BANKING SECTOR WILL MAINTAIN ITS CONSISTENT VIEW

TOTAL ASSETS HAVE DECREASED TO USD 728 BILLION BUT, BANKING SECTOR WILL MAINTAIN ITS CONSISTENT VIEW FAST GROWTH PERIOD MAY ONCE AGAIN START IN BANKING SECTOR BANKING SECTOR MAY OVERCOME EXTERNAL SHOCKS

2019-03-01 -

Although a decrease in the profitability performance has been experienced in Turkish banking sector in 2018, it still maintains its high return on assets in local currency and its high interest margins and it continues its efforts to increase its non-interest income even further. The growth trend of banking sector in 2019 will constitutively be based on the level of loan interests that will be determined in accordance with the developments in the inflation rate. In 2019, liquidity and capital adequacy became more prominent than profitability indicators. In 2019, the ratio of NPL may increase as to double the total. The expected upward momentum in unemployment rate will increase the NPL ratio in consumer loans. However, in terms of the total loans, the risks will remain at a manageable level.

The most important and largest aspect of the Turkish finance system is the banking sector. All kinds of developments to be occurred in the banking sector creates decisive impacts in terms of the financial consistency of Turkish economy and the real economy.

The Turkish banking sector, which has been affected by financial innovations and information-based technological developments, has been exposed to heavy public regulations and has a high share under the Turkish finance system, this share is supported with the high share of households in total financial assets.

As of the end of 2017, Turkish banking sector was the second largest banking system after Russia between developing European countries with a total size of assets of 864 billion US Dollars and as of 2018, the size of assets have decreased to 728 billion US Dollars.

The banking sector regulated, monitored and controlled by Banking Regulation and Supervision Agency (BRSA) and the Central Bank of the Republic of Turkey (CBRT) consists of deposit banks, development and investment banks and the participation banks operating on share of profit basis within the framework of

Islamic rules.

SIZE OF ASSETS ARE 728 BILLION USD

As of the end of 2018, the asset size of the banking sector, which has the largest share in the Turkish financial system, was 728 billion USD (3.843 billion TL). In terms of asset size, it remains the second largest banking system in developing European countries after Russia.

In Turkey, the “Banking assets/GDP” ratio is similar to the other developing countries, however it is below the average of developing countries. Therefore, the growth potential of the Turkish banking sector is still high.

Although Turkish banking sector has achieved a low profitability increase with 4,21 percent compared to the previous year in 2018, due to the extraordinary decrease of TL, the profitability performance decreased by 25.57 percent in dollar basis.

In 2019, access to international financial resources and developments related to non-performing loans are the most decisive factors in the sector. The average maturity of 73 days of term deposits, the main funding source constitute a risk. The development of non-performing loans will be critical in the profitability.

MAINTAINS THE POTENTIAL TO REACH EXTERNAL RESOURCES

The financial power of the Turkish banking sector that will support the economical activity and growth has been rasped and weakened with the extraordinary decrease of TL in years 2017 and 2018, however it maintains the potential to reach external resources and the ability to carry on this capacity.

As the increase tendency of the borrowing cost of banks from abroad continue with the monetary tightening practices of FED, the fact that the monetary expansion in the European and Far Eastern markets has not shrunk limits this increase. The monetary policies of European Central Bank’(ECB) that are not that tight will continue to contribute in terms of funding cost to the Turkish banking sector in 2018 as well.

Despite the worsened security conditions and the continuing geopolitical risks, there is no re-financing risk for the banks in Turkey.

In addition, thanks to high capital adequacy, Turkish banks have the possibility to expand continuously and to increase their loan volume for a long time. Because, the Turkish banking sector has double buffers on Capital Adequacy Ratio (CAR).

Therefore, the view of the Turkish banking sector is stable in our opinion. However, in 2018, by allowing practices that will show the weighted risk amount low and legal equity high, the real decrease in CAR has been concealed in the records.

In terms of risk management, Turkish banking sector is able to manage its pricing and balance sheet in international norms.

MAINTAINS ITS HIGH ASSET PROFITABILITY

Despite the fact that the net interest margins of the Turkish banking system have decreased to around 3,47 percent, it is not able to generate a capacity of creating employment since it provides corporate loans rather than investment loans. Turkish banking sector still maintains its high return on assets in local currency and its high interest margins and it continues its efforts to increase its non-interest income even further.

Despite the low total asset size it has been able to maintain the healthy status in terms of adequate profitability, high deposit share, high non-interest expenses, high capital rate, high inflation and decreased value of local currency in 2018. However, the continuance of the growth rate in 2019 is based on the consistency of local currency, decrease of inflation and the ability to reach domestic/international fund resources.

A CHALLENGING PROCESS IN TERMS OF PROFITABILITY IS NOT EXPECTED

Since the increase in interest costs and the high deposit account rates will not prevent the difficulties to arise in creating additional resources, it is not expected that a challenging period with a decrease in loan growth rate and profitability.

In this context, although the recent increase in the risk premium of Turkey leads to the increase in the costs of syndication loans the banks draw from abroad, we do not expect any difficulties regarding the debt service rate.

The financial and management power of the sector with high mobility is in a level to balance the possible external shocks and maintain its growth performance.

Especially, in 2018, digitalisation with efficiency purposes in cost and competition management maintains its importance. Within the equity structure of the sector, the rate of the ones that are not resident in Turkey are very high.

THE DECREASE OF DEMAND IN HOUSING LOANS WILL DECREASE THE LOANS PROVIDED TO CONSTRUCTION

In the Turkish banking sector, a growth of 22 percent was achieved in 2017 based on KGF sourced loans. This growth in loans also positively affected the profit performance of the sector. The rise in

The interest of the strong and reputable global investors in the banking sector has decreased in 2018. High ability to integrate with the world economies, high liquidity and high-quality capital structure and the ability to access international funds continue to be the decisive and powerful specialities of the sector.

term deposit rates, which have been increasing due to the effect of KGF, will maintain its upward trend in 2018.

Weakening in the demand of housing loans for investment purposes will weaken the provision of loans of the construction industry. In 2018, we expect an incentive application for housing loans similar to KGF.

The deposit interest rates has increased due to the increasing loan volume, and the swap interest rates will be higher due to the deterioration and volatility in the risk perception in the market. Market rates, swap interest rates and rising inflation will also raise deposit costs.

The scope and degree of the possible negative effects of the Zarrab case that is still ongoing in the US and is subject to a violation of Iranian sanctions towards the Turkish banking system will become

apparent.

DEBT COVERAGE LEVEL OF THE FX LIQUIDITY IS ADEQUATE

On the other hand, despite the high dependence of Turkish banks on external debts, the level of foreign exchange liquidity in terms of coverage of short term debts in foreign currency is quite sufficient.

The fact that foreign exchange rates reach high sensitivity upon being subject to political fluctuations, constant increase of country geopolitical risks for a long time, the decline in the EU membership process rather than progress, the private sector’s high foreign exchange debt and the depreciation of TL emanate the equities and pose a threat on the asset quality of banking sector and the introduction of construction industry to high-risk sectors have been the factors that cause problems to Turkish banking sector.

Legal framework of the Turkish banking sector, which is aligned with the outline of EU legislation, except for issues such as branching and deposit guarantee abroad is shaped in accordance with the criteria for reinforcement of integration into global economies, the Basel process and the Capital Requirements Directive (CRD).

In this context, the European Commission has approved that both the supervision framework and the regulatory framework of Turkish banking in December 2016 were largely compatible and equivalent to the EU regime.

PURE MONOPOLY COMPETITION STRUCTURE BETWEEN MAJOR BANKS

With respect to the regulatory framework, this high equivalence was admitted as the result of Basel III’s further implementation under the Turkish legislation. In terms of risk management, Turkish banking sector is able to manage its pricing and balance sheet in international norms.

Smaller banks within the Turkish banking sector are under oligopolistic competition behaviour in terms of resource management strategy and are under monopolistic competition conditions in terms of asset management strategies.

In terms of major banks, there is a pure monopoly competition structure

The sector, which is not at the desired level in scale and cost efficiency, will intensify its structuring and growth strategies in this area as of 2019. The fact that the sector is funded by resources in foreign currency increases the risks of foreign dependency. In terms of assets, the decrease in the weight of securities decreases the level of being affected by market risks.

for all of the balance sheet management strategies. Thus, smaller banks are more subject to competition, and competitive behaviour among the major banks due to concentration has still not become a basic trend.

BANKING IS THE SECTOR MOST OPEN TO CHANGE AND DEVELOPMENT

Banking sector is the sector most open to change and development and the one that is most affected by national and international regulations, continuously changing customer demands, developing technology and social and political structure changes. With its structure open to such interaction, it is expected that banks’ agenda will be increasingly focused on basic subjects such as capital, liquidity, profitability and cost management, and digitalization.

Turkish banking sector has a very dynamic structure in product and service formations, with its infrastructure aligning with a flexibility in accordance with the ever-changing expectations of loan and deposit customers and investors within the scope of their innovative and sustainable business models.

The strong capital structure of the banking sector and the deepening of capital markets will continue to be an advantage in 2018 as well in terms of domestic/international borrowing and deposit collection.

NOT IN THE DESIRED LEVEL IN TERMS OF SCALE AND COST EFFICIENCY

The Turkish banking sector, which is still not at the desired level in scale and cost efficiency, will intensify its structuring and growth strategies in this area as of 2018.

As innovative approaches are implemented in terms of branching in the Turkish banking sector, branches still possess a lot of importance among alternative channels. The loan provision capacity and the elasticity coefficients against interest volatility and regulation pressures of the Turkish banking sector are still well above the optimum levels applicable in the global arena.

As legal arrangements improve the resistance of the banks against crisis, they also create downward pressure on productivity and profitability. However, the financial innovations created at the national and global level can significantly eliminate the negative effects of regulatory constraints.

The fact that propensity to save and saving force is low in national level, the high external debts and obligations of the real sector, the country unable to get out of middle income trap, high resource costs making intermediation costs expensive, sustained price instability and the fact that grey economic area is quite large weakens the sector.

USE OF ALTERNATIVE RESOURCES OTHER THAN DEPOSITS IS INCREASING

Although banks mainly provide deposits-based financing, the use of alternative resources is also increasing. In developed countries, international liabilities of banks have increased in recent years due to increasing funding facilities in parallel with quantity expansion.

The external debt renewal rate of the banking sector is above 100 percent and the fact that the funds provided from abroad are long term funds, this contributes to the extension of the maturity of the liabilities. The issuance of securities from banks continues to accelerate and grow.

While the ratio of nonperforming loans to equity was 17.84 percent in 2017, it has increased to 21.98 percent in 2018. In 2018, non-performing receivables also increased by 43.53 percent in nominal terms and the share of NPL within total loans have mathematically increased compared to the previous year since the nominal increase ratio of total loans (12,58%) is lower than the NPL increase.

As of 2017, NPL conversion rate was 2,95% and has increased to 3,69% in 2018. However, as the presence of loan receivables subject to restructuring and special implementations for companies unable to pay their debts, there is no statistics regarding the amount of such concealing transactions.

In any case, it is clear that such concealing transactions make the NPL conversion rates seem lower in the balance sheets.

The financial and management power of the sector with high mobility will balance the possible external shocks and maintain its growth performance. The sector will maintain its ”stable“outlook in 2019. Loan growth will begin once again as of the second half of this year.

GROWTH POTENTIAL OF THE INDUSTRY WILL CONTINUE FOR A LONG TIME

Within the integrated structure of Turkish money and capital markets, banking is still the largest sector and the one with the highest level of international integration. The growth potential of the Turkish banking sector, which has been growing steadily, will continue for a long time.

As a regulatory and supervisory authority, the disciplinary structure provided by the Banking Regulation and Supervision Agency (BRSA) continuously increases the managerial awareness in the risk perception of the sector.

Turkish banking sector has been separated from European banks and banks of other developed countries in terms of its healthy assets and high profitability. As of 2012, the Turkish banking sector, which was mainly funded by deposits, increased its capacity to generate funds outside deposits and the opportunities to obtain long-term funds.

In the recent years, based on the changes in the interest rates and public finance in Turkey, the asset composition of Turkish banking sector has changed and now they tend towards loans with higher gains instead of public financing.

CAPITAL STRUCTURE IS HIGH, OPERATIONAL EFFICIENCY IS LOW

The capital structure of the Turkish banking sector is high. While the return on assets and equity of the Turkish banking sector is high, however its operational efficiency is low. The main income source of the Turkish banking is net interest income; however, the sector is not able to diversify its incomes.

The effect of the foreign currency position risk on the income generation of the sector is negligible. The asset quality of the Turkish banking sector is quite high due to the low and horizontal NPL conversion ratios.

There is no liquidity gap based on almost all maturities in transactions under balance sheet. However, the average maturity of 73 days of the term deposits, the main funding source constitute a risk. As there are no restrictions on capital transfers in Turkey, the task of financing the current account deficit in 2012 was switched to the banks from the real sector.

FINANCING COSTS HAVE INCREASED AND THE GROWTH HAS LOST ITS SPEED

While the domestic and international financing costs of the banks increase, the growth trend has lost its speed. Although the deterioration in the asset quality is limited, cost increases have become prominent as the aspect that limit the profitability.

However, we expect the profitability of banking to recover due to the stoppage in cost increases. However, the increase of NPL will be critical in shaping sector profitability.

The reduction of operational structures as a result of technological developments and innovative approaches that increase efficiency in business processes reduce the personnel need and branching tendency of the banking sector. Therefore, as of September 2018, both the number of branches and the number of personnel have decreased in absolute and relative terms compared to the same period of the previous year.

FOREIGN RESOURCES AND NON PERFORMING RECEIVABLES WILL BE DECISIVE

In 2019, access to international financial resources and developments related to nonperforming loans are the most decisive factors in the sector. Although we anticipate that the sector will perform better in 2019 and maintain its profitability, significant growth may not be achieved due to the desire for growth is low.

In 2018, the devastation on the banking sector caused by the high volatility in financial markets was successfully managed. However, uncertainties regarding the real sectors and the risk of spread create a significant uncertainty over the mid-term outlook of the banking sector.

LATELY, THE SECTOR HAS BEEN SUBJECT TO IMPORTANT ARRANGEMENTS

The restructuring processes of loans for large and medium sized companies were among the important agenda items of the banking sector as of 2018. With this process, it was possible to overcome the difficulties in the economy together with the real sector.

As well as global developments, developments in politics and foreign relations in 2018 led to an upward pressure on FX rate and interest rates and made business transacting conditions of Turkish banking sector more difficult. Due to these difficulties occurring, the sector has recently been subject to important regulations.

While the domestic and international financing costs of the banks increase, the growth trend has lost its speed. Although the deterioration in the asset quality

The sector is able to reach the fast growth position once again at any time. Publicfunded incentives will provide new opportunities to the sector, which has sufficient equity and liquidity capacity to meet the loan demand.

is limited, cost increases have become prominent as the aspect that limit the profitability. We expect the profitability of banking to recover due to the stoppage in cost increases. However, the increase of NPL will be critical in shaping sector profitability.

LOAN INCREASE WILL COMMENCE AS OF THE SECOND HALF OF 2019

In 2019, access to international financial resources and developments related to non-performing loans are the most decisive factors in the sector. Although we anticipate that the sector will perform better in 2019 and maintain its profitability, significant growth may not be achieved due to the desire for growth is low.

Loan growth will begin once again as of the second half of the year 2019. We think that the sector has the equity and liquidity capacity that is adequate to cover the loan demand. Additionally, we expect that government supported incentives within 2019 will provide new opportunities for the banking sector.

The restructuring processes of loans for large and medium sized companies were among the important agenda items of the banking sector as of 2018. With this

The fact that propensity to save and saving force is low in national level, the high amount of external debts and obligations, the exposure of funding positions to political actions in every sense, the country unable to get out of middle income trap, high share of commercial loans, high resource costs making intermediation costs expensive and the fact that grey economic area is quite large weakens the banking sector.

process, it was possible to overcome the difficulties in the economy together with the real sector.

TOTAL ASSETS PER PERSON IS ONE TENTH OF THE DEVELOPED COUNTRIES

Although the size of the assets against GDP of the Turkish banking sector is close to the average of developing countries, it is about one third of the developed countries’ average.

However, total assets per person is about one tenth of the developed countries, although it is only slightly above the developing countries’ average.

Loan amount per person of the Turkish banking system, is among the countries with the highest amount compared to the developing countries. In terms of loan/deposit ratio, the Turkish banking sector has the highest level including the EU.

However, while the share of loans within assets is higher than the average for the Turkish banking sector, the share of deposits in resources is below the average.

Since the operating expenses/operating income ratio, the ratio of net fee commission income to operating expenses and the NPL ratio within total loans are lower than the average of developing countries, this creates productivity and profitability advantage.

However, in terms of actual rate of return calculated on the difference between the return on equity and government debt security earnings, Turkish banking is lower than the developing and developed country average rates.

BANKING SYSTEM IS OPERATING IN A HEALTHY AND EFFICIENT MANNER

Turkey has a banking system that operates in a very health and efficient manner. In parallel to the efforts for restructuring and integration with international markets, Turkish banks have made important changes both in their corporate structures and in the quality of the services and products they offer.

As a result of freedom from market policies and a more liberalised financial system, many foreign investors and entrepreneurs as well as domestic entrepreneurs were attracted to the potentially lucrative Turkish banking sector.

In terms of technology and digital conversion, Turkish banking system has undergone significant changes and transformations. They are able to compete with the world through products and services such as internet banking, mobile services, contactless payments and online loans, and are even a pioneer in some of these services.

NPL RATE WILL BE DOUBLED

The difference in favour of the loan between loans and deposits in the Turkish banking system was created through cross FX rate swaps that have

In 2019, access to international financial resources and developments related to non-performing loans are the most decisive factors in the sector. Although it is anticipated that the sector will perform better in 2019 and maintain its profitability, significant growth may not be achieved due to the desire for growth is low. The growth trend will constitutively be based on the level of loan interests that will be determined in accordance with the developments in the inflation rate.

been implemented since 2008 and as a result, the resource structure of the Turkish banking sector entered into foreign currency concentration.

The growth trend of banking sector in 2019 will constitutively be based on the level of loan interests that will be determined in accordance with the developments in the inflation rate.

We expect the rate of non-performing loans to increase in 2019 to double. The ongoing deterioration in commercial and corporate loan quality will continue its pressures on provision expenses and profitability due to restructured loans. The expected upward momentum in unemployment rate will increase the NPL ratio in consumer loans.

However, in terms of the total loans, we anticipate that the risks will remain at a manageable level. In 2019, liquidity and capital adequacy became more prominent than profitability indicators for banking sector.

I- General Information

The Turkish banking system, which has low sensitivity to interest risk, maintains its healthy and strong structure and despite the fluctuations in global financial markets, it maintains its ability to renew its debts abroad and its short-term liquidity shocks due to its strong buffer against possible FX liquidity shocks. Current

Capital Adequacy Ratios are in a level to cover the potential losses the interest fluctuations will cause. The Capital Adequacy Ratio (CAR) of the sector is calculated in accordance with the Basel II rules. CAR maintains its high level extending to years. The CAR of the sector is 17.27% as of 2018.

By converting the long-term foreign currency assets obtained from abroad to fixed interest TL resources with the cross money trade transactions, the banking system limits the interest risk caused by the long term fixed interest loans, especially housing loans.

However, in 2019, signs of relaxation in FED’s interest decision have become visible once again. This relaxation may offer advantages on the fund supply costs of

Turkish banking sector.

SYSTEM IS TENDING TOWARDS NONDEPOSIT FUNDING RESOURCES

In the recent years, the Turkish banking system has tended increasingly towards non-deposit funding resources. The increased use of nondeposit funding resources

increases the sensitivity to fluctuations in funding resources and the dependence on external fragilities and leads to deterioration in loan/deposit rates.

The Turkish banking sector, which possesses a very high share of domestic non-residents within its equity structure and is most open to international changes and developments, has shown a weak profit increase in local currency in 2018 compared to the previous year and due to the extraordinary loss of value of TL, profitability performance in foreign currency has decreased.

The financial power of the Turkish banking sector that will support the economical activity and growth has been rasped and weakened with the decrease of TL in 2018, however it maintains the potential to reach external resources and the ability to carry on this capacity.

INTEREST MARGINS ARE STILL HIGH, NON-INTEREST INCOMES ARE GRADUALLY INCREASING

The Turkish banking sector is a sector with high return on assets, increasing interest rates, with still high net interest margins, and which non-interest incomes are gradually increasing.

Despite the low total asset size, it has been able to maintain the current status in 2018 in terms of adequate profitability, high deposit share, high non-interest expenses, high capital rate, high inflation and low real growth rates.

The sector is able to reach the fast growth position once again at any time. The sector’s capacity to generate resources other than deposits that started in 2012 has increased in 2018.

The concentration of assets, loans and deposits in the sector is quite high. In all three areas, the share of the first five banks is approximately 60 percent. The highest concentration is in deposits, loans and generated profits. Within the equity structure of the sector, the rate of the ones that are not resident in Turkey are very high.

In 2014, banks maintained a high level in terms of issuance of securities and subordinated debts from abroad in 2018 and the increase rate of subordinated debts are decreased. Despite the shrinking money supply at global level, the costs of syndication and securitisation loans obtained from foreign banks are still lower than domestic resource costs.

RATE OF NPL TO EQUITY HAS REACHED 22%

While the ratio of non-performing loans to equity was 17.84 percent in 2017, it has increased to 21.98 percent in 2018.

In 2018, non-performing receivables also increased by 43.53 percent in nominal terms and the share of NPL within total loans have mathematically increased compared to the previous year since the nominal increase ratio of total loans (12,58%) is lower than the NPL increase.

SECTOR MAINTAINS ITS QUALITY EQUITY STRUCTURE

The capital adequacy rate of the sector is 17.27% as of 2018. The fact that 80,88% of the regulatory equity is comprised of principal capital shows that the sector maintains its quality equity structure, however the approximately 90% level is decreasing.

The fact that 80,88% of the regulatory equity is comprised of principal capital shows that the sector maintains its quality equity structure, however the approximately 90% level is decreasing.

In terms of assets, the weight of the securities in Turkish banking sector is continuously decreasing and has decreased to 12% level. Loans increased from 38.93 percent in 2005 to 64.41 percent as of the end of 2017. In 2018,

Despite the increase in profitability and capital adequacy ratios, restructurings and high amount of receivables transferred to asset management companies in 2018, a low balance has been managed to be achieved in the NPL ratio of assets. Turkish banking sector has been separated from European banks and banks of other developed countries in terms of its healthy assets and high profitability.

the share of loans within total assets have decreased to 62.07 percent.

In comparison with the European Union countries since 2005, it is seen that return on assets and the assets of Turkish banking sector as well as net interest income and non-interest income generation rates are higher, however, it is also seen that the provision expenses and non-interest expenses are higher than the EU Countries. The fact that the share of non-interest incomes within total incomes has entered an increasing trend in the recent years comes to the forefront as an important observation.

52 BANKS HAVE A TOTAL OF 11.625 BRANCHES INCLUDING OVERSEAS BRANCHES

In the sector, with 34 deposit banks (3 public, 9 private, 21 foreign, 1 TMSF), 13 development and investment bank (4 public, 5 private, 4 foreign) and 5 participation banks operating under Islamic rules (2 public, 3 foreign) there are 52 banks in total. These 52 banks have a total of 11.625 branches, including the branches located overseas.

As of the end of 2019, the 88% share of the banking sector belongs to deposit banks, 5,35% share belongs to participation banks while 6,65% belongs to development and investment banks. Share of deposit banks is in a decreasing trend.

II- Sizes in Numbers

As of December 2018, the assets of the Turkish banking system grew by 17.95 percent on a local currency basis, reaching 3,842 trillion TL (728 billion USD). In US Dollars, the Turkish banking sector grew by 139.94 percent between 2006-2018 cumulatively.

In 2018, Turkish banking sector’s total growth was realized as 17.95 percent, with 23.33 percent in foreign currency

Continuous interest of strong and reputable global investors, strong and experienced executive structure, High ability to integrate with the world economies in every field, high liquidity and quality capital structure and ability to access international funds are the decisive and prominent features of Turkish banking sector.

and 13.20 percent in TL. Asset growth increased by 33.25 percent in FX assets, 8.32 percent in TL assets and 17.95 percent in total assets.

FX DEPOSITS ARE AT THE FIRST PLACE IN CONTRIBUTION TO GROWTH

Among the resources, in terms of contribution to growth, FX deposits are at the first place, FX debts to banks are second while TL deposits are at the third place. Among the assets, in terms of contribution to growth, FX loans are at the first place, interest accruals are second while securities are at the third place. Since usage from legal reserves are facilitated compared to the previous year, legal reserves have decreased.

While the main funding item among the banking resources is still deposits, the share of deposits within total resources have been 61,9% in 2005, to 52,83% as of the end of 2015, to 53,23% in 2016 and decreased to 52,52 as of 2017. In 2018, it has been realised as 51,92%.

III- Profitability

Although a decrease trend has started in the Turkish banking sector’s profitability indicators, it has maintained the current high level in 2018 as well.

The fact that sector’s funding structure depends highly on deposits causes it to need more branches and operating expenses and this makes negative reflection on sector profitability.

1,85% RETURN ON ASSETS AND 16,94% RETURN ON EQUITY

While the sector realised 1,85% return on assets, return on equity was calculated as 16,94%. The main reason for the decline in profitability in 2018 is the depreciation of TL and the increase of funding costs and the deterioration in the asset quality.

Net interest income is a main income source; however, the sector is not able to diversify its incomes. Within the components of the net interest margin, it is seen that the impact of the provision expenses in the margin is higher than the EU countries.

Net interest incomes is the mains income source of Turkish banking sector and is constitutes the 73,21% of the total incomes as of the end of 2018. The ratio of the non-interest incomes to the total income is lower than the EU countries.

FOREIGN CURRENCY POSITION RISK RATIOS ARE VERY LOW

Two of the main indicators of the net foreign currency position risk of the sector is the “Total Foreign Currency Position / Assets Ratio” and the “Total Foreign Currency Position / Equity Ratio”; by the end of 2018, they are realised as 0,04% and 3.72%, respectively.

IV- Liquidity

There is no liquidity gap based on almost all maturities in transactions under balance sheet. With the effect of increase of reserve ratio, highest liquidity surplus have been in the maturity

segment up to 7 days and in annual level. There are liquidity gaps based on almost all maturities in transactions off-balance sheet. However, the Turkish banking system has a net liquidity surplus.

The sector is operating with an asset resource composition structure with high liquidity.

AVERAGE MATURITY OF THE DEPOSIT IS 73,9 DAYS DESPITE THE INCENTIVES

As of 2018, the banking sector finances 51.92 percent of its assets with deposits and/or participation funds.

Even though longer term deposits have been encouraged by making tax arrangements as of 2013, the 74 days of average maturity of the deposits in 2012 has decreased to 72,77 days in 2014, increased to 84,80 in 2015, decreased 72,27 in 2016, decreased to 71,06 in 2017 and continued as 73,93 days in 2018.

V- Asset Quality and Risks

In the 2018 balance sheet of the Turkish banking sector, 61.99 percent of the assets are comprised of loans and leasing receivables and 11.58 percent of the assets comprised of securities with government debt securities. While the share of securities in the balance sheet decreases, the share of loans shows a weak increase.

According to BRSA data, 90.80 percent of the total risks of the banking system belongs to loan risk, 7.35 percent to operational risks and 1.86 percent to market risk. The total amount of the risk measured is 2.707.565 Million TL.

In general, the Turkish banking sector is covering its on-balance sheet FX position with an FX long position on the off-balance sheet. The net foreign currency position of the sector has been at low levels for many years.

VI-Equities

While the share of equity in the balance sheet was 13,17 percent in 2012, it has decreased to 11,19 percent in 2013, 11,64 percent in 2014, 11,12 percent in 2015 and to 10,99 percent in 2016. In 2017, this ratio increased by 11.01 percent, but declined to 10.88 in 2018. The lowest equity/total resource ratio belongs to participation banks.

CAPITAL ADEQUACY RATE MAINTAINS ITS HIGHEST LEVEL WITH 17,27%

Capital Adequacy Ratio of the sector is calculated in accordance with the Basel II rules. CAR maintains its high level extending to years. The CAR of the sector is 17.27% as of 2018.

In the determination of the loan quality levels of the receivables from the Centralised Governments and Central Banks in foreign currency, the sovereign ratings of the institutions such as Fitch, Moody’s, S&P, JCR, DBRS and IIRA are used.

In the determination of the loan quality levels of the corporate receivables of banks and intermediary institutions, or centralised governments administrative units and non-commercial enterprises, multilateral participation banks that reside overseas, the credit ratings of the institutions such as Fitch, Moody’s, S&P, JCR, DBRS and IIRA are used.

In the determination of the risk weight of various receivable classes from banks, debt instruments issued by banks, financial institutions other than banks, debt instruments issued by financial institutions other than banks, corporate companies that are not within the scope of small and medium-sized enterprises, debt instruments issued by corporate companies that are not within the scope

of small and medium-sized enterprises that reside in Turkey and/or overseas, JCR Eurasia Rating has been authorised, however, since its notes have not yet been matched, bank receivables in this context are considered non-rated and CAR is calculated on a 100% risk weight.

“INVISIBLE BUFFER” ZONE CREATED UNNECESSARILY

Under the current implementation, in the calculation of CAR calculations of the banks, “invisible buffer” zones have been created unnecessarily. As a result of the fact that all corporate companies are included in the 100% risk weight with no separation made between the risk levels of the loans constituting 63% of the Bank’s assets, the total of the risk weighted items have been calculated much higher while the CAR is calculated much lower than it is. Thus, an invisible buffer has been created.

It is meaningless and unnecessary to maintain the “invisible buffer” zone which causes the amount with exposure to loan risk must higher and that pressurises CAR’s actual value downwards in such conjuncture. This “invisible buffer” zone reduces the capacity of the banking sector to provide loans. Unless this zone is eliminated, the loan provision tendency of the banking sector will be extremely difficult to revive.

MOST SUITABLE METHOD FOR THE USE OF NATIONAL SCALE RATINGS

Elimination of these invisible buffer zones shall be made with the use of National Scale Rating in the determination of the risk weight of the domestic receivables. This method shall be the fastest and the most effective. These are a lot of major countries using national scale ratings.

In this period when banks are increasingly stuck in providing funds to the real sector, the use of “national scale ratings” in the calculation of risk weights as CBRT will be the most suitable macro

precautionary measure to address global, regional and local conjectural barriers and will become the most effective national policy of the period.

The use of national scale ratings were determined by Basel as the national right of choice for national authorities to decide on their own national interests. This right of choice prioritises the necessity to use national scale ratings. However, the BRSA seems to have preferred to use global ratings for the calculation of risk weight in this area.

However, Turkey does not have the luxury to act like a country with a capital surplus. There are different applications for the use of national and international ratings in the matching of credit rating notes in various countries. The regulatory authorities of each country are taking initiative in accordance with the needs and national interests of their countries.

On the other hand, continuous interest of strong and reputable global investors, strong and experienced executive structure, High ability to integrate with the world economies in every field, high liquidity and quality capital structure and ability to access international funds are the decisive and prominent features of Turkish banking sector.