Enough to go around: Lending is on the rise in a number of segments

Restrained by a cautious central bank governor and chastened by rising non-performing loans (NPLs) in the consumer segment, Turkish banks are maintaining a relatively moderate pace of lending growth in 2013. Although global financial conditions loosened dramatically in late 2012 and early 2013, Turkish banks were expected to increase loans by 15-20% in 2013, around the same pace or a little faster than in 2012, when lending growth was held back by the European crisis.

The pace of lending growth over the past decade has been phenomenal. Bank lending grew from 14% of GDP at the end of 2002 to 55% of GDP at the end of 2012, even as real GDP grew by 63% over the same period, according to the Banking Regulatory Supervision Agency (BDDK) and the Turkish Statistical Institute.

Closing Tge Gap

However, the next stage of development will be more difficult, and will depend on the success of broader efforts to spread affluence more evenly. The past decade’s banking growth has been concentrated in the financial and political capitals, Istanbul and Ankara, while most of western and central Turkey remains relatively under-banked and eastern Turkey has been woefully neglected.

As a result, Istanbul, Ankara and other western cities have relatively mature lending markets, and growth of some types of consumer lending, especially credit cards, must now slow in those areas to a pace closer to that of economic growth. Meanwhile much of the rest of the country remains under-banked and ripe for acceleration, especially eastern Turkey, if the obstacles that have held back progress there can be overcome.

To illustrate the scale of the gap, Istanbul, with an 18% share of the national population, absorbed a disproportionate 42% share of lending as of September 2012, a remarkable number even considering the city’s importance as the country’s financial centre. By contrast, eastern Turkey, with a 22% share of the national population, had only an 8% share of lending. Expanding banks’ presence will be crucial. Ufuk Uyan, the CEO of Kuveyt Türk Participation Bank, told OBG, “Branch expansion is driving growth in Turkey’s participation banking sector, which is likely to experience much higher growth rates than the traditional banking segment in the coming years, albeit from a low base.”

Turkish banks also have big opportunities ahead to expand long-term lending as they become better able to attract long-term funding. As Turkey continues to improve its track record on inflation and currency stability, Turkish banks will be better able to pursue growth in such areas as public-private project finance and residential mortgages.

Consumer Lending

Turkish banks’ non-housing consumer lending business is relatively advanced, with outstanding loans of TL188bn (€81.17bn) at the end of 2012, or 13% of GDP, according to the BDDK. The eurozone average is 15% of GDP for banks’ non-housing consumer lending, according to the European Central Bank (ECB). The rapid growth of consumer lending in 2010-11, especially to young, urban professionals in Istanbul and other major cities, has tapped out many borrowers. NPLs, which had been declining since 2009, began a gradual rise in 2012, reaching 4% of all non-housing consumer loans and 5.3% of consumer credit card debts as of January 2013.

“The tremendous increase in credit card use in such a short time has elevated levels of risk in the retail lending segment,” Martin Spurling, the CEO of HSBC Turkey, told OBG. “Also, reduced economic growth in 2012 has led to an increase in NPLs. However, overall NPL rates in Turkey are still lower than in most other countries.”

Although credit-reporting systems are advanced, credit history databases remain thin. Also, the relatively high interest rates that borrowers are willing to pay in the non-housing consumer segment make lenders willing to accept moderate losses. Average rates on non-auto, non-housing consumer loans were 13.4% as of mid-March 2013, about 700 basis points over one-month deposit rates, according to central bank data.

Growth of credit card lending slowed in early 2013 to an annualised pace of 18% in the first 10 weeks of the year, down from 29% annual growth in 2012. Other non-housing consumer loans sped up to at an annualised growth pace of 22% in the first 10 weeks of 2013, up from 16% annual growth in 2012. Credit card lending growth is likely to continue slowing in 2013 as banks tighten lending standards. A central bank tightening of banks’ reserve requirements in February was widely understood as an effort to rein in consumer lending.

Within non-housing consumer lending, the biggest growth potential lies in auto loans, which are relatively underutilised with only TL8.3bn (€3.58bn) lent by banks at the end of 2012 and another TL5.2bn (€2.24bn) by non-bank finance companies.

Home Loan Segment

Consumer housing loans are still in their infancy in Turkey, standing at 6% of GDP in 2012. That compares to an average 17% of GDP as of 2011 among the 10 new EU members from central and eastern Europe and an average of 40% of GDP in the eurozone in 2012, according to the European Banking Federation and the ECB. Those figures don’t include non-bank-funded home loans, which are rare in Turkey and common in some European countries.

The home loan segment grew at a 15% pace in 2012 but was expected to slow in 2013 as a result of a large increase in the rate of value added tax levied on new homes, whose buyers are more likely to use mortgages than buyers of existing homes. The key to growth in the sector is bringing down long-term interest rates. Average rates on mortgage loans hit a record-low 9.3% in mid-March, according to the central bank. But loan durations are short, with most loans for five or 10 years.

Business Lending

Outstanding loans to nonfi-nancial corporations (NFCs) grew 20% in 2012 to reach TL401bn (€173.15bn), or 28% of GDP, according to the central bank. That compares to an average of 22% of GDP as of 2011 among the 10 new EU members from central and eastern Europe and 48% of GDP in the eurozone in 2012.

Blue-chip Turkish firms are tough customers, especially when global credit conditions are loose. During such periods they can access funding directly from foreign banks or Eurobond markets. Turkish NFCs had $84bn of foreign-sourced debt at the end of 2012, according to the central bank, up 6% from 2011.

Turkish banks are looking forward to taking part in the several large infrastructure projects being planned by the government, which are expected to be financed with a mix of domestic and foreign bank funding. Notably, the state bank Halkbank has already raised funds for the government’s International Finance Centre project (see Capital Markets overview) with a TL250m (€107.9m) initial public offering in February 2013 for a 28% stake in its Halk GYO unit, a real estate investment trust. The funds raised will finance the construction of five buildings at the planned centre, one of which will become Halkbank’s new headquarters.

Small Business

On the other end of the size scale, small and medium-sized enterprises (SMEs) represent one of the most important banking frontiers. They play a weighty role in Turkey’s economy, and dominate especially outside of major cities. As of 2009 SMEs accounted for 78% of employment in Turkey and 56% of GDP, according to the Turkish Statistical Institute, but their actual share is likely larger after accounting for their substantial unreported business.

Bank lending to the sector is substantial but well below potential, reaching TL198bn (€84.5bn) at the end of 2012, including lending to unincorporated businesses, according to the BDDK. Lending to the sector was growing at an annual rate of 9% as of October 2012, with the more recent trend obscured by a change in how SMEs are counted.

Understanding the link between the smaller average company sizes and lower lending rates in less developed parts of the country, the government has made lending to SMEs a priority and tasked state-owned banks to focus on the segment.

Since most SMEs that have not previously worked with banks are unprepared to meet standard underwriting criteria, the SME lending business requires that banks commit resources to business development coaching. Cem Mengi, the head of commercial banking at ING Bank, told OBG, “SMEs in Turkey often have difficulty managing cash flows, which stifles business growth by exacerbating their lack of investment capital and liquidity.”

Hayrettin Kaplan, the general manager of Türk Eximbank, told OBG that turning prospective small businesses into creditable businesses often requires a fundamental change in the owner’s management style. “It’s about organisation and delegation,” he said.

Among private banks, fiekerbank has a particular focus on SME loans, which it has packaged into covered bonds and successfully sold to foreign investors including multinational development banks. Zeki Önder, the executive vice-president of fiekerbank, said SME lending had a role to play in meeting the ambitious target for export growth included in thegovernment’s 2023 strategy. “Lenders can mobilise the capital and business development expertise that SMEs need to target new markets,” he told OBG.