coming into the picture, so the ratio will get worse -- which is quite normal.
As I mentioned, there was someone I spoke with a little while ago from an international auditing company’s risk division sector for Central and Eastern Europe (which includes Turkey) who described “ticking time bombs” on banks’ balance sheets. What do you think of this?
If what is meant by ticking time bombs is highly leveraged structures, which not only include the credit risk but also the exaggerated market risks involved, there is none of this in Turkey. So all of this, what is being framed as toxic assets, where certain toxic instruments that are being leveraged further and packaged as security and sold to banks -- there is none of this in Turkey. [Were this to have been the case] that would be a dangerous thing that would have been written off -- or when the leverage were unwound, it would have had exaggerated effects on the balance sheets of banks -- there is none of that. But what is an obvious trend is that since banks have continued to lend and support not only to small business, but also individuals, credit cards, medium-sized companies and larger-sized companies because of the liquidity squeeze, we will see some deterioration in asset quality.
Actually we are forecasting in the guidance that the cost of risk will deteriorate from 1.3 percent at the 2008 year-end to 1.65 percent at the 2009 year-end. So banks have started taking some preventative actions in response to the changing environment -- in particular, applying some more stringent credit rules, reducing exposure to certain sectors that are highly exposed, adjusting their small business score card systems, having extra checks on sizeable credit disbursements and having more selective criteria for underwriting and monitoring loans.
Now, you mentioned syndicated loans at the beginning, but do you see much of a threat of these not being rolled over?
As far as we are concerned, we have YTL 2.1 billion in syndications on our books consisting of two separate syndicated loan facilities. In September of this year, we had YTL 800 million in one-year facilities that have matured. Also, foreseeing that market conditions could get worse, we have raised that amount, and we raised YTL 1 billion of syndication for one year. And the pricing of that, was [the London Inter Bank Offered Rate] LIBOR plus 75 basis points. Our second syndication for this year is coming up in December, which is YTL 700 million. We have communicated already to the market that with increased first syndication, we will not be tapping the market this year, but we will be testing the market at the end of the third quarter to see what we want to do with it. So I think given the market conditions, we will have to see the developments in the first quarter to see for what sort of amount and maturity and for what type of instruments we will tap the market. So, as it is indicated in our case, I think in general for the banking sector there are no major problems in terms of rolling over syndicated loans.
What do you think about the possibility of state guarantees for bank deposits and, specifically, do you see any “moral hazard” involved with these loans?
I don’t really want to comment too much on this. But what I can say is that what we have seen in developed markets certain precautions that were taken in order to make sure that credit markets work and that investors are not frightened into completely getting their money out of the system. So what we have seen in France, Greece, Ireland, etc. is different applications. Some had a vertical commitment for guaranteeing deposits, some went so far as to guarantee the whole liability side of the banks’ balance sheets -- including bank borrowings, not only deposits.
Small and medium-sized enterprises (SMEs) were one of the big focuses of Yapı Kredi campaigns a few months ago; however, SMEs are now finding it much harder to gain credit. What percentage of the bank’s total loan portfolio is made up of loans to SMEs and is Yapı Kredi going to remain committed to extending loans to SMEs?
It’s not only campaigns; you probably hear this because we are more vocal on campaigns. SME banking is a strategic focus area for us. ... And since SMEs need working capital, financing comes with it. At the end of 2007, 13 percent of our loans went to SMEs; as of the end of September 2008, this was up to 14 percent. What we define as SMEs are companies with less than a 3 million turnover. We grew significantly over the last 12 months -- since we identified this as a major focus area. This move has led to a high generation of revenue for us in the retail segment due to a strong volume increase. We have a lot of product offerings for SMEs and have been focusing on acquiring new SME clients. So our focus has not changed.
In 2008 alone we acquired 57,000 small business clients. We currently have around 450,000 active SMEs clients. In light of deteriorating market conditions, we have continued our commercial relationships with SMEs in a more prudent and disciplined approach. This means that not only for SMEs but for all types of lending, we have taken a number of measures in terms of not taking disproportionate risks.
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