articles Ratings /ratings/en/research/articles/200623-banking-industry-country-risk-assessment-turkey-11535776 content
Log in to other products

Login to Market Intelligence Platform


Looking for more?

Request a Demo

You're one step closer to unlocking our suite of comprehensive and robust tools.

Fill out the form so we can connect you to the right person.

If your company has a current subscription with S&P Global Market Intelligence, you can register as a new user for access to the platform(s) covered by your license at Market Intelligence platform or S&P Capital IQ.

  • First Name*
  • Last Name*
  • Business Email *
  • Phone *
  • Company Name *
  • City *
  • We generated a verification code for you

  • Enter verification Code here*

* Required

Thank you for your interest in S&P Global Market Intelligence! We noticed you've identified yourself as a student. Through existing partnerships with academic institutions around the globe, it's likely you already have access to our resources. Please contact your professors, library, or administrative staff to receive your student login.

At this time we are unable to offer free trials or product demonstrations directly to students. If you discover that our solutions are not available to you, we encourage you to advocate at your university for a best-in-class learning experience that will help you long after you've completed your degree. We apologize for any inconvenience this may cause.

In This List

Banking Industry Country Risk Assessment: Turkey


Banking Industry Country Risk Assessment: Uruguay


Tech Disruption In Retail Banking: Korean Banks Accelerate Digital Transformation


Tech Disruption In Retail Banking: Digitalization Will Divide Taiwan Banks


Banking Industry Country Risk Assessment Update: July 2020

Banking Industry Country Risk Assessment: Turkey

Major Factors


S&P Global Ratings classifies the banking sector of Turkey (unsolicited; foreign currency: B+/Stable/B; local currency: BB-/Stable/B) in group '9' under its Banking Industry Country Risk Assessment (BICRA). Other countries in group '9' include Azerbaijan, Egypt, Kazakhstan, Greece, Bangladesh and Argentina.

Chart 1


Our bank criteria use our BICRA economic risk and industry risk assessments to determine a bank's anchor, the starting point in assigning an issuer credit rating. The anchor for banks operating only in Turkey is 'b+'.

Our assessment of the economic risk reflect the country moderate per capita income as well as the pressure we see on banks' asset quality, despite the relatively low number of reported nonperforming loans (NPLs) at 4.6% of the total as May 31, 2020. We expect asset quality metrics to deteriorate given the recession and the sharp lira (TRL) depreciation. In particular, we expect NPLs to reach 11%-12% by 2021, while problematic loans (NPLs plus restructured loans) will pass to more than 20% of loans from about 10% in September 2019. Banks have granular and diversified loan books; however, corporate sector indebtedness looks high when compared to other emerging markets. Moreover, risks are further exacerbated by some specific characteristics of this portfolio--namely, the accelerated lending through the Credit Guarantee Fund (CGF), and more recently via state banks, as well as the high proportion of foreign currency lending (almost 37% of gross loans). These features accentuate banks' credit risk, in our view.

Our assessment of industry risk in Turkey largely reflects relatively low domestic savings, which partially explains Turkish banks' higher historical reliance on near-term external debt than other banking systems. As a result, the industry is more exposed to developments in global capital markets and depends on maintaining positive investor sentiment. The current market environment, characterized by increasing risk-aversion of both international investors and depositors, could threat banks' access to external debt, increasing refinancing risk.

We also consider checks and balances within the Turkish institutional system weak, raising questions about the quality of regulation and perceived independence of Banking Regulation and Supervision Agency and the Central Bank. In our view, the Turkish banking system's profitability will benefit from lower interest rates in the near term because they will support business volumes and reduce costs of domestic funding. The increase in cost of risk will absorb a large part of banks' profitability, though.

Economic And Industry Risk Trends

The economic risk trend is negative, in our view, considering the significant risks to our forecasts if the depressed economic environment persists for longer than we expect, diminishing the potential for recovery from 2021; or if fiscal countermeasures prove ineffective or insufficient. In our base-case scenario, we forecast that the economic slowdown following COVID-19 will affect banks' asset quality, increasing the systemwide NPL ratio to 11%-12% by the end of 2021 and banks' cost of risk to 320-330 basis points (bps) on average in 2020 and 2021 from an already-high 270 bps on average in 2018-2019. In this context, the real estate market's performance remains a crucial factor in determining the final amount of losses banks will suffer.

In our view, Turkey's industry risk is on a negative trend because banks are highly vulnerable to negative market sentiment and risk aversion. Amid the banks' large external debt, access to external funding sources remains very important to cover their refinancing needs. We think that Turkish banks might suffer from the general decrease in confidence of both international investors and domestic depositors. The former are becoming increasingly risk-averse, and this might affect banks' ability to roll over their external debt. The latter could increasingly convert their savings into foreign currency, adding to the pressure on the banking sector. Also, we think that increased interference in the banking sector could represent a possible step toward weakening of supervisors' independence and their ability to oversee the banking sector effectively.

Economic Risk   |  8

Economic resilience: global and domestic recessions add pressure on the Turkish banking system

The pandemic will have a negative impact on the Turkish economy in the guise of weaker foreign trade and tourism as well as the direct effects of the virus on domestic demand. Our view of economic resilience balances the country's moderate per capita income, its vulnerability to external risk, and the uncertain political environment with the relatively low general government debt and dynamic private sector.

Economic structure and stability.   Turkey's economy is large and diverse, characterized by a flexible small and medium enterprise (SME) sector, a strategic geographic location, and a young and increasing population. GDP per capita in U.S. dollars is moderate for an emerging market. We project per capita income will decline to $8,293 this year with only a moderate recovery toward $10,000 by 2022.

Following a period of adjustment after the substantial currency volatility of August 2018, the Turkish economy navigated 2019 helped by supportive external conditions. However, the recovery has faded away in the wake of COVID-19 and the consequent global recession. In particular, we forecast that GDP will contract by 3.1% in real terms in 2020, before recovering by 4.2% in 2021, with the tourism sector being particularly hard hit. There is significant uncertainty surrounding our forecasts, in particular the speed with which the Turkish economy can recover from this unprecedented shock. A second wave of COVID-19, either in Turkey or Europe, could worsen the outlook for recovery.

Similar to other countries, the Turkish government enacted a series of measures to support the economy and the banking system from the consequences of the outbreak. The measures include tax deferrals, a TRL50 billion credit guarantee fund and a three-month ban for layoffs, a total in 250 bps interest rate cut from March to May, forbearance measures on capital requirement and asset quality, and a government bond purchase program to support market liquidity.

Macroeconomic policy flexibility.   In our view, Turkey's monetary policy has historically not been effective in managing inflation. The Central Bank of the Republic of Turkey (CBRT) has never met its 5% inflation target since it was introduced in 2012, while the real effective exchange rate has shown substantial swings. We consider that political pressure on the independence of the central bank and to keep rates low continues.

In the current situation, we believe that the central bank has limited ability to counteract further exchange rate volatility or to meet unexpected external financing requirements. Since the beginning of the year, the CBRT's foreign exchange (FX) reserves have trended down and deteriorated in quality, because its borrowing has picked up via swap lines on the liability side in foreign currency. We net these obligations out and expect net FX reserves (usable reserves) to drop below US$10 billion this year from about US$30 billion in 2019 before staging only a gradual recovery over the medium term.

In contrast with monetary policy, Turkey's fiscal position remains comparatively strong. This year we expect the direct measures taken against the impacts of the COVID-19 as well as the broader weaker economic activity and a drop in revenues to raise the general government budget to a deficit of 5% of GDP in 2020 from an average of about 2.5% of GDP over the past three years. This will contribute to an increase in the net general government debt to about 34% of GDP in 2020 from about 29% in 2019. Still, we believe that Turkey's debt level remains contained, leaving policy room for the authorities to respond.

Political risk.   Turkey's institutional arrangements have eroded substantially in recent years. The country is now an executive presidential system and we see limited checks and balances between government bodies, with power concentrated in the hands of the executive branch, making policy responses difficult to predict. Nevertheless, a degree of domestic political competition remains, as highlighted by the results of last year's local elections, when opposition parties secured mayorships of large cities including Istanbul, Ankara, and Izmir, and electoral authorities acknowledged these results. We believe this outcome might lead to greater scrutiny of public spending, but the situation remains fluid.

Beyond domestic political developments, Turkey faces a number of risks in the international arena. For example, disagreements with the U.S. stemming from Turkey's purchase of Russian anti-aircraft systems could lead to sanctions, and the military operation in Northern Syria and the decision to interfere in the Libyan civil war also increase geopolitical risk.

Table 1

BICRA Turkey--Economic Resilience
--Financial year ending Dec. 31--
2016 2017 2108 2019 2020F 2021F 2022F
Nominal GDP (bil. $) 862.6 852.0 773.0 754.1 698.6 768.2 847.3
Per capita GDP ($) 10,807.7 10,543.3 9,427.0 9,068.9 8,292.9 9,002.2 9,802.2
Real GDP growth (%) 3.2 7.5 2.8 0.9 (3.1) 4.2 3.5
Inflation (CPI) rate (%) 7.8 11.1 16.3 15.2 11.3 10.3 9.8
Monetary policy steering rate (%) 8.5 9.3 25.5 12.0 N/A N/A N/A
One-year government borrowing rate (%) 9.9 11.6 19.9 19.2 N/A N/A N/A
Net general government debt as % of GDP 24.5 24.0 27.3 29.3 34.1 33.4 32.9
F--Forecast. N/A--Not applicable.
Economic imbalances: Banks credit losses will raise amid the recession

Correction phase.   Following several years of fast economic growth and increasing leverage, the economy has slowed in 2018 and 2019, and we expect it to fall into recession in 2020 due to the impact of COVID-19. The recession, exacerbated by the high level of foreign currency loans in a context of volatile Turkish lira, will heavily weigh on banks' asset quality, in our view.

Before COVID-19, we were already expecting banks' NPL ratios to increase due to the gradual recognition of NPLs in the wake of currency depreciation of August 2018 and the consequent adjustment phase. Due to the pandemic's economic impact, we expect that asset deterioration will accelerate and the NPL ratio will increase to 11%-12% by the end of 2021 from 5.8% at year-end 2019, while problematic loans (NPLs plus restructured loans) will rise above 20% from about 10.1% as of September 2019 (see chart 2). In our view, net new provisions for loan losses after problem loan recoveries is a useful indicator of the asset quality deterioration in Turkey, more than reported NPLs. This figure has risen significantly in recent years and we expect it will remain high over the next two years, following the global recession due to COVID-19 and the aftermath of 2018 currency crisis.

Chart 2


We view as particularly risky the performance of loans to the construction and energy sectors, which are often denominated in FX and lack a natural currency-risk hedge. According to our calculation, construction and energy loans constitute about 8.5% and 7.3% of total loans as of April 2020. In our view, the commercial real estate segment represents a higher risk than the residential housing market, as the vacancy rate was already elevated in 2019 (over 25% up from only 6% in 2013). Those sectors already presented official NPL ratios of 9.2% and 6% respectively. These figures, which account for 26% of total NPLs, do not show the full extent of the problems, in our view, as they exclude restructured loans. In this respect, some sizable restructurings occurred in 2018-2019, such as the one targeting the renewable energy company Bereket Enerji Uretim AS (for about $4.6 billion debt).

Other sectors vulnerable to the consequences of COVID-19 are auto (about 1.4% of the system's loans), transportation (about 6.1%), and tourism (about 3.6%). The latter might be underestimated because some projects are recorded under construction. We anticipate that Turkey's tourism sector will be hit particularly hard because flow from foreign tourists will likely be meaningfully lower.

Lira volatility continues to erode Turkish banks' asset quality. That is mainly because weakening FX increases the burden of Turkish borrowers to service their debt (foreign currency loans account for about 37% of the total as of April 2020). Despite some natural hedging of corporates and some restructuring, we view the potential implications for asset quality if FX depreciation persists as a key risk.

Table 2

BICRA Turkey--Economic Imbalances
--Financial year ending Dec. 31--
2016 2017 2108 2019 2020F 2021F 2022F
Annual change in claims of resident depository institutions in the resident nongovernment sector in % points of GDP 2.7 1.0 (3.9) (2.4) 0.8 0.5 0.8
Annual change in key index for national residential house prices (real) (%) 4.5 0.0 (8.3) (5.2) (6.0) (0.7) 0.1
Annual change in inflation-adjusted equity prices (%) 1.2 36.5 (37.2) 6.6 (39.3) 11.0 3.6
Current account balance/GDP (%) (3.1) (4.8) (2.7) 1.2 0.2 (0.6) (0.9)
Net external debt/GDP (%) 30.3 32.0 34.2 28.6 32.4 29.8 26.9
Credit risk in the economy: We expect leverage to gradually decline amid low investments

Private-sector debt capacity and leverage.   Turkey household gross indebtedness is fairly low, at 14.7% of GDP as of year-end 2019 (see chart 3), while corporate leverage has historically been higher than peers, at 65.8% of GDP as of year-end 2019. Corporate debt has increased due to heavy stimulus to households and SMEs (via the CGF program) and the lira devaluation, which weighed on borrowing in FX. At year-end 2019, the private-sector debt (household and corporate debt) accounted for 80.5% of GDP, up from about 62% in 2014. We forecast this will gradually decline over the next couple of years, to reach about 75%. We include in this corporates' foreign lending and lending from local banks, because we believe it is a more accurate representation of domestic leverage.

Nominal credit growth (including the exchange rate effects) has expanded to about 9.7% in 2019, which implies a deleveraging in real terms. We expect systemwide loans to expand by 8%-10% in 2020, because of strong political pressure, then to pick up to about 15% in 2021, amid economic recovery. State banks will drive loan growth, as they did in 2019.

The debt payment capacity, measured by GDP per capita, is relatively low. From 2020-2022, we expect GDP per capita to remain at about $9,000 on average, well below $15,000 threshold for middle-income countries under our criteria. Also income inequality emphasizes the country's low debt capacity.

Chart 3


Lending and underwriting standards.   In our view, Turkish banks have relaxed lending and underwriting standards. Given the highly competitive banking environment in Turkey--particularly regarding doing business with large conglomerates--there is an element of asset and name lending versus cash flow lending. This practice has contributed to asset quality deterioration recently. In addition, strong lending expansion by public banks reflects a less conservative approach, in our view. Most banks--in particular the large commercial banks--have well-defined credit risk and pricing policies, effective credit scoring, and experienced staff. Lenders benefit from an efficient central credit registration bureau.

Other mitigating factors include the following:

  • Banks are restricted from lending in foreign currencies to households.
  • The loan books of Turkish banks do not usually exhibit any significant single-party or industry concentration.
  • Mortgages exhibit relatively short tenors and conservative loan-to-value ratios that were slightly below 65% in September 2019, which is under the 75% regulatory cap.

Payment culture and rule of law.   We consider the payment culture and rule of law in Turkey weak. Turkey scores relatively poorly on the World Bank's Rule of Law and Control of Corruption indicators (both are negative). Furthermore, we have observed that transparency has weakened in the aftermath of 2018 currency crisis. This particularly relates to asset quality disclosure in the banking system. Positively, in our view, the legal framework is relatively efficient and creditor-friendly. Households borrowers tend to exhibit a good degree of loyalty toward banks, as demonstrated by strong problem loan recovery in 2010 and 2011, which helped the system contain credit losses.

Table 3

BICRA Turkey--Credit Risk In The Economy
--Financial year ending Dec. 31--
2016 2017 2108 2019 2020F 2021F 2022F
Claims of resident depository institutions in the resident nongovernment sector as a % of GDP 62.4 63.4 59.4 57.1 57.9 58.3 59.1
Household debt as % of GDP 18.1 17.4 15.3 14.7 14.1 13.9 13.5
Household net debt as % of GDP (25.8) (24.4) (26.5) (32.0) (32.8) (31.2) (29.8)
Corporate debt as % of GDP 67.4 68.3 69.1 65.8 65.5 63.7 62.3
Real estate construction and development loans as a % of total loans 8.2 8.6 8.9 8.8 N/A N/A N/A
Foreign currency lending as a % of total domestic loans 34.8 32.6 38.8 36.9 41.0 37.8 36.5
Domestic nonperforming assets as a % of systemwide domestic loans (year-end) 3.4 3.1 4.2 5.8 9.4 11.4 11.9
Domestic loan loss reserves as a % of domestic loans 2.6 2.5 4.5 5.3 8.7 10.6 11.1
F--Forecast. N/A--Not applicable.
Base-case credit losses

In our most recent forecasts, we expect the Turkish economy to contract by 3.1% in real-terms in 2020 and unemployment to remain well above 13%, while the weakening of the lira will further weigh on the corporate sector. Consequently, we expect asset quality to deteriorate substantially in 2020-2021, although it might take time to become apparent on banks' loan books, given the forbearance and other measures introduced by the regulator. In this scenario, we expect banks' cost of risk to rise to 320-330 bps on average in 2020 and 2021, from an already-high 270 bps on average in 2018-2019 and compared with an average of 170 bps over the past five years.

The real estate market's performance is a crucial factor in assessing the amount of losses banks will suffer, given that banks make large uses of real estate collateral. In our base-case scenario, we expect property prices to continue to only moderately decline in real terms in 2020, in line with 2019, due to the economic deterioration and weakened confidence, then stabilize in 2021 and 2022.

Table 4

BICRA Turkey--Base-Case Credit Losses
--Financial year ending Dec. 31--
(%) 2016 2017 2108 2019 2020F 2021F 2022F
Credit losses to total loans* 1.6 1.2 2.5 2.9 3.8 2.7 2.4
Systemwide loan growth 16.8 21.0 19.1 12.1 8.0 15.0 10.0
Real GDP growth 3.2 7.5 2.8 0.9 (3.1) 4.2 3.5
*Credit losses include specific and general provisions. F--S&P Global Ratings forecast. Source: S&P Global Ratings

Chart 4


Industry Risk   |  9

Turkish banks' high reliance on short-term external debt compared with that of peers is a key factor constraining our assessment of the country's industry risk. This reliance exposes the industry to investors' confidence and conditions in capital markets. At the same time, increased power concentration over the past years increase risks from institutional checks and balances.

Institutional framework: Weakened independence

Banking regulation and supervision.   Turkey's regulatory standards are generally in line with international standards, after having improved significantly since the country's economic crisis in 2001 and the international economic crisis in 2008-2009. Turkey has implemented reforms and tightened prudential norms following lessons learned from these crises.

Turkish banks must comply with conservative rules on retail lending in foreign currency, loan-to-value ratios on residential mortgage loans, related-party exposures, and open foreign currency positions. Households and SMEs cannot borrow in FX.

The minimum Basel II regulatory capital adequacy ratio is 8%, but in practice, banks must maintain ratios higher than the Turkish regulator's 12% target to be able to issue bonds and open new branches. The country's Basel III regulations took effect in January 2014, and limits on liquidity coverage and leverage ratios in January 2015.

However, we have observed some relaxation of prudential norms, particularly since the 2018 crisis. In our view, Turkey has suffered an erosion of institutional checks, balances, and governance standards in recent years. Following the June 2018 elections, power remains firmly concentrated in the hands of the executive branch, with policy responses difficult to predict. As an example, the regulation on mandatory reserve requirement remuneration has changed several times recently in efforts to boost growth.

Regulatory track record.   We assess the regulator's track record as weak. Perceived political pressure on the central bank and the regulator weakens our view of the independence of these institutions, as well as their ability to carry out their responsibilities effectively.

Examples include:

  • Foreberance measure in loans classification (till end 2020 Turkish banks will only recognize Stage 2 loans after 90 days past due and stage 3 loans after 180 days past due)
  • Incentives to restructure loans rather than classify them as NPLs
  • Reduction of the risk weighting for foreign currency and gold reserves placed at the CBRT to 0% from 50%
  • The temporary possibility for banks not to consider mark-to-market losses on government bonds and use historical exchange rates to avoid inflating risk-weighted assets when calculating regulatory capital ratios
  • The overheating created in 2017-18 by the massive usage of Turkey's Treasury-backed CGF (credits granted under the CGF carry a 0% risk weight for the purposes of the regulatory capital ratio)

More recently, the BRSA has introduced the so-called "asset ratio," which aims to give banks incentives to accelerate loan growth, imposing an administrative fine to those banks which do not lend sufficiently in proportion to their deposit base. We think the ratio could put additional strain on the funding base of the banks and privilege lending growth versus underwriting standards.

We understand that the majority of these measures are temporary and aim to alleviate the impact of exceptional circumstances on the economy and the banking sector. Nevertheless, we believe they could represent a possible step toward weakening the supervisors' independence and ability to oversee the banking sector effectively.

Governance and transparency.  We regard governance and transparency in Turkey as weak. This is largely driven by banks not accurately disclosing the full extent of problem loans in their books. The new forbearance on loans classification will also contribute to reduce comparability with other banking sectors. Restructured loans, although increasing, are not disclosed and do not contribute to official NPLs inflow. Similarly, we have doubts about transparency and corporate governance at some large state-owned banks. This is highlighted, for example, by the conviction on Jan. 3, 2018, of an executive at Halkbank. Should this investigation result in large fines or sanctions, it could have significant political and economic implications for Turkey and damage investor perceptions of risk in the country. Also, the strong lending growth of public banks since the 2018 currency crisis raises doubts on the banks' independence regarding lending and underwriting decisions.

Other practices paint a more positive picture. As in some other emerging countries, ownership of banks by industrial conglomerates prevails, but most of these banks are controlled jointly by foreign shareholders. The regulator closely monitors related-party risks, which it caps at 25% of shareholders' equity. The degree of financial account disclosure is good, as measured by the frequency and timeliness of reporting, the quality of financial reports, and the degree of standardization. Banks publish their accounts also under IFRS, although less frequently. Almost all banks are publicly listed, and the dissemination of public information is more frequent and transparent than in peer countries.

Competitive dynamics: Turkish banks' profitability will benefit from interest rate cuts in the near term, but return remains well below cost of capital

Risk appetite.   We think risk appetite among Turkish banks is high, particularly during boom times, toward higher-risk segments (notably SMEs and consumers). Credit growth has been fast, particularly in 2017-2018, when it averaged 20% per year following the CGF's introduction. Despite moderate deleveraging in real terms in 2019, we expect loan growth will remain relatively aggressive in the next years, especially for public banks.

Industry stability.   Although the number of banks is relatively high, few large players dominate the market. Turkish banks enjoy high margins and good efficiency, and benefit from high yields on government debt, a large part of which are inflation-indexed products. Competition is strong, though, and we expect it to further increase, putting pressure on margins in the medium term.

In 2020, banks' profitability will be supported by the cuts in interest rates, as liabilities reprice faster than assets. However, increasing credit losses--that we expect to jump by to 3.7%-3.8% in 2020--and high cost of FX swaps will negatively affect net results. In addition, in March 2020, a regulation imposed a cap on various fee items such as money transfers, ATM withdrawals, early loan repayment, and account and card maintenance. On average, fee income accounts for one-fourth of bank revenues and we expect the new regulation to reduce fees by 10%-15%, further stressing bank revenues and profitability.

Turkish banks' capitalization is under pressure due to weaker earnings retention, assets growth exacerbated by lira depreciation (because capital is largely lira-denominated while risk-weighted assets have a large foreign exchange portion), and mark-to-market valuation on government securities. Banks are trying to issue hybrid instruments, which is increasingly difficult and costly given the market risk aversion and limited size of the domestic market.

In May, the government announced the recapitalization of three state banks with TRL21 billion (about $3.0 billion) through the Sovereign Wealth Fund. This capital increase follows 2019's recapitalization for a TRL28 billion total, and will be conducted through a similar mechanism, in which the Sovereign Wealth Fund issues debt securities to banks and uses proceeds to recapitalize them.

Market distortions.   Public-sector banks' loans books are rapidly expanding, despite limited lending opportunities and the difficult economic environment, amid the government's efforts to provide fresh financing to the economy. We calculate that public banks' lending increased by about 27% in the first five months of this year (or by about 17% in real terms, adjusted for foreign currency fluctuations). By comparison, for the rest of the sector, lending growth was only 14% (or less than 5% in real terms, adjusted for foreign currency fluctuations). This is in addition to about a 17% expansion for public banks in 2019 compared with about 5% growth for the rest of the sector, which implies a contraction in real terms for private banks in 2019 amid high inflation. We think this divergence between private and public banks is distorting the competitive dynamics of Turkey's banking sector.

We expect this diverging trend to continue in 2020, despite the introduction of the new asset ratio as a way to incentivize a boost in lending activity, as private banks are likely to increase their security holdings or decrease the deposit base rather than lending out more.

Competition from the very small nonbank financial institutions segment is negligible. The CBRT made these entities subject to minimum reserve requirements in 2013 in an attempt to improve financial stability and minimize unfair competition from this segment.

Table 5

BICRA Turkey--Competitive Dynamics
--Financial year ending Dec. 31--
2016 2017 2108 2019 2020F 2021F 2022F
Return on equity (ROE) of domestic banks 12.5 13.6 12.9 10.1 2.0 4.7 4.6
Systemwide return on average assets (%) 1.5 1.6 1.4 1.2 0.3 0.7 0.6
Net operating income before loan loss provisions to systemwide loans (%) 4.4 4.6 5.8 6.2 5.5 5.0 4.7
Market share of largest three banks (%) 36.7 39.0 40.5 41.4 N/A N/A N/A
Market share of government-owned and not-for-profit banks (%) 36.7 38.1 41.6 44.0 46.0 46.5 46.5
Annual growth rate of domestic assets of resident financial institutions (%) 16.8 19.6 19.6 17.0 13.0 15.0 10.0
F--Forecast. N/A--Not applicable.
Systemwide funding: The industry is exposed to the rapidly changing dynamics of international capital markets

Core customer deposits.   Core customer deposits fund the bulk of the Turkish banking system. However, during economic booms, credit growth significantly outpaces savings rates, requiring banks to increase their foreign debt and putting funding under stress (see chart 5). This is because of the young, increasing population with high consumption, and relatively weak domestic wealth formation in Turkey. However, with reduced lending growth amid economic correction and increased dollarization in deposits (which is further inflated by the lira's depreciation), we expect the ratio of core customer deposits (defined as 50% of corporate deposits and 100% of retail deposits) to systemwide loans to increase to 82-84% in 2021 from about 73% in 2019.

Chart 5


Lira depreciation and lack of confidence from domestic depositors is also driving a significant increase in deposit dollarization, which adds pressure to the banking system increasing the currency mismatch. Both residents and nonresidents in Turkey are allowed to hold deposits in foreign currency. The percentage of deposits in FX increased to about 53% of total deposits as of May 2020. Clients are converting deposits in hard currencies and also gold, which accounted for about 10.7% of total FX deposits in mid-June. To reduce incentives to the growth in FX deposits, in June, the BRSA announced a tax on foreign currency purchases amounting to 1% and a one-day settlement delay.

External funding.   Turkish banks' high reliance on external debt is one of the key factors that contribute to its high banking industry risk, because it exposes banks to negative market sentiment and risk aversion. We believe that, after the relatively favorable external conditions in 2019, the increasing uncertainties in both domestic and global markets constitute the banking system's main vulnerability over the next 12-18 months.

For 2019, net banking sector external debt gradually declined to about 21% of systemwide domestic loans due to limited lending growth and a decrease in rollover rates to about 90%. We expect external debt will keep declining moderately over the next 12-18 months because we expect rollover to slightly decline. However, we think that the increasing risk aversion of international investors might affect banks' ability to roll over their external debt. These risks are exacerbated by the debt's near-term nature, with about $76.5 billion, or 53% of systemwide external debt, maturing in the next 12 months as of April 2020.

Most Turkish banks retain sufficient liquidity to withstand restricted access to the capital markets under the current lira volatility. By our estimate, broad liquid assets amounted to $110.8 billion as of April 2020, an amount more than sufficient to cover upcoming wholesale funding maturities over the next 9-12 months. However, about $54 billion of liquid assets are central-bank-receivable, so if conditions worsen, the central bank would suffer a reserve shortage.

In the first four months on 2020, international investors sold about $3.2 billion of Turkish equities, signaling a lack of confidence in the country and weighing on the lira's depreciation. We believe there is significant downside risk if market pressure continues for a long period or domestic residents lose confidence in the financial system, leading to large deposit outflows, which currently is not our base-case scenario.

Domestic debt-capital markets.   The shallow nature and underdeveloped status of domestic debt markets in Turkey restricts our assessment of systemwide funding. The regulator gave Turkish banks permission to raise debt from domestic markets in 2010. In addition, the country's domestic savings rate is below that of its sovereign peers, and funds collected by private pension schemes and insurers will become a major source for banks only in the long term. The increasing amount of domestic bond issuance and the number of official incentives to boost domestic savings contribute to the debt markets' development.

Government role.   The government's role does not affect our assessment of systemwide funding in Turkey. The government has a moderately effective track record of providing guarantees and liquidity during periods of market turmoil. However, CBRT's role as a lender of last resort is constrained, because its foreign currency reserves have been on a downward path following the very high volatility in exchange rates. Therefore, we believe that the government's capacity to provide support in a systemic crisis scenario is constrained. Turkey also has a prefunded savings deposits insurance fund (the SDIF).

Table 6

BICRA Turkey--Systemwide Funding
--Financial year ending Dec. 31--
2016 2017 2108 2019 2020F 2021F 2022F
Systemwide domestic core customer deposits by formula as a % of systemwide domestic loans 62.5 58.0 63.9 72.9 82.9 84.2 82.5
Net banking sector external debt as a % of systemwide domestic loans 26.3 25.4 24.6 20.6 17.1 15.3 15.3
Systemwide domestic loans as a % of systemwide domestic assets 63.6 64.5 61.0 58.0 55.4 55.4 55.4
Outstanding of bonds and CP issued domestically by the resident private sector as a % of GDP 0.2 0.2 N/A N/A N/A N/A N/A
Total consolidated assets of FIs as a % of GDP 104.7 104.7 103.8 104.9 109.3 110.1 106.7
Total domestic assets of FIs as a % of GDP 101.8 102.1 102.0 103.9 108.1 109.0 105.6
F--Forecast. N/A--Not applicable.

Peer BICRA Scores

Two factors distinguish Turkey from most other countries in BICRA group '9'. Although high risk, Turkey has one of the lowest risk assessments for economic resilience in its peer group. However, in terms of systemwide funding, the country exhibits higher risk than all its peers, owing to its higher reliance on short-term external debt. This aspect renders Turkey's banks more vulnerable than those of its peers to turbulence in debt and capital markets abroad.

Table 7

Peer BICRA Scores
Turkey Azerbaijan Egypt Kazakhstan Greece Bangladesh Argentina
BICRA group 9 9 9 9 9 9 9
Economic risk 8 9 9 9 9 8 10
Economic risk trend Negative Stable Stable Stable Stable Stable Stable
Industry risk 9 9 8 9 8 9 7
Industry risk trend Negative Stable Stable Stable Stable Stable Negative

Government Support

We classify the Turkish government's propensity to support the domestic banking system as uncertain. In terms of its track record of support, the most important example is the systemic crisis of 2001, when the government-owned SDIF took control of failing banks. The fund assumed all domestic and foreign liabilities of the banks in question and no depositor or lender lost money.

Although Turkey still has some headroom to provide support (given that net general government debt levels are under 30% of GDP), we don't believe that blanket across-the-board support will be extended in the event of a systemic crisis. In our view, the government might help only specific banks or differentiate between various types of bank liabilities, for example, forcing the institutions to restructure debt to non-residents while protecting the interests of domestic depositors.

Things are set to change with the adoption of resolution regimes. Turkey is a Basel III-compliant country. Increasingly, banks are issuing Basel III-compliant capital instruments. The country is also a Financial Stability Board member, so it should be implementing a fully functioning resolution framework.

Table 8

Largest Turkish Banks By Assets (March 2020)
Rank Bank Total assets (mil. TRL)
1 Turkiye Cumhuriyeti Ziraat Bankasi A.S. 695,438

Turkiye Is Bankasi AS


Turkiye Vakiflar Bankasi TAO


Garanti BBVA A.S.


Yapi ve Kredi Bankasi A.S.


Akbank T.A.S.

Source: Bank financial statements. TRL--Turkish lira.

Related Criteria

Related Research

This report does not constitute a rating action.

Additional Contact:Financial Institutions Ratings Europe;

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and and (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to:

Register with S&P Global Ratings

Register now to access exclusive content, events, tools, and more.

Go Back