Turkey Commercial Banking Report Q1 2008

From Q108 we will be calculating the Commercial Banking Business Environment Rating (CBBER) for each of the countries surveyed by BMI. This will permit a more systematic and comprehensive comparison of the conditions within the banking industries of the various countries than was possible in the past. For each country, it will also facilitate a comparison of the conditions within the banking sector and conditions prevailing in other sectors.

Turkey's overall CBBER is 56.7. The equivalent figures for the US and eurozone are 84.8 and 81.4, respectively. Turkey's CBBER is approximately in the middle of all the countries we monitor in Central and Eastern Europe. Within the CBBER, the most important aspect is the (banking) market element of the limits of potential returns. This element accounts for 42% of the overall CBBER. Turkey's rating for this element (68.1) is higher than the overall CBBER and significantly higher than the country element of the limits of potential returns (38.0). Turkey has a sophisticated commercial banking sector, with relatively large total assets and expectations of relatively strong growth in total assets and client loans during the 2007-2012 forecast period. Nevertheless, the CBBER shows that Turkey's banking sector is being held back by country factors, including the low level of per-capita GDP, high company taxation and, in particular, GDP volatility.

As Q207 data points to continued weak household demand in Turkey, we are highlighting downside risks to our 2007 GNP growth estimate of 5.5%. That said, the longer-term picture is still extremely positive, with the monetary policy loosening thought to have begun Q4 expected to be a major stimulus for growth in 2008 and beyond.

Turkish economic growth was 3.9%year-on-year (y-o-y) in the second quarter of 2007, the lowest growth rate recorded in four years and well below the 9.3% y-o-y growth in Q206. Private consumption remains the key factor dragging on the economy, contracting by 0.3% y-o-y in the quarter, the first time it has fallen on an annual basis since 2002. While high interest rates have affected on Turkey's domestic demand since Q306, the weak Q2 figure is also likely reflective of a downturn in consumer confidence in the lead up to the parliamentary elections held on July 22 2007. During the last month of the second quarter, the consumer confidence index fell back below 95.0, while perceptions of the country's overall economic situation also dipped.

We stress, however, that the economic data was not wholly negative. Indeed, the situation with regard private consumption could have weighed even further on the economy, if not for the upswing in preelection government spending. Public consumption growth stayed above 5.0% in Q207, expanding by 7.4% y-o-y, underpinned by a 21.3% y-o-y increase in central government expenditures. Furthermore, the investment and external sectors continued to buoy the economy, with gross fixed capital formation and exports rising by an impressive 10.0% y-o-y and 12.7% y-o-y, respectively. That foreign investments continued expanding in the double digits at a time when political instability arguably hit its highest level since 2001 is a particularly positive signal for the country. It suggests to us that risk perceptions of Turkey as an investment destination have lessened noticeably over the past few years, and the global market is recognising that the country is in a much more fundamentally stable position than most periods past.