The Banks Association of Turkey Recent Developments in the Turkish economy and Turkish Banking System Ersin Özince Ch

1. The Banks Association of Turkey Recent Developments in the Turkish economy and Turkish Banking System Ersin Özince Chairman of the Board London, November 24, 2005 Turkish Banking System

2. Outline Economic outlook • Short term outcomes • Expectations for the near future Turkish banking system • Main issues affecting banks • Operational environment • Short-term outcomes and selected indicators • Expectations for the near future Turkish Banking System

3. Economic outlook Turkish Banking System

4. Macro economic policies in conjunction with a positive international environment led to economic performance to improve considerably since 2002. • Disinflationary monetary and tight fiscal policies supported by the structural reforms created an environment for higher growth led by the private sector. Turkish Banking System

5. Succesfully implemented free market principles will further encourage private sector and foreign investment enabling to increase the international competitiveness. • The start of accession negotiations will further reinforce the dynamism of Turkey to complete economic reforms enhancing Turkey’s integration with the EU. Turkish Banking System

6. Short-term outcomes • Quick and sustainble recovery in growth led by private sector • Savings gap widened due to rapid increase in private sector fixed capital investments mainly in machineries while public sector savings gap continued to narrow • Strong fiscal adjustment led to dramatic decline in public sector borrowing to 1 percent of GNP in 2005 down from 13 percent in 2002 • Less pressure from the Government on the financial markets while financial assets to GNP also rises Turkish Banking System

7. Short-term outcomes • Sharp decline in inflation • Stability sustained in money and capital markets; a substantial fall in the cost of borrowing and real interest rates • Strong demand for TL both from domestic and foreign investors • Rapid growth in CB reserves and improvement in fx position Turkish Banking System

8. Short-term outcomes • Jump in lending to private sector and consumer loans as well as housing loans • Expanding volume of foreign trade • Widening current account deficit due to increase in investments and energy prices • Foreign investors’ interest on the banking sector • Acceleration in privatisation • Strengthening rating outlooks Turkish Banking System

9. Improved economic performance positively reacted by the investors in the Istanbul Stock Exchange Turkish Banking System

10. Expectations for the near future • Should current program successfully implemented, macroeconomic aggregates are likely to approach to Maastricht criteria in a few years. • Thus, an atmosphere for well functioning of market economy is likely to be further improved. Turkish Banking System

11. According to the Government programme public sector deficit targeted to receed to 3 percent of GDP by 2008 Turkish Banking System

12. Inflation is down 4 percent in 2008 Inflation 100 75 50 25 0 95 . . . . '00 . . . . '05 . . '08 Turkey EU-15 Turkish Banking System

13. Government debt is likely to meet the EU level in 2008 Turkish Banking System

14. Turkish Banking System Turkish Banking System

15. As a natural outcome of new transition period, a new era of structural change has emerged in the financial sector. Transition of operational environment as well as regulations related financial institutions towards international standarts, a rapid increase in capital inflows and accelerated entries of foreign banks have stimulated competition in the banking the sector. Turkish Banking System

16. Main issues affecting banks • Since 2002, banks have been operating in a considerably less risky atmosphere • Decline in inflation and strong demand for TL stimulated the competition and restructuring the balance sheet • Government’s crowding out affect on financial markets lessened • Regulation likely to meet the international standarts, notably to the EU directives • Supervision strengthened further • Better expectations and vital activity stimulated consumer business • Foreign investors’ interest intensified • Basel II road map was announced Turkish Banking System

17. Operational environment • Banks subject to Banking Act in their universal activities and to Capital Market Act in capital market activities • Banking Regulation and Supervisory Board is an autonomous authority of the banking sector since 2000. • No discretionary regulation for foreign banks operating in Turkey • Regulatory capital for establishment of a bank is currently about USD 15 million • Financial sector is small and has low degree of deepening • Despite gradual improvement, deposits have very short term maturity Turkish Banking System

18. Operational environment • Traditionally banks occupy majority, 95 percent of financial sector • Financial services subject to various heavy tax burdens increasing intermediation cost dramatically, although some positive steps taken recently • The share of fx or fx denominated items in the balance sheet still high albeit shrinking recently • High techonology utilization on services Turkish Banking System

19. Short-term outcomes • Strengthened confidence in the banking sector and rating outlooks • Banks gradually adopting to changing environment; disinflation and recoveryare likely support the sector • Full guarantee on deposits limited • Improvement in asset quality; NPLs’ contained and highly provisioned • Regulatory capital requirements met, economic and working capital began to rise Turkish Banking System

20. Short-term outcomes • Earnings less dependent on windfall and inflationary gain from the Governmet securities as interest margin and income from fees and commission increased • Improving return on equity is likely to encourage capital growth • Higher lending tendency to private sector • Risks arising from fx and interest rates lowered but maturity gap is still important Turkish Banking System

21. Short-term outcomes • Foreign banks’ share is increasing • Concentration has risen • Risk management improved • Foreign borrowing accelerated • Banks’ market capitalisation jumped Turkish Banking System

22. Reduced pressure of Government on financial sector; higher trend for TL deposits and upward trend loans; notably from households Government debt and selected financial assets As % of GNP 2002 2005 Spt. Public sector borrowing requirement 13 1 Domestic debt 55 52 Total deposits 48 44 TL deposits 21 28 FX deposits 27 16 Investment funds 2 4 Loans 18 28 Consumer 1 5 Credit cards 1 3 Turkish Banking System

23. Total assets grew rapidly in USD terms but remained almost the same as percent of GNP Total assets USD billion % 300 250 80 200 60 150 40 100 20 50 0 0 99 '00 '01 '02 '03 '04 '05 J Total assets As % of GNP Turkish Banking System

24. Dramatic decline in number of banks Number of banks 85 80 75 70 65 60 55 50 45 40 35 30 25 20 15 10 5 0 80 85 90 95 99 '00 '01 '02 '03 '04 '05 J Total Private dep banks Turkish Banking System

25. Structure of the banking system Market structure June 2005 Banks Employment Branches Assets Loans Deposits % share % share % share 34 Deposit banks 125.416 6.034 96,5 94,1 100 State owned 3 39.080 2.039 32,5 19,9 39,5 Private 17 79.870 3.786 60,1 69,3 57,1 Fund 1 401 1 0,5 0 0 Foreign 13 6.065 208 3,4 4,8 3,4 Non-deposit taking banks 13 4.471 19 3,5 5,9 0 Total 47 129.887 6.053 100 100 100 Turkish Banking System

26. Asset size getting larger Bank total asset size USD billion/number 99 '01 '02 '03 04 05 J 40+ 1 1 30-40 1 2 20-30 1 1 1 2 2 2 10-20 1 5 5 4 4 2 5-10 6 2 1 1 4 5 1-5 19 10 12 13 11 10 0,5-1 11 4 5 3 1 2 - 0,5 43 28 26 26 25 24 Total 82 50 50 50 48 48 Turkish Banking System

27. Large banks increase their market share Concentration 80 90 '00 05 J First five* Asset 63 54 48 61 Deposits 69 59 51 65 Loans 71 57 42 54 First ten* Asset 82 75 69 84 Deposits 88 85 72 89 Loans 90 78 71 78 * according to asset size Turkish Banking System

28. Assets and liabilities have been reshaped Turkish Banking System

29. Breakdown of loans Share NPLs Selected sectors, July 2005, % in total share in total Consumer loans and credit cards 18.1 0.7 Housing 6.0 0.1 Automobiles 5.6 0.2 Others 3.7 0.2 Credit cards 2.8 0.2 Wholesale and retail trade 12.9 0.8 Textiles 8.0 19.3 Food, beverage 5.3 7.0 Leasing and factoring 5.1 1.8 Construction 4.7 6.4 Communications and transportations 4.6 4.5 Metal 4.5 3.5 Manufactures of metal 4.5 3.5 Chemicals 3.2 0.1 Machinery 2.6 2.7 Tourism 2.6 0.1 Others 23.9 49.6 Total 76.1 50.4 Turkish Banking System

30. Rather stable fx position; met the requirements Fx position* (Fx assets-fx liabilities) Milyar dolar 5 0 -5 -10 -15 -20 88 90 95 '00 '01 '02 '03 '04 '05 H Sector Including fx indexed * excluding fx indexed assets and liabilities Turkish Banking System

31. Stronger capital; thanks to the restructuring program, recovery in economic activity and profitability Turkish Banking System

32. Working capital improved rapidly Working capital* USD billion 20 15 10 5 0 -5 99 '00 '01 '02 '03 '04 '05 J Sector State-owned Private * Shareholders' equity+current year net income-permanent assets Turkish Banking System

33. From losses to sustained profitability; likely to encourage investors Return on equity (%) % 60 40 20 0 -20 -40 -60 -80 -100 -120 '99 '00 '01 '02 '03 '04 '05 J Sector State-owned Private Figures in 2002-2004 are according to inflation accounting Turkish Banking System

34. Positive developments in the banking system positively reacted by the investors Turkish Banking System

35. Rapidly growing numbers of credit and debit cards Selected inditacors 2002 2003 2004 Thousands ATMs 12 13 14 POS machines 496 662 912 Credit cards 16 20 27 Debit cards 35 40 43 Turkish Banking System

36. Expectations for the near future • Larger and deeper financial markets • Lengthening the maturities • Higher lending to private sector • Sufficient earnings to feed capital • Decline in margin with widening business activity • Positive atmosphere for foreign investors • Intense competition on behalf of depositors and borrowers Turkish Banking System

37. Growth in the banking sector accelerated after 2002 Turkish Banking System

38. Substantial growth during the last years Turkish Banking System

39. Still low degree of banking on the basis of inhabitants Turkish Banking System

40. Selected banking sector indicators, 2004 MU 12 EU 25 Turkey* Income per capita Euro 24.681 22.508 3.401 Total assets per capita Euro 65.520 63.027 2.361 Total assets to GDP % 265 280 69 Loans to GDP % 117 118 23 Housing loans to GDP % 34 40 1 Consumer credits to GDP % 7 8 2 Loans to deposits % 121 123 52 Number of credit institutions per inhabitants 48.689 54.965 1.513.872 Number of branches per inhabitants 1.857 2.306 11.653 Number of employment per inhabitants 143 151 560 * Figures fo banks High growth potantial compared to the EU Turkish Banking System

41. Thank you. Turkish Banking System