Turkey performing well but needs more capital for growth, says S&P - IFN

Turkey performing well but needs more capital for growth, says S&P

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TURKEY: The Turkish Islamic banking sector is set for a strong performance next year after posting exceptional growth between 2008-12. A new report released this week by S&P notes that this is the result of the Turkish government’s positive approach towards the sector, including its maiden sovereign Sukuk in 2012 which has subsequently spurred a spate of corporate issuance. An improved legislative infrastructure and low degree of financial intermediation have also been instrumental in attracting more funds in the form of investment from GCC countries. The report, entitled ‘Turkey’s Growing Islamic Banking Sector Needs Fresh Capital For An Added Push’, highlights the potential for growth within the market, but stresses that fresh additional capital is needed for continued growth, due to a number of challenges unique to the Turkish market. Despite the current four participation banks now accounting for 5.4% of the total banking sector in terms of assets, data from Turkey’s Banking Regulatory Supervisory Authority for 2008-12 shows a 1.5% deterioration in participation banks’ aggregate regulatory capital adequacy ratio (CAR). Although the participation banks have made moves to regain this capital through Tier-2 issuances, raising the level of regulatory CAR to 14.8%, S&P believes that such issuances could falter in 2014 due to uncertainty of the schedule for the reduction of bond purchases by the US Federal Reserve. Credit risks are also seen as a potential concern for the banks, given their comparatively higher exposure to the construction industry and their rapid credit growth over the past four years. The report stresses that participation banks could grow faster and further with foreign investment. Three of the four participation banks in Turkey are already majority-owned by foreign banks and S&P notes that ongoing support from foreign owners will “play an important role in helping existing players expand particularly given Turkey’s still developing debt markets". The potential market for participation banks in Turkey remains high, with plans from the government to introduce Islamic banking subsidiaries at state-owned banks, with Halk Bank being the first, with initial equity of TRY300 million (US$146.36 million). Whilst this will increase the market share for participation banks it will also increase competition, and S&P believes that the private banks are also a continuing challenge that will impact the current players. “We believe competition from this segment will remain strong, leaving little room for participation banks to solidify their market positions," the report concluded.