Turkish Banking Sector and Turkish Banks

Sadrettin Bagci

Tel : +90 212 336 7277

November 2008 Fax: +90 212 282 2256

sadrettin.bagci@finansinvest.com
TURKISH BANKING SECTOR

Past Performance

Recent Trends

Outlook

2
BANKING SECTOR – Continous Growth since 2002
Loans, TRY Billion Deposits, TRY Billion
350 450

400
300
350
250 CAGR: 20.9%
300

200
CAGR: 38.4%
250
337
200 405
150
280 357
150 313
218
100 254
153 100 197
161
50 103 142
70 50
56
0 0
2002 2003 2004 2005 2006 2007 1H08 2002 2003 2004 2005 2006 2007 1H08

Equity, TRY Billion Assets, TRY Billion

80 700

70 600

60 CAGR: 21.9%
500
CAGR: 21.2%
50
400
40
73 74 633
300
561
30 58
54 485
46 200 397
20
36 306
26 250
100 213
10

0 0
2002 2003 2004 2005 2006 2007 1H08 2002 2003 2004 2005 2006 2007 1H08

3
Source: The Banks Association of Turkey

1
BANKING SECTOR – Penetration Improved as well
• Significant growth performance over the last six years, beating the 19.2% CAGR in Nominal GDP
Loans to GDP Deposits to GDP
40% 50%

45%
35%
40%
30%
35%
25%
30%

20% 25%
37% 44%
33% 20% 41% 41% 42%
15% 39%
29% 35% 35%
24% 15%
10% 18%
16% 15% 10%
5%
5%

0% 0%
2002 2003 2004 2005 2006 2007 1H08 2002 2003 2004 2005 2006 2007 1H08

Equity to GDP Assets to GDP

9% 80%

70%
9%
60%

50%
8%

40%
9% 66% 69%
8% 61% 61% 64%
8% 30%
8% 55% 55%
8%
8% 20%
8%
7%
7%
10%

7% 0%
2002 2003 2004 2005 2006 2007 1H08 2002 2003 2004 2005 2006 2007 1H08
4
Source: The Banks Association of Turkey and the Central Bank of Turkey

2
BANKING SECTOR – Main Drivers of the Loan Growth post 2002
While
• Pent-up demand during the crisis period in 2001 and
• Gradual decline in interest rates
have helped for increasing loan demand after 2002,
• Easing public sector borrowing requirement due to falling domestic debt stock
has enabled banks to shift their focus from domestic borrowing instruments to loans

60% Domestic Debt Stock / GDP -left scale 20%

55%
Public Sector Borrowing Requirement -right scale
Loans to Assets
50% 50%
Security Portfolio to Assets 15%

45%
40%
10%
40%
30%
35%
5%
20%
30%

0%
25% 10%

20%
0% -5%
12 02 06 03 12 03 06 04 12 04 06 05 12 05 06 06 12 06 06 07 12 07 06 08
1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008

Source: The Banks Association of Turkey and the State Planning Organization
5

3
BANKING SECTOR – Share of Foreign Banks has Increased
Meanwhile the Turkish Banking Sector has attracted the interest of foreing banks thanks to the
• Strong growth potential backed by the favorable population dynamics, strengthening economic activity and
of course with the EU accession progress.
• The share of foreign banks in the Turkish Banking Sector has significantly increased from a mere 3% at
end 2002 to around 26% as of June 2008.
Turkish Banks with Foreing Partners
Turkish Party Foreing Party Share of Foreign Banks in Turkish Banking Sector
Akbank Citibank
Denizbank Dexia
30%
Fortis Bank Fortis Now BNP Paribas
Sekerbank Bank Turan Alem 25%
TEB BNP Paribas
Garanti Bank GECF 20%
Yapi Kredi Bank Unicredit
Finans Bank NBG 15%
26.0%
Foreign Banks in Turkey 10%
ABN AMRO Bank N.V.
Arap Turk Bank 5%
Bank Mellat 3.1%
Citibank 0%
Deutsche Bank 2002 1H08
Eurobank Tekfen
HSBC Source: Banking Regulation and Supervision Agency

ING Bank
JPMorgan Chase Bank
Millennium Bank
Sociéte Générale
Source: Banks Association of Turkey
6

4
BANKING SECTOR – Players w.r.to Ownership
PLAYERS w.r.to OWNERSHIP
As of August 2008 # of Banks # of Branches # of Staff
Sector 50 8,875 179,746
Deposit Banks 33 8,343 163,662
Public 4 2,357 41,751
Private 11 4,062 81,299
Foreign 18 1,924 40,612
Participation Banks 4 483 10,701
Investment & Development Banks 13 49 5,383
Source: Banks Association of Turkey

SIZE of the SECTOR w.r.to OWNERSHIP

As of August 2008, TRY Million Assets Loans Deposits Equity
Sector 648 347 398 83
Deposit Banks 605 320 381 69
Public 184 77 136 17
Private 323 181 192 39
Foreign 97 62 53 13
Participation Banks 22 17 17 3
Investment & Development Banks 21 10 0 10
Source: Banks Association of Turkey

MARKET SHARES w.r.to OWNERSHIP

As of August 2008 Assets Loans Deposits Equity
Deposit Banks 93% 92% 96% 84%
Public 28% 22% 34% 21%
Private 50% 52% 48% 47%
Foreign 15% 18% 13% 16%
Participation Banks 3% 5% 4% 4%
Investment & Development Banks 3% 3% 0% 12% 7
Source: Banks Association of Turkey

5
BANKING SECTOR – Recent Growth Trends
TRY mn 2005 2006 Oct.07 2007 Oct.08 YoY Growth YtD Growth
Deposits 251,869 308,396 329,283 350,609 425,501 29.2% 21.4%
Bank Deposits 8,709 11,581 7,203 10,444 12,625 75.3% 20.9%
Customer Deposits 243,160 296,815 322,080 340,165 412,876 28.2% 21.4%
LC 153,995 181,532 208,257 221,384 268,640 29.0% 21.3%
FC 89,165 115,283 113,823 118,781 144,236 26.7% 21.4%
FC, US$ mn 66,452 82,017 96,005 101,984 92,441 -3.7% -9.4%
Customer Time Deposits 194,304 243,933 270,180 285,364 355,876 31.7% 24.7%
Customer Demand Deposits 48,857 52,882 51,900 54,801 57,000 9.8% 4.0%
Demand Deposit Ratio 20.1% 17.8% 16.1% 16.1% 13.8%
Source: BRSA Weekly Data

TRY mn 2005 2006 Oct.07 2007 Oct.08 YoY Growth YtD Growth
Loans 153,101 214,998 250,161 271,865 360,005 43.9% 32.4%
Performing Loans 152,265 214,250 249,109 270,758 357,946 43.7% 32.2%
Non-Performing Loans 7,486 8,127 9,420 9,776 11,251 19.4% 15.1%
NPL Provisioning 6,650 7,379 8,368 8,669 9,192 9.8% 6.0%
NPL Ratio 4.7% 3.7% 3.6% 3.5% 3.0%
NPL Provisioning Ratio 88.8% 90.8% 88.8% 88.7% 81.7%
LC Loans 108,101 156,467 188,144 202,696 252,694 34.3% 24.7%
FC Loans 45,001 58,531 62,016 69,169 107,311 73.0% 55.1%
FC Loans, US$mn 33,538 41,641 52,308 59,388 68,776 31.5% 15.8%
Corporate & Commercial Loans 107,457 147,888 166,242 180,052 244,302 47.0% 35.7%
Retail Loans 45,644 67,110 83,919 91,813 115,703 37.9% 26.0%
Consumer Loans 28,618 45,931 59,595 65,813 83,343 39.8% 26.6%
Housing Loans 12,405 22,165 28,392 30,898 38,305 34.9% 24.0%
Auto Loans 6,146 6,405 5,766 5,928 5,802 0.6% -2.1%
General Purpose Loans 10,066 17,362 25,436 28,987 39,235 54.2% 35.4%
Credit Card Loans 17,026 21,179 24,324 26,000 32,360 33.0% 8
24.5%
Source: BRSA Weekly Data

6
BANKING SECTOR – Recent Growth Trends
10.11.08 31.10.08 29.09.08
TRY Million
Loans 374,690 378,044 366,221
-TRY Loans 268,142 269,903 273,941
-FX Loans 106,548 108,141 92,280
-FX Loans, $ 70,287 72,113 74,927
Non-Performing Loans (Net) 2,546 2,444 2,328
Non-Performing Loans (Gross) 12,278 12,069 11,399
Provision for NPL's 9,746 9,625 9,071
Total Deposits and Funds (3) 442,674 444,284 432,737
-Time Deposits and Participation Accounts 383,128 381,137 364,824
-Demand Deposits and Special Current Accounts 59,546 63,147 67,913
-Savings Deposits-TRY 173,444 172,938 165,511
-FX Deposits (Natural Persons) 83,820 83,970 82,594
-FX Deposits (Natural Persons), $ 55,294 55,995 67,062
-Other Deposits (Commercial Deposits included) 166,832 168,593 166,911
- TRY 100,127 101,531 108,081
- FX 66,705 67,062 58,830
- FX, $ 44,004 44,720 47,767
-Deposits Under Insurance 124,286 123,925 121,592
Source: BRSA Daily Banking Data

NPL Ratio 3.17% 3.09% 3.02%

NPL Coverage Ratio 79.38% 79.75% 79.58%
Demand Deposit Ratio 13.5% 14.2% 15.7%
Guaranteed Deposits / Total Deposits 28.1% 27.9% 28.1% 9

6
BANKING SECTOR – Composition of Assets & Funding
• While loans are the main placement item with 53% share in total assets as of August 2008,
• The funding side is mainly composed of deposits with 61% share

Shareholders'
Tangible Assets Other Assets Other Liabilities Equity
3% 5%
7% 13%
Liquid Assets
12%

External Deposits
Securities
27% Borrowing 61%
Loans, Net 14%
53%

Short Term
Funds
5%

Source: Banking Regulation and Supervision Agency

10

7
BANKING SECTOR – Composition of Loans
Breakdown of Loans 2005 2006 Oct.07 2007 Oct.08
LC Loans 70.6% 72.8% 75.2% 74.6% 70.2%
FC Loans 29.4% 27.2% 24.8% 25.4% 29.8%
Corporate & Commercial Loans 70.2% 68.8% 66.5% 66.2% 67.9%
Retail Loans 29.8% 31.2% 33.5% 33.8% 32.1%
Consumer Loans 18.7% 21.4% 23.8% 24.2% 23.2%
Housing Loans 8.1% 10.3% 11.3% 11.4% 10.6%
Auto Loans 4.0% 3.0% 2.3% 2.2% 1.6%
General Purpose Loans 6.6% 8.1% 10.2% 10.7% 10.9%
Credit Card Loans 11.1% 9.9% 9.7% 9.6% 9.0%
Source: BRSA Weekly Data

Breakdown of Retail Loans, TRY Million

120,000

100,000 Credit Card Loans

Other Consumer Loans
80,000
Auto Loans
Housing Loans
60,000

40,000

20,000

0
10 02
02 03
06 03
10 03
02 04
06 04
10 04
02 05
06 05
10 05
02 06
06 06
10 06
02 07
06 07
10 07
02 08
06 08
10 08
Source: The Central Bank of Turkey

11

8
 BANKING SECTOR – Interest Rates

Benchmark Interest Rate vs. CBRT's Policy Rate, % 24.00

28.00
Benchmark Bond Compound Interest Rate
26.00 22.00
CBRT Compound Policy Rate
24.00 20.00
22.00
18.00
20.00

18.00 16.00
Interest Rates in the Treasury Auctions
16.00 14.00
Policy Rate Compound
14.00
12.00
12.00

04 06

07 06

10 06

01 07

04 07

07 07

10 07

01 08

04 08

07 08

10 08
11 05

01 06

03 06

05 06

07 06

09 06

11 06

01 07

03 07

05 07

07 07

09 07

11 07

01 08

03 08

05 08

07 08

09 08

Source: The Central Bank of Turkey and Istanbul Stock Exchange

700 24.00

600 22.00

500 20.00

400 18.00

300 16.00

200 Duration 14.00

100 Interest Rates in the 12.00

Treasury Auctions
0 10.00
04 06

07 06

10 06

01 07

04 07

07 07

10 07

01 08

04 08

07 08

10 08
Source: The Turkish Treasury and the Central Bank of Turkey

12

9
BANKING SECTOR – Liquidity Ratios have Diminished but Still at
Comfortable Levels
• Compared to a year ago the 1 Week and 1 Month Liquidity ratios have been following a declining path, but
we believe these levels are still strong for our banking sector

2.80

1 Week
2.60
1Month

2.40

2.20

2.00

1.80

1.60

1.40

1.20

1.00
08 07 09 07 10 07 11 07 12 07 01 08 02 08 03 08 04 08 05 08 06 08 07 08 08 08

Source: Banking Regulation and Supervision Agency – Monthly Bulletin

13

10
BANKING SECTOR – Capital Strength is Fair Enough

• The sector’s Capital Adequacy Ratio (CAR) stood at 17.7% in August 2008, indicating a 123bps decline
with respect to December 2007 and a 96bps decline from August 2007. The inclusion of operational risk
since June 2007 and the increasing risk weighting of non-cash loans since January 2008 all played a role in
the decline in CAR rates in 2008.
20%
CAR
Equity / Assets
18%

16%

14%

12%

10%
08 07 09 07 10 07 11 07 12 07 01 08 02 08 03 08 04 08 05 08 06 08 07 08 08 08

Source: Banking Regulation and Supervision Agency – Monthly Bulletin

14

11
BANKING SECTOR – Comparison of Capital Strength
20.0 Bank Capital to Assets
18.0
16.0
14.0
12.0
10.0
8.0
6.0
4.0
2.0
0.0

ni
a ic ary nia nia nd ria via ro el ia lic tia ine rke
y
na ia s ia va
bl la lga Lat neg Isra ton ub roa vi uss ru rb ldo
l ba pu ung ma hua o ra u o la e
A Re o t P Bu te Es Rep C U
k T g R Be S Mo
H R Li on ze
c h M a k er
ze ov H
C Sl an
d
ia
sn
Bo

35 CAR
30
25
20
15
10
5
0

va
Be ey
R via

ze nia
l

ac gro
ry

ep d

M ia
Es e

ia
a

Al a
Po c

R a

s
U ia
Bu ia
om c

on ina
C a
Li ae

li

li

ni
n

ru
ni

ti
ga

rb
on
si
ar
an

do
rk
ub

ub

oa
la
ch Lat

ai

a
r
ua

ne
to

v
us

la
Is

Se
lg

Tu
b
kr
un

ed

ol
go
ep

r
th

te
H

M
er
ak

M
H
ze

ov

d
C

Sl

an
ia
sn
Bo

Source: IMF Global Financial Stability Report – October 2008 15

12
BANKING SECTOR – Comparison of NPLs may become a Major
Problem
• Though we still feel confident about the NPL ratio of the sector, which is 3.2% as end of August 2008, the
possibility of further slow-down in Euro Zone economy may pave for a rise.
• Given that our exports to Euro Zone constitutes almost half of the total exports of Turkey, the importance
of the Euro area economic growth becomes more significant.

3.7% 90%
NPL Ratio
3.6%
NPL Provisioning 88%
3.5%

3.4% 86%

3.3%
84%
3.2%
82%
3.1%

3.0% 80%

2.9%
78%
2.8%

2.7% 76%
08 07 09 07 10 07 11 07 12 07 01 08 02 08 03 08 04 08 05 08 06 08 07 08 08 08

16
Source: Banking Regulation and Supervision Agency – Monthly Bulletin

13
 10.0
12.0
14.0

0.0
2.0
4.0
6.0
8.0
La R
100.0
120.0
140.0
160.0

0.0
20.0
40.0
60.0
tv om 80.0
Es ia an
to ia
n
Be ia
la U
kr
Li rus
th C ai
n
ua ze e
ni ch
H a R
un ep
ga ub
Bu ry lic
lg
ar
ia
Is
Is
ra rae
Sl e l
ov Ru l
ak ss Be
Bo i la
sn Cz Re a r
ia ec pu us
an h R bli
d c
H epu C
er
ze b li
ro
at
go c ia
vi M
n on
P a te
ne
M ola
on n gr
NPL Ratio

te d o
ne
NPL Provisioning

gr
Al o Tu
ba Sl r ke
ni ov y
a ak
Tu R
rk ep
M e y ub
BANKING SECTOR – Comparison of NPLs

ol lic
do
v
M

Source: IMF Global Financial Stability Report – October 2008

Se a
rb ol
i do
C a va
r
M oat
ac ia
ed La
on tv
R ia
om ia
an
R
U ia us
kr s ia
ai
ne
17

14
BANKING SECTOR – Short FX Positions were Cut Recently

• We had observed that banks reduced their on balance short FX positions from over US$14bn in mid August
2008 to around US$5.2bn by end of October 2008. Although the on balance short FX positions are mostly
hedged (net short FX position of the system is US$1.3bn as of 31 October 2008), we still harbour some
doubts regarding the quality of the hedging.

20,000

15,000

10,000

5,000

-5,000

-10,000
Net FX Position
-15,000 On Balance
Off Balance
-20,000
10 05

12 05

02 06

04 06

06 06

08 06

10 06

12 06

02 07

04 07

06 07

08 07

10 07

12 07

02 08

04 08

06 08

08 08

10 08
Source: Banking Regulation and Supervision Agency – Weekly Bulletin

18

15
BANKING SECTOR – Profitability has slowed down

• We haven’t observed that a severe deterioration in the top-line growth yet but especially the increasing
provisioning and the higher OPEX growth compared to the overall revenue growth, we face with a decline
in the profitability ratios.
• We are almost sure that the economic imbalances will result in a further slow down in the profitability
ratios in the following three to nine months time.
23% 3.0%

RoAE -left scale

2.9%
22% RoAA -right scale

2.8%

21%
2.7%

20% 2.6%

2.5%
19%

2.4%

18%
2.3%

17% 2.2%
08 07 09 07 10 07 11 07 12 07 01 08 02 08 03 08 04 08 05 08 06 08 07 08 08 08
19
Source: Banking Regulation and Supervision Agency – Monthly Bulletin

17
BANKING SECTOR – Satisfactory Top-Line Growth

• As Spread and Net Interest Margin (NIM), we have observed a slow-down in the pace of top-line (Net
Interest Income) growth. It is lightly above 20% YoY, but the growth level was higher in early 2008.
• Although we think the growth pace is adequate at the moment, due to the sudden jump in the interest
rates started late in September 2008 is expected to further put pressure on spread and margins.

6.00% 30.0%
NII Growth
Spread
5.50% NIM 25.0%

5.00% 20.0%

4.50% 15.0%

4.00% 10.0%

3.50% 5.0%

3.00% 0.0%
08 07 09 07 10 07 11 07 12 07 01 08 02 08 03 08 04 08 05 08 06 08 07 08 08 08
20
Source: Banking Regulation and Supervision Agency – Monthly Bulletin

18
 Bo
sni
a
an Mo
d n
H t en

0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
er e
ze gro
go
vi
na
Se
rb
C ia
ro
R atia
om
an
U ia
kr
ai
Be ne
la
Sl Ma ru
ov ce s
ak do
R nia
ep
ub
lic
Is
ra
e
Tu l
rk
RoAE

Al ey
ba
H nia
un
ga
R ry
us
si
Po a
la
nd
Source: IMF Global Financial Stability Report – October 2008

La
C tv
ze Mo ia
ch ld
R ova
ep
BANKING SECTOR – Comparison of Profitability

ub
Bu lic
lg
Li aria
th
ua
n
Es ia
to
ni
a
21

19
BANKING SECTOR – Consumer Confidence

105 Consumer Confidence and Borrowing Possibility 37 • The latest survey is as of September
100 35
2008, a lot has changed since then.
95 33

90 31 • But we belive the consumer confidence

85 29
should be knocked-out for the time
being, given the strong relationship
80 27
Consumer Confidence Index -left scale
Borrowing Possibility (next 3 months) -right scale
between the exchange rate and the
75 25
consumer confidence.
09 05

12 05

03 06

06 06

09 06

12 06

03 07

06 07

09 07

12 07

03 08

06 08

09 08
Consumer Confidence vs. Inverse TRY/USD • On top of that the ongoing interest
110 0.90
Consumer Confidence Index -left scale rates in the market limits the borrowing
105 Inverse TRY/USD -right scale 0.85
possibility.
100
0.80
95
0.75
90
0.70
85

80 0.65

75 0.60
09 04

12 04

03 05

06 05

09 05

12 05

03 06

06 06

09 06

12 06

03 07

06 07

09 07

12 07

03 08

06 08

09 08

22
Source: The Central Bank of Turkey

20
BANKING SECTOR – Portfolio Preferences

• Foreign investors have more faith in the Turkish Capital Markets

Portfolio Preferences of Citizens, % Share

2004 2005 2006 2007 Sep.08
FX Deposits 25.7 22.1 25.4 22.9 23.1
TL Deposits 34.9 42.0 42.8 46.1 47.8
Repo 0.6 0.4 0.6 0.6 0.5
TL Domestic Borrowing Instruments 19.2 15.5 13.5 12.2 12.2
FX Borrowing Instruments 0.9 0.5 0.4 0.3 0.2
Eurobond 1.9 1.5 1.4 0.9 0.8
Mutual Funds 8.3 8.5 5.8 5.8 5.1
Participation Accounts 2.0 2.5 2.8 3.3 3.5
Equity 5.7 6.6 6.6 6.9 5.7
Pension Funds 0.1 0.4 0.7 1.0 1.2
Source: State Planning Organization

Portfolio Preferences of Foreigners, % Share

2004 2005 2006 2007 Sep.08
Equity 47.0 58.0 52.4 65.5 58.5
T-Bills and Bonds 38.3 35.0 39.2 29.6 34.0
Eurobond 3.5 1.1 0.8 0.3 0.8
Deposits 11.3 5.9 7.6 4.6 6.8
Source: State Planning Organization

23

21
BANKING SECTOR – Outlook

Short-Term Outlook
• Going forward we expect the high interest rate environment to prevail during the rest of 2008.
• Banks are likely to end up the year with around 35% YoY loan growth.
• We expect deposit growth to be around 25% YoY in 2008.
Long-Term Outlook
• Security portfolio build up will gain some pace and the structure of the securities is expected to turn
out to be floating rate rather than fixed rate securities.
• We forecast the loan growth at 16% in 2009 and deposit growth at around 20%.
• Thanks to the postponement of Basel-II, which would be in effect starting from 2009 according to the
previous plans, banks will be able to meet the necessary capital requirements.
• Syndication roll-overs will not be a major problem for Turkish banks in our view.
• We expect the banks providing the four main criteria to outperform the market going forward. These
are:
Sufficient liquidity
Wide funding base
Strong capitalization
Low OPEX
24

22
BANKING SECTOR – ISE Total vs ISE Listed Banks

• There are 17 banks listed on the ISE as of today with total market capitalization of TRY62bn (US$41bn)
• While banks constitute 35% of the total market capitalization of the ISE total, the trading volume of banks is
more significant at slightly over 50% in 2008.

60%
Banks Market Capitalization / ISE Total 51.6%

50% Trading Volume of Banks / ISE Total

37.8%
40%
33.2%
30.7%
30% 26.9% 26.7%
25.4%
23.6%

20% 38.5% 40.2%

36.5% 35.3%
29.1%
25.4% 26.0%
10% 21.5%

0%
2001 2002 2003 2004 2005 2006 2007 2008

Source: Istanbul Stock Exchange 25

23
BANKING SECTOR – ISE Banks’ Performance in the last one year

• Banking sector index has fallen by almost 60% compared to a year ago.
• Banks have also underperformed the ISE-100 by 15% in the last one year.

120 1.00

100
0.95

80
0.90

60

0.85
40
Banking Sector
Index Nominal
0.80
20 Performance
Banking Sector
Index Relative
Performance
0 0.75
11 07

12 07

01 08

02 08

03 08

04 08

05 08

06 08

07 08

08 08

09 08

10 08

11 08
26
Source: FinansInvest Research

24
BANKING SECTOR – Trading at their historical lows

• The banks in our coverage are trading very close to their historical low P/E and P/BV multiples.

12-M FW Looking P/E and P/BV Ratios

25.00 2.50
P/E -left scale
P/BV -right scale
20.00 2.00

15.00 1.50

10.00 1.00

5.00 0.50

0.00 0.00
2003 2004 2005 2006 2007 2008 2009

Source: FinansInvest Research Forecasts

27

25