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How Turkey Weathered the Storm:

Lessons from Turkish Banks

Süleyman Aslan

Deputy General Manager

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Turkish Banking Sector Resilience to 2008

Global Crises

A Symbol of Resilience and Growth:

Halkbank

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GNP is about USD 730 billion, 16th largest in the world, 6th in the EU; 2nd

in the region after Russia.

Member of G-20 countries

Income per capita is around USD 10,000

Foreign trade volume to GDP is about 45 percent.

Almost half of Turkey's total trade is with the EU.

Population is about 72 million in which the group of 15-64 age has a share

of 65 percent.

Unemployment rate is about 11 percent.

In terms of total assets of banks, Turkey is ranked the 15th in the EU.

Turkish economy - selected indicators.

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Turkey is one of the affected countries by the crisis:

Turkey’s level of integration with the world economy had increased noticeably over the last years, on all

indicators.

The Turkish economy have benefited significantly from this enhanced integration through increased

productivity and competitiveness.

Nevertheless, such an integrated country could not stay isolated from to the impacts of recent global

crisis.

Parallel with the other emerging market economies, Turkey has been negatively affected from the

deceleration of the global economic growth and slowing international capital flows.

Source: Turkish Treasury

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Turkey had paid a very high price for the restructuring in 2001.

Since then, a very strong and efficient regulation has been in place, headed by the BRSA (the

Watchdog).

25 banks were taken over and they were either closed or merged with a state bank.

Re-regulated banking environment. New banking law was drafted. More than 100 regulations

(in full compliance with BIS and BASEL rulings) were introduced.

16% of total loans was restructured in 2002.

Year 2001, largest financial crises ever in Turkish financial history. The banking system

had gone through one of the most comprehensive restructuring process ever since

then.

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US$ bn as % of GDP

I.i. State banks' duty losses 19,0 12,8

Treasury 19,0 12,8

I.ii. Recapitalisation of state banks 2,9 2,0

Treasury 2,9 2,0

Subtotal 21,9 12,8

II. Cost of banks taken-over by the SDIF 22,5 15,2

Treasury 17,3 11,7

Private sector 5,2 3,5

III. Recapitalisation of private banks 2,8 1,9

Treasury (capital-like credits) 0,1 0,1

Private sector 2,7 1,8

Subtotal 25,3 17,1

IV. Total cost 47,2 31,9

Treasury 39,3 26,6

Private sector 7,9 5,3

Cost of 2001 financial crisis & restructuring.

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Banking sector restructuring program.

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What lessons taken from 2001 experiences.

Financial crisis of February 2001 have incurred heavy losses on the banks and have caused general

distrust vis-a-vis the financial system

After the crisis, in order to have sustainable growth in the economy; public sector deficits were

reduced and pressure of public sector on financial markets were mitigated

Once the macroeconomic conditions recovered, confidence of economic units regarding the financial

system has been re-built

Consolidation in the banking system

Strengthening the Capital of Banks- (i.e. Recapitalization)

Capital adequacy ratios have been strengthened ( Basel minimum of 8% )

Liquidity conditions - Despite strong growth in lending, the system remains fairly liquid overall

FX position - the overall foreign exchange position has been brought back into balance with

regulations

Developing strict risk management

Regulations on Improving the supervisory framework

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Turkish banking sector has shown remarkable resilience to the global crisis.

The reasons behind the relatively limited negative effects on the banking system are;

Restructuring of banking sector after 2001 financial crises.

High capital adequacy ratios level with 20%.

High asset quality. No “high risky” -toxic assets in Turkish bank balance sheet.

Well-diversified lending portfolio, mainly to private sector and G-securities.

Overall leverage level of the consumers and firms are relatively lower. The interest expense burden on

consumers is around 12% of their disposable income, a very low level even in the EM standards. Also,

Turkish people’s FX debt burden is almost nil. The average leverage of firms is around 30% of their

balance sheets, again an indicator of a low leverage.

Small investments in housing financing.

Good risk management (interest rate risk, counter-party and maturity risks.) Low currency and liquidity

risks thanks to successful risk management and effective public supervision, High cash equity and

strong liquidity.

No change in deposit-guarantee limit, current level is USD 33,000.

No direct financial support from the Government.

Timely measures taken by the Central Bank of the Republic of Turkey (CBRT) and the BRSA .

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Turkish Banking Sector has been less affected by the global crisis because of

high capital adequacy ratios.

Turkish banks are on top of the G-20 countries in terms of capital adequacy, assets profitability and

return on equity.

Source: Turkish Treasury. BRSA

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87,0

47,0 44,6

11,2 11,4

5,0

11,0 12,7

8,6 9,6

5,8

9,2 8,4

12 13,2

2002 2009 2010

Spot

Credit Cards

Others

General Purpose

Auto

Housing

Corporate (Others)

Turkish banks have focused on traditional retail and corporate banking activity

and refrained from risks driven by sub-prime mortgages and complex financial

instruments.

Corporate and commercial

loans retreated to 45% of the

total from 87%.

Mortgage loans were only 1%

of total loans, now it accounts

11% of the total loan book.

Unlike its counterparts in

developed markets, Turkish

banks have refrained from

risks driven by sub-prime

mortgages and complex

financial instruments.

Retail banking in Turkey

remains underpenetrated and

carries a huge potential.

Source: Turkish Treasury, BRSA

Breakdown of Total Loans

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Deposits, which are the ultimate funding source of the banking sector, restrain the

dependency of the banking sector on more volatile wholesale funds.

Compared to other countries, loans in Turkey are funded with stable resources such as customer

deposits.

Contrary to the deposit dominating funding structure in Turkey, in the European Union the loan to

deposits ratio is 113.3 percent and the rate of deposits to total assets is just 40.1 percent

Source: CBT

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The structure of balance sheet has changed in Turkey: a rebalancing of assets in

favour of credit.

Source: BOFA, ML

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The biggest problem for the Turkish banks was the asset quality deterioration

after the 2001 economic crisis… This time only a tiny bump on the road.

NPL ratio jumped to 24% in 2001

…

… but just to 5.4% in the 2009

crisis and 3.7% at the end of 2010

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Global financial crisis did not influence the market structure of Turkish banking

sector.

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The number of branches and personnel preserved its increase tendency despite the global

economic crisis in 2007-2009 periods. Turkey’s banks have aimed to continue hiring new staff

and open new branches in the upcoming period.

Source: Turkish Banking Association

2000 2002 2007 2010 March,2011

Number of Total Banks 79 54 46 45 44

Number of Total Branches 7.837 6.106 7.618 9.465 9.581

Total Employment 170.401 123.271 158.534 178.503 180.038

Banking Sector in Turkey

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Turkish Banking Sector Resilience to 2008

Global Crises

A Symbol of Resilience and Growth:

Halkbank

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Asset size of 78 bn TRY, ranking 6th among peers

Solid and stable deposit base amounting 56bn TRY, ranking 5th among peers with 9.1%

market share

Sound loan portfolio reaching 47,6 bn TRY with 8.3% market share

ROE of 28% outperforming the peers

High asset quality without write off or sell off, 3,5% NPL ratio.

Trademark in SME business with low risk,

Nationwide branch network with 730 branches

13,400 employees with high levels of professional knowledge and skills

CAR of 16% indicating strong capitalisation

Loan-to-Deposit Ratio of 84%

Local and international credibility, Ba3+ rating from Moody’s and BB+ rating from Fitch

Halkbank Highlights – 1stQ 2011

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Brief History of Halkbank

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IPO and Shareholder Structure

As of 10 May 2007, 24.98% of the shares of the

Bank have been sold through a very successful

public offering and the shares have been listed in

Istanbul Stock Exchange. Halkbank’s IPO

represents the largest one that ever occurred in the

Turkish capital markets.

IPO 2007 1Q 2011

69.5 %

30.5 %

85.6 %

14.4 %

7,3

2,6

9,8

May.07 Mar.09 Mar.11

(USD Billion )

Market cap

Foreign Investors Local Investors

Shareholder Structure

Foreign Investor Holdings

24.98 %

Free Float

74.98 % State

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Strong and Healthy Asset Growth Since 2002

19.9 % (CAGR)

(TRY Billion )

2005 2006 2007 2003 2004 2002

17.4 19.4

25.7

51.1

40.2

34.4

27.1

2008 2009

60.7

Q1-11

72.9

2010

78.0

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Halkbank- Best Example of Transformation Story

Beginning with 2002, balance sheet composition has shifted in favour of loans and customer-focused

approach was adopted. Within this context, as of March 2011 the share of loans in total assets increased to

61% whereas the share of securities has declined to 26.8%.

12%

27%

61%

12%

28%

61%

11%

35%

54%

14%

36%

51%

15%

40%

45%

13%

53%

34%

11%

65%

24%

13%

70%

17%

19%

68%

13%

11%

82%

7%

Asset Mix

2005 2006 2007 2003 2004 2009 2002 2008 Q1-11

Other Assets Securities Loans

2010

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(a) Including interest accruals.

Uninterrupted loan growth since 2002

2005 2006 2007 2003 2004 2008 2002

1.3 2.6

4.5

25.8

18.1

11.6

6.3

32.5

2009

44.3

2010 Q1-11

47.6

105.0% 73.1%

41.7%

84.0%

55.6%

42.6%

25.6%

36.5%

7.4%

(TRY Billion ) (a)

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Market Share in Loans ( % )

8,3

2,4

4,04,3

3,8

5,2

6,2

6,8

8,1 8,3

1

2

3

4

5

6

7

8

9

2002 2003 2004 2005 2006 2007 2008 2009 2010 1Q 11

8,18,17,8

6,4

5,6

4,7

3,0

4,13,7

2,5

1

2

3

4

5

6

7

8

9

2002 2003 2004 2005 2006 2007 2008 2009 2010 1Q 11

Cash Loans

Total Loans

7,67,8

6,9

5,4

3,93,6

1,9

3,8

3,02,6

1

2

3

4

5

6

7

8

9

2002 2003 2004 2005 2006 2007 2008 2009 2010 1Q 11

Non-Cash Loans

6,96,8

4,54,8

5,8

3,2

1

2

3

4

5

6

7

8

9

2006 2007 2008 2009 2010 1Q 11

Retail Loans

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26.7

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5.0 4.5 4.3

3.1 3.0 2.9 2.7 2.6 1.5

1.0 0.4 0.3

Ma

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Loans by Customer Segmentation Sectoral Diversification (%)

Well-diversified loan book

Tra

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25

Strong presence all around the country

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2.010

1.631

1.0181.031

863

554528

486

594

-581

4,94,75,4

21,4

30,8

3,53,8

8,5

16,0

0

5

10

15

20

25

30

35

2003 2004 2005 2006 2007 2008 2009 2010 1Q 11

NPL Ratio ( % )

Efficiency and Asset Quality

2005 2006 2007 2003 2004 2002 2008 2009 2010

Net Profit (Million TRY) NPL Ratio (%)

Highest ROE (%) Profile

2001

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Once ailing Halkbank shines brightest today among Turkish Banks

Thanks to…

- Better operating environment

- Political stability and growing economy

- Better monetary policy implementation by CBTR

- More prudent fiscal policy

- Better regulation and supervision

- Better management supported by crisis experience

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Thanks…