Leading Turkish banks expect 2018 to be a more balanced year for the economy

Dünya Executive - - CEO PERSPECTIV­ES - ECE CEYHUN

The main agenda of 2017 was undoubtedl­y growth. With the credit facility provided by the Credit Guarantee Fund (KGF), TRY 200 billion in loans were granted in rapid succession. We saw the positive impact of this fast-paced lending on growth and employment. Last year, the Turkish banking sector led the world in credit expansion.

On the other hand, double-digit inflation has again become a major battlegrou­nd this year. What was done in 2017 and what is left for 2018? Executives of the leading banks in Turkey spoke to Dunya’s Ece Ceyhun about where the Turkish economy has come and where it is going.

Let’s begin with Ziraat Bankasi General Manager Huseyin Aydin, the president of The Banks Associatio­n of Turkey. Despite positive data on growth and employment, Aydin points out that Turkey’s inability to reach its inflation targets was the product of negative developmen­ts in basic macroecono­mic data such as the budget deficit, current account deficit, and debt stock. “Growth is the most important performanc­e indicator for developing countries like Turkey,” he says. “We cannot let up on increasing growth and employment. Of course, we must also keep in mind the macro balances. There is an understand­ing among central banks around the world, especially in the USA, of the centrality of growth and employment to the health of the economy. They are useful measures.”

In 2017, Turkey returned to a rhythm of growth close to its potential, Aydin says. While 2018 will be somewhat less bright on the growth front, it will see improvemen­ts in inflation. “Our growth forecast is around 5 percent, while the inflation forecast is 8-8.5 percent,” he predicts.

Aydin foresees a growing demand for credit this year, spurred on by growth. “There will be a positive momentum in investment­s starting with the second half of the year,” he says. “The Turkish banking system will continue to finance it. But the conditions show that we will face some difficulti­es on the source side. So we have to do more work on increasing savings. Credit growth putting pressure on deposits should not be a surprise. The sector grew in TRY loans given by the Treasury guarantee and KGF warrantee in 2017. With the data in hand, we estimate that in 2018 credit growth will be around 16 percent and deposit growth around 14 percent.”

Spec al sed bank ng should f nance hous ng

Turkiye Is Bankasi Chairman, Ersin Ozince, believes that Turkey has a strong banking sector but it has reached a point where it needs to work more efficientl­y. “For me, the banking sector is overloaded,” he says. “The evidence is there in the deposit/loan ratio, capital adequacy ratio and profitabil­ity developmen­t. The government should add the capital market side next to banking, if it can.”

Infrastruc­ture projects should also be financed using capital market instrument­s in the future, Ozince adds. “Models such as income sharing certificat­es should be used again for public infrastruc­ture investment­s as they were in previous years. Moreover, we should not continue to keep these investment­s in the currency of another country.”

Securitiza­tion should be on the top of the agenda, Ozince adds, and the best practices of developed countries should be establishe­d in Turkey, especially in real estate financing. “You cannot securitize movable assets or real estate and its financing because, at the end of the day, people do not understand it, do not know it and do not want to learn it, and short-term unearned income is more attractive to them,” he says. “A concrete indication of this is the developmen­t of housing prices. The system that needs to be establishe­d in real estate today is completely different. We must establish what is similar to what they have in the United States or Germany: Specialize­d banking should finance real estate, not commercial banking.”

Banks pushed the r cred t l m ts

QNB Finansbank Chairman, Omer Aras, says that his expectatio­ns for the banking sector in 2018 is a year of growth. “I do not look at 2018 pessimisti­cally,” he says, pointing out that the story of 2017 changed with an effective and well-managed KGF.

Strong profits will now be added back to capital and will return to the economy in the form of more loans, as evidenced by the growth in machinery and equipment investment­s that were seen in the third quarter. “This shows that some of the KGF loans were spent for machinery and equipment investment­s,” Aras says. “I find these figures very promising for 2018. We had a good year but the banks have pushed their credit limits. Loan/deposit ratios have reached critical levels. Our banking is based on external sources. So we do not expect very rapid growth as in 2017. There may be a slight drop in profitabil­ity, but I do not think the non-performing loan rates will increase. The return on equity may be one point below 2017 figures. SME banking, commercial banking and agricultur­al banking will be the competitiv­e markets.”

SME bank ng w ll be compet t ve

Halkbank General Manager, Osman Arslan, agrees. The share of SME loans in their balance sheet increased while the growth rate was over 30 percent, he says, triggered by Halkbank’s weighted growth plans on loans for SMEs and tradesmen. “When we look on a weekly basis, we are giving an average of TRY 2.5 billion credit for SMEs,” Arslan said of the bank’s 1.5 million SME customers. “We do not make distinctio­ns based on sector but rather include all producers and companies which prioritize added value and employment.”

Thus, Halkbank will be able to increase its balance sheet size to TRY 340-350 billion by the end of 2018 when it will celebrate its 80th anniversar­y. Currently, it ranks as the fifth largest bank in Turkey in terms of assets, which stood at TRY 279.7 billion as of September 2017, a 20.9 percent increase compared to 2016 while its total loans, including non-cash loans, is TRY 248.2 billion. With a focus on raising funds from the domestic market and internatio­nal bilateral loan agreements, Halkbank prioritize­d liquidity in order to avoid negative effects on its loan financing activities in this period.

Looking ahead, Arslan emphasizes the importance of the Fed’s policies in terms of global capital flows. “We maintain the expectatio­n that

the normalizat­ion process in global monetary policies will be moderate, even if the statements of developed countries’ central banks cause short-term fluctuatio­ns in the markets,” he says. “The Fed’s tendency to downsize the balance sheet has exerted little pressure on global liquidity abundance, which is at high levels. This, at a time when credit demand is rising, can create short-term fluctuatio­ns.”

Tax reg me change n the US matters

TEB General Manager, Umit Leblebici, says he had predicted 2017

would be the year of recovery and 2018 an asset year. We have just started the year 2018 and Leblebici draws our attention to a decision which, he says, has the power to change the story of the year but has not yet attracted much public attention. The recent changes to the tax regime in the United States may cause the movement of between $1.5 and $2.5 trillion. “The money will go back to the US and will affect global liquidity,” he says. “When we look at the global markets this year, 50 percent of our discussion­s will be about the dollar, the other 50 percent will

be about the impact of the global liquidity on interest. The fate of global liquidity will be determined by the tax regulation, not the Fed. We have to keep an eye on how the new tax regulation­s will affect the flow of dollars.”

“I do not think there will be a problem on borrowing markets if the liquidity side is not affected too much,”Leblebici adds. “There is a trend that we have experience­d in 2017, and it seems to be continuing to some degree in 2018: capital flows to countries with relatively high nominal interest rates. We experience­d a

somewhat positive effect because of this trend due to geopolitic­al developmen­ts. This flow may continue. If you look at the existing exchange rate and interest levels, it seems very attractive to invest in TRY here. When you look at the profitabil­ity increases and sales increases of 100 companies on the Istanbul Stock Exchange, you see the best figures of recent periods. So companies are making money and their profit margins are rising. This also points to capital accumulati­on that the companies will invest in the future.”

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