Banking on Change

Four years on from Turkey's major banking and financial crisis, the sector has been recently pondering a new law - along with the costs of implementing an old one. With the IMF also due in town at the start of April, the Banking Draft Law has taken on a wider dimension, as Fund experts push for revision before signing a new stand-by agreement.



The crisis in February 2001 was followed by a number of the nation's banks going into state receivership, a process that had also been underway before the crash. A Union of Turkish Banks report released in mid-March showed that between 1999 and 2003 some 20 banks were taken over in this fashion, with eight others shut down.



During this time, the Treasury injected some $39.3bn into the banks to cover operational losses and those banks in receivership. The figures also showed that the Savings Deposit Insurance Fund (TMSF) - the official body that guarantees bank deposits - had some $7.9bn assigned for recapitalisation purposes.



Traditionally, Turkey's banks, while numerous, have largely had relatively small deposit bases. Many ordinary Turks do not put their money into banks, but in the past kept savings in foreign currency, which they have greater trust in. Partly to try to turn this around, a law was introduced many years ago giving commercial banks a 100% state guarantee on deposits.



This meant that while depositors were protected, the state itself could be faced with covering some substantial holes whenever a bank went into receivership. When this happened en masse in 2000-01, the banking authorities were faced with an enormous liability.



Therefore, changing this law has since been something of a priority, yet finding a way to do this without undermining confidence in the remaining banks has been problematic.



The new draft law envisages that the TMSF will take control of defaulted banks for up to nine months, with an Audit Commission appointed that will include foreign experts. This latter move also means dissolving the existing audit board, while the former will see an end to control over defaulted banks by the banking watchdog, the Banking Regulation and Supervision Authority (BDDK).



Yet the Treasury will still be obliged to meet the commitments of the banks transferred, meaning that for up to nine months, a defaulted bank could be a continuing burden on Treasury funds.



Getting to this stage too has also involved some debate with the IMF, which has paid particularly close attention to this new law. It was the Fund which demanded the auditing board be dissolved and that foreign experts be drafted in to do some going through the books. The arrival of an IMF delegation in the first week of April has also added a deadline to the law's passing, although BDDK Chairman Tevfik Bilgin told reporters on March 24 that no date had yet been fixed for the draft law to be submitted to parliament. Deputy Prime Minister Abdullatif Sener was more optimistic though, saying he expected the law to be on the chamber's agenda next week.



As for the IMF stand-by agreement that the delegation is also coming to discuss, Central Bank Governor Sureyya Serdengecti told reporters March 23 that the government was ready to sign a new stand-by deal immediately, a move aimed at heading off growing rumours in the financial community that the government was not ready.



Whatever the case, the Turkish banking sector has been going through some major changes in recent months. The overall number of banks has fallen - there are now 48 in operation, down from 2000's total of 79. Yet meanwhile, the rate of profit growth has also been on the way down. During the 1990s, banks made major gains from government papers, with sky-high rates of interest often going into triple figures. This had always prompted complaints from the country's real sector that the banks were failing to provide a source of investment, being more concerned with trading T-bills.



Yet the days of high interest rates are over - as can be seen starkly in the levels of profits. Union of Turkish Banks figures show a 100% increase in profits between 2002 and 2003, yet this fell to 30% in 2004. Total assets, however, are growing, with these up 22.7% last year to $229bn. Private banks accounted for some 57% of this total, state banks the rest. Net earnings were also up 11.5%, year-on-year.



However, interest rates in Turkey, while much lower than they have been in decades, are still higher than elsewhere, which has led companies to increased overseas borrowing. This has its dangers, as BDDK's Bilgin pointed out. He warned these companies that this borrowing had left them in a short position in which "any volatility in exchange rates could hurt these firms and in turn, the banking sector as well."



The US Fed's interest rate change this week did cause a slight jitter in this regard too, as US dollar rates climbed, if only to fall back a little by the end of the week.



Meanwhile, the question remains as to how the banking sector overall can both compensate for the decline in profits from government paper and reorient itself towards providing the kind of support for investment needed by the real sector - and by ordinary Turks. To some extent, the growth in consumer credit vehicles has been aimed at solving this problem, with larger numbers of credit cards and charge cards now available. Providing new services is likely to be the name of the game in future, with this being a contest the larger banks are likely to do better at, provisioned as they are with the resources to retool and reshape - along with what some critics might say was a fair amount of disposable excess capacity and resultant economies of scale.



So, change is very much on the agenda for the sector, with a new legal framework, the likelihood of more consolidation - and, many hope, higher market values for Turkey's banks in the future - accelerating foreign interest.