VZCZCXYZ0011
PP RUEHWEB

DE RUEHAK #0442/01 0831254
ZNR UUUUU ZZH
P 241254Z MAR 09
FM AMEMBASSY ANKARA
TO RUEHC/SECSTATE WASHDC PRIORITY 9162
INFO RUEHIT/AMCONSUL ISTANBUL PRIORITY 5553
RHEHAAA/NSC WASHDC PRIORITY
RUEATRS/TREASURY DEPT WASHDC PRIORITY

UNCLAS ANKARA 000442 
 
SENSITIVE 
SIPDIS 
 
DEPARTMENT FOR EUR/SE MARSH, EEB/OMA SNOW, TREASURY FOR 
PARODI, WEISS, VELTRI 
 
E.O. 12958: N/A 
TAGS: EFIN ECON TR
SUBJECT: TURKISH BANKING SECTOR STRONG, BUT WARY 
 
REF: A. ANKARA 297 
     ¶B. 2008 ANKARA 1982 
     ¶C. 2008 ANKARA 1978 
     ¶D. 2008 ANKARA 1744 
 
¶1. (SBU)  Summary.  The number one concern of Turkish banks 
today is credit risk from Turkish Lira (TL) and foreign 
exchange (FX) loans made to the private sector.  That risk is 
manageable now, but all banks, the Central Bank, and the 
Banking Regulator (BDDK) are all watching trends in 
non-performing loans (NPL) carefully.  Turkish banks 
benefited from the painful reforms they made after the 
financial crisis of 2000-2001.  The number of banks declined 
from 80 in 2001 to 56 today, and the BDDK expects to see some 
additional consolidation.  Across the board Turkish banks now 
maintain high capital adequacy ratios (CAR) averaging 18 
percent, which is well above the Basel II standard of eight 
percent.  Central Bank stress testing shows that even if 
non-performing loans increase from the current average of 
four percent to 13 percent, banks will still be able to 
maintain an average CAR of 12 percent.  To date, companies 
have been able to roll over or repay their debts, and FX 
loans are available, albeit at higher rates and from fewer 
sources.  End summary. 
 
NPL Concerns and Auto Stimulus 
------------------------------ 
 
¶2. (SBU)  In February, BDDK President Tevfik Bilgin warned 
banks against distributing dividends from 2008 earnings and 
encouraged them instead to use profits to bolster their 
capital base.  BDDK has set 12% as the minimum threshold for 
CAR.  If a bank drops below that level, it cannot open 
branches or acquire subsidiaries.  Despite their healthy CAR 
levels, banks are making few loans.  Instead, they are 
minimizing credit risk by using deposits to buy Turkish 
Treasury bonds instead of lending to businesses or 
individuals.  Government bonds constituted just 27% of 
banks, total assets at the end of 2008 and reached 52% in 
the first two months of 2009, showing banks' aversion to 
lending.  Overall loan demand for new investment is down, due 
to concerns about the economy and stagnant inventories, but 
companies still need working capital.  In past crises, 
company owners took personal loans for working capital or 
companies helped each other by extending receivable repayment 
to 60 or 90 days. 
 
¶3. (U)  One reason for banks' aversion to lending is the 
continuing growth in NPLs, which increased 1.3% per week in 
the first two months of 2009.  The banking sector's NPL ratio 
was 3.6% at the end of 2008, and has increased to 4.21% as of 
March 2009.  While NPLs still constitute only four percent of 
total loans outstanding, their continued increase makes banks 
very cautious about lending.  The heaviest NPL levels are in 
credit cards (7.7%), loans to SMEs (4.3%), and auto loans 
(7.5%).  The first two categories are generally unsecured, 
but auto loans are made on only 75% of the car's value and 
secured by the vehicle.  Meanwhile, NPL ratios for retail 
loans were 3.68% at the end of 2008 and have grown slightly 
in 2009.  Defaults on housing loans (1.5%) remain manageable. 
 Turkey does not have a sub-prime mortgage problem because of 
timing and luck.  It took the Parliament years to refine the 
mortgage law, so Turkey did not get into derivatives or 
mortgage-backed securities and does not have a significant 
secondary mortgage market. 
 
Loan Volumes 
------------ 
 
¶4. (U)  Total loans in the banking sector reached 368 billion 
TL ($216 billion) in 2008, marking a 29% year-on-year 
increase, with FX loans constituting 29% of the total.  In 
2008, banks in Turkey provided $45 billion in FX loans, and 
an additional $25 billion in FX loans was extended by foreign 
banks and Turkish bank branches outside the country.    The 
total FX debts of the non-bank corporate sector is $95.6 
billion as of January 2009 according to the Central Bank. 
According to the same data, total bank and non-bank debt as 
of January 2009 is $138 billion.  FX loans are supposed to be 
restricted to borrowers who have foreign exchange earnings. 
However, some individuals and non-exporting companies found a 
way to circumvent the restrictions by putting up FX held in 
Turkey or overseas as collateral.  FX borrowing became less 
attractive in late 2008 and early 2009 as the lira dropped in 
value against the dollar and the euro. and made repayment of 
FX loans much more expensive. 
¶5. (SBU)  The banking sector,s FX debt payments are less of 
a concern in 2009.  As of January 2009, total bank debt is 
$29.5 billion, with $4.9 billion due within one year.  The 
sector's total foreign borrowings in 2008 were $60 billion. 
Turkish banks managed to roll over 55% of that amount and 
repaid the balance.  BDDK's Vice President, Sabri Davaz, does 
not expect banks to have significant problems rolling over or 
repaying their debts in 2009. 
 
¶6. (SBU)  The lack of sophisticated monetary instruments in 
the Turkish banking sector has been an advantage of late, 
with public exposure to leverage lower in Turkey than in most 
other countries.  According to Akbank research, Turkish banks 
have a low penetration of banking products to consumers, 
which provides an opportunity for further growth when the 
economy picks up.  Turkish household debt is also relatively 
small compared to EU levels.  Turkish household debt to GNP 
was 11% at year end 2007, compared to a ratio of 56% for EU 
households.  Selim Guray Celik, Vice President of state-owned 
Ziraat Bank, says Ziraat has a low 1.6% level of NPLs, 
because more than 50% of its loans are made to civil servants 
and pensioners whose loan payments are automatically drawn 
from their Government-deposited salaries or pensions held at 
Ziraat. 
 
Looking to the Post-Crisis Future 
--------------------------------- 
 
¶7. (SBU)  Ekrem Keskin, Secretary General of the Banks' 
Association of Turkey, said the main risks the banking sector 
will face in 2009 and beyond are: uncertainties in the 
international environment, reliance on external borrowing, 
pressures on FX liquidity, contraction in economic activity, 
rising costs of financing in the private sector, ownership 
changes in banks in Europe, interest rate risk, and increases 
in non-performing loans.  We discussed each of these with our 
contacts at BDDK, the Central Bank, and several of the 
biggest banks in Turkey.  None are unduly concerned about 
these risks, and all are pleased that Turkey stayed out of 
the muck experienced by American and European banks. 
 
¶8. (U)  Interest rates on loans have not declined much 
despite Central Bank rate cuts, but CB Vice Governor Erdem 
Basci expects rates to trend down slowly.  The banks' strong 
liquidity conditions will pave the way for decreasing loan 
interest rates in the coming periods.  The CB lowered its 
benchmark overnight borrowing rate--now 10.5%--another 100 
basis points on March 19.  The CB has cut a total of 625 
basis points from the overnight borrowing rate since November 
¶2008. 
 
¶9. (U)  The Turkish Banking sector has long been suffering 
from maturity mismatch with deposit maturity of approximately 
32 days and lending maturities of one year or more.  In 
recent months, this problem seemed to stabilize as banks 
bought government securities with various maturities instead 
of extending loans.  Once the economy starts to recover, 
maturity mismatch will again be a problem if banks cannot 
find ways to attract longer term deposits. 
 
¶10. (SBU)  Comment:  Turkish banks have been both lucky and 
smart.  Industry reforms after the 2000-2001 crisis were 
painful and expensive but the industry is well situated now 
to withstand some shock.  High capital adequacy ratios and an 
effective banking regulator are good buffers against industry 
problems.  We and everyone in the industry will closely watch 
NPL trends, which remain the most significant risk for the 
industry.  We will also watch for renewed signs of normal 
banking operations and the lending needed to jump-start the 
economy once the world starts to recover from its economic 
recession.  According to BDDK data, the number of branches in 
the banking sector increased by 1,108 in 2008, with a nine 
percent increase in the number of employees.  Turkish banks 
opened a total of 268 branches in the last three months of 
2008, and hired 1,140 new employees.  This significant growth 
just as the Turkish and world economies were slowing remains 
unexplained.  It should, however, position Turkish banks to 
expand lending quickly as soon as business conditions 
improve.  End comment. 
 
Visit Ankara's Classified Web Site at 
http://www.intelink.sgov.gov/wiki/Portal:Turk ey 
 
Jeffrey