ATKearney sees banking boom as Turkish lenders boost loans and fees
Reading the headlines on Turkish macroeconomics you wonder how the financial industry is currently doing, as it is typically described as a central element in each economic system. The headlines that catch most attention are not so positive. Leading banks were laying off people, significantly cleaning the balance sheets by selling non performing loans and in our daily life we observe the one or the another bank branch closes or a well known ATM disappears. The loan deposit ratio went up from 132 percent to 147 percent in the begining of the year. At the same time we are reading across international markets, that the global industry players will be disrupted by new start ups (fin-techs) that might overnight re-define the industry as we know it for many decades. To get a clearer picture of what’s happening, we talked to A.T. Kearney Partner Michael Weiss on the outlook of the Turkish banking sector.
Weiss indicates that Turkey’s financial industry mastered the macroeconomics of the previous years with an impressive resilience, other markets in Europe would wish to have experienced on this level. Banks have invested significantly to improve their risk management and cash collection to be more sophisticated and efficient in follow ups before selling loans along the previous years. According to the 2016 banking reports and 2017 first quarter updates published last week, banks seem to have not only been able to ensure their refinancing on the international markets, but are also in the middle of a booming market phase: consumer loans are growing on high speed, new digital offers are present every- where. And as Weiss states, there seem to be still a huge untapped growth potential when the size of the insurance market in Turkey is compared to other markets. The key challenge is that the current set up of key players but also the regulatory framework do not allow to harvest the market potential. “The myth of a missing insurance culture in Turkey cannot explain the current gap, especially when you compare it to other markets. We probably have more a sales challenge than cultural,” says Weiss.
Battle to win in the retail banking
A quick look at the published market data comparing the outlook of the previous years looks very promising, according to Weiss. With a focus on retail banking activities in Turkey, a substantial improvement of key parameters like income per customer ratio, a double digit increase in income per employee ratio and a cost to income ratio indicate a return to 2012 figures, based on A.T.Kearney’s model.
However Weiss adds, it is still early to be fully positive about the outlook of the sector in Turkey. He states that the current growth parameters are obviously fueled by regulatory support and interventions to soften the current macroeconomic impact more than the banking success. “The current growth is financing a buffer for a given time. It is key to ensure sustainable growth models in banking are in place for the next phase to come. But it’s worth to look not only to the macroeconomic environment” he says.
Challenge at top line productivity
Weiss indicates that Turkey has the most attractive cost-income ratio for retail banks among the European markets, while significantly being challenged at top line productivity. “This is a key challenge in Turkey driven by the relatively high number of banks with very similar offerings, customer ‘shopping around culture’ and local service models” he says.
While most of the European banks optimize their costs by accelerating the sales and service of the same financial product through digital channels with 90 percent less of the classic branch channel, the key topic in Turkey is how to accelerate top line productivity after having invested
significant IT budgets along the previous years. “While we observe ongoing improvements here and there, we don’t see a step change yet impacting the local banking sector that would explain the business case of earlier IT budgets” Weiss indicates.
Growth with fee-based model
“Most of the banks have invested in IT infrastructure and digital awareness of their employees, but are now struggling to reduce their product portfolio complexity in order to match with the new customer service requirements” he says.
According to Weiss, this is especially challenging as the future growth potential will not emerge from a continued increase of general purpose loans but rather a fee-based model. “To win the battle on fee-based growth banks need not only to adapt their own service model for the digital and classic customers, but also to realign their ecosystem with other financial and non-financial partners” he says.
Digital and analog world
It seems that the new fashion in Europe is a competition in closing banking branches. For instance one of the leading retail banks in Germany announced to close 50 percent of their banking branches within 12 months. “Closing a branch does not mean you are digital” says Weiss, “If you want to grow you would rather like to ensure that your service model is compatible with the digital and analog world. This is challenging as we will see that customers are not fully migrating towards either branch or website logic.”
Customers are choosing channels along their journey not because of pricing advantage but for their specific needs in specific situations. “Banks who are not taking an active lead in navigating the customer journey towards the right touchpoints will loose them ‘on the way’ to competitors are delayed demand” says Weiss.
So where does the growth potential lie for the banking sector? According to analysis made by ATKearney, the banks will have to move away from the credit depedency and generate additional growth in the mid-term, as of next year, the latest. “One of them is fee-driven growth” says Weiss, “Which does not mean that you they would increase their banking fees such as handling a current account. The provisions they earn as a result of providing services to others, such as selling service products for insurance companies, among many others, would have to increase.”
Innovation for the banks would be in this case finding ways to in- crease the fee contribution on their total profit, since an upswing in the loan portfolio seems unlikely under the current circumstances.
Weiss states that the speed and the direction of the strategic transformation of the Turkish financial system is currently determined from a set of multiple factors, beyond the local market competition and macroeconomics.
“And if we talk about strategic transformation we do not mean the replication of the ‘disrupting fintechs’ story we are hearing at conferences across the world. If you look to the facts we have globally much more fintechs that considering themselves as technical service providers than ‘dangerous disruptors’ in the meantime” he says.
ATKearney Partner Michael Weiss