The Financial Services Sector in Turkey

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1 The Financial Services Sector in Turkey February 214 1

2 Glossary of Terms Acronym ATM AUM BIST BKM BRSA CAGR CAR CBRT CEO CMB CRD EBRD EGM EIU EU FCI FDI FİDER GDP IFC HATMER Definition Automated Teller Machine Assets Under Management Borsa Istanbul Interbank Card Center Regulation and Supervision Agency Compound Annual Growth Rate Capital Adequacy Ratio Central Bank of the Republic of Turkey Chief Executive Officer Capital Markets Board of Turkey Capital Requirements Directive European Bank of Reconstruction and Development Monitoring Center Economist Intelligence Unit European Union Factors Chain International Foreign Direct Investment Turkish Agency Gross Domestic Product Istanbul Financial Center Life Insurance Information and Monitoring Center Acronym HAYMER IMF Definition Insurance Claims Follow-up and Monitoring System International Monetary Fund IMKB Istanbul Stock Exchange before 212 ISE ISPAT N/D NPL O/N OECD OIC Q ROA ROE SAGMER SME TBB TEB TL Istanbul Stock Exchange The Republic of Turkey Prime Ministry Investment Support and Promotion Agency No Data Non-Performing Loan Overnight Organization for Economic Cooperation and Development Organization of the Islamic Cooperation Quarter Return on Assets Return on Equity Health Insurance Information and Monitoring Center Small and Medium Enterprises Turkish Bank Association Turkish Economy Bank Turkish Lira 2

3 Glossary of Terms Acronym TSRB TSPAKB UK USA USD WB Definition Insurance Association of Turkey The Association of Capital Market Intermediary Institutions of Turkey United Kingdom United States of America United States Dollar World Bank 3

4 Table of Contents Executive Summary 5 A. Overview of Economic Indicators in Turkey 6-12 i. Turkey s Macroeconomic Outlook 7-8 ii. FDI in the Financial Services Sector in Turkey 9-1 iii. Mergers and Acquisitions B. A Detailed Look at the Financial Services Sector i. A Brief Overview of the Global Financial Services Sector D. Turkey s Competitive Landscape i. Turkey s Workforce and Skilled Labor within Financial Services ii. Disposable Income 74 iii. Major Projects Financed by Turkish Banks iv. The Financial Sector s 218 Targets 78 v. Istanbul Financial Center Initiative 79-8 vi. Major Financial Sector Stakeholders ii. The Sector in Turkey iii. Funds in Turkey iv. Financial in Turkey v. in Turkey vi. in Turkey C. The Detailed Outlook on Capital Markets i. Borsa Istanbul ii. Brokerage Firms 72 4

5 Executive Summary Turkey has demonstrated robust macroeconomic growth in recent years thanks to the government s ambitious growth program and is expected to sustain it over the next 5 years according to international economic organizations. According to OECD forecasts, real GDP growth is projected to rise approximately 4% in 214 and 215, while the Economist Intelligence Unit (EIU) expects an annual average growth rate of 5% until 217. According to the EIU, even though around 78% of bank assets globally were located in developed markets in 212, and 22% in developing countries, this ratio is expected to change by 217, and the trend will shift towards emerging markets. Turkey s financial services sector continued to show healthy growth with an expanding loan base and favorable liquidity conditions. Total asset size grew a CAGR 19% between 28 and the third quarter of 212 surpassing a total asset size of TL 2,14 billion. The asset quality the of Turkish banks improved as asset size grew a staggering CAGR 21% between 23 and September 213 exceeding TL 1,63 billion with an asset to GDP ratio of 97% in 212. Despite the Eurozone crisis, Turkey s loan expansion continued to grow as the economy grew. Total loans exceeded TL 794 billion in 212, while the loan to deposit ratio surpassed 13% in 212. The Capital Adequacy Ratio (CAR) remained well above international standards as the average CAR for banks were 17.3% in 212, while the same ratio was 34.2% for development and investment banks and 13.9% for participation banks. The share of life insurance premiums increased a CAGR of 14%, while non-life insurance premiums grew at a CAGR of 17% from 29 to 212. Financial leasing receivables between 28 and 212 increased at a CAGR of 3.2% exceeding TL 16 billion in 212, while total assets in the factoring sector reached TL 18.1 billion in 212, which accounts for a 16% increase compared to the previous year. Capital markets in Turkey also had an advantageous year in 212. In 212, Borsa Istanbul s BIST-1 index had the highest index return percentage in the world with 61%. Turkey s ambitious 223 goal is to transform Istanbul into a prominent financial center. Turkey s large population of young people, qualified labor force and rapidly developing markets along with its geographic location makes Istanbul an ideal candidate for a finance hub. 5

6 A. Overview of Economic Indicators in Turkey i. Turkey s Macroeconomic Outlook ii. iii. FDI in the Financial Services Sector in Turkey Mergers and Acquisitions 6

7 f 215f 216f 217f Turkey s fast-growing economy is expected to attract more investments in the future. Turkey has undergone profound economic transformation over the last decade and its economic fundamentals are quite solid. It is the 17 th largest economy in the world and the 6 th largest economy in Europe with a current GDP of approximately USD 82 billion in 213. Having boomed as fast as 9.3% and 8.8% in real terms in 21 and 211, OECD projects a real GDP growth of around 4% in 214 and 215, while EIU projects on average 5% growth until 217. Monetary policy played a vital role in reining in inflation over recent years. Turkish inflation has stayed under 1% since 24 and year-end inflation was 7.4% in 213. EIU forecasts that average inflation will further ease to 4% by 218. Figure 1: GDP Growth Rate (Constant Prices) 9% 4% -1% -6% Source: TurkStat, OECD, EIU *f: forecast Figure 2: Inflation, % EIU* 12% 9% 6% 3% % Source: TurkStat 7

8 Turkey s investment environment has become increasingly more welcoming to foreign investors. Figure 3: The Central Bank of the Republic of Turkey O/N Interest Rates 6% 5% 4% 3% 2% 1% % Source: CBRT Borrowing Lending Overnight lending rates have been steadily decreasing over the years, reaching 7.5% in September 213, which is a 5 basis point decrease since 22. Fitch Ratings announced Turkey s investment grade rating as BBB in November 212 and Standard & Poor s announced a BB+ rating in March 213. These events signal further upgrades and are expected to boost the inflow of institutional funding. Moody's raised Turkey s government bond ratings to Baa3 and revised its outlook to stable from positive in May 213. These rating upgrades are due to sustained economic growth, rapid progress on structural and institutional reforms and improving public finance metrics. Table 1: Turkey s Credit Ratings Standard & Poor s Rating (Local Currency) Outlook (Local Currency) Rating (Foreign Currency) Outlook (Foreign Currency) BBB Stable BB+ Negative Fitch BBB Stable BBB- Stable Moody s Baa3 Stable Ba1 Positive JCR BBB- Stable BBB- Stable Source: Moody s (May 213), S&P (February 214), Fitch (December 213), JCR (May 213) 8

9 USD Billion USD Billion Turkey has attracted significant foreign direct investments in the last decade. Figure 4: FDI Inflows to Turkey, Source: World Bank DataBank Figure 5: Total FDI in the Financial Services Sector, Source: Ministry of Economy, CBRT Note: FDI does not include Sberbank s acquisition of Denizbank,since Sberbank bought Dexia s shares of Denizbank Turkey has become an attractive destination for foreign direct investments (FDIs). After 22, weak FDI inflows then experienced an incremental increase and reached a record level of USD 22 billion in 27. The decrease of inflows in 29 was due to the global economic crisis, which lowered FDI across the globe including Turkey. However, according to 211 totals, Turkey has recovered well from the global crisis. In 213, FDI inflow rose to USD 12.9 billion, compared to USD 8.6 billion in 29. Financial services is one of the most popular sectors for foreign direct investments. In 212, the financial services sector accounted for 15.4% of the total FDIs in Turkey. In 213, total FDI in financial services reached USD 3.42 billion, which accounts for 26% of the total FDIs in Turkey. 9

10 The Financial Services Sector and Major M&As in 213: The financial services sector was in second place for M&As which included both local and foreign investments. Figure 6: M&A Deal Values in 213 (Disclosed) Energy Financial Services Infrastructure Food&Beverage The financial services sector had the second highest M&A disclosed deal values in 213 with USD 1.6 million, coming in right after energyrelated deals. Manufacturing Retail Media Logistics&Transportation Real Estate The totals shown for M&As include both local and foreign deals. The total number of business deals in 213 was 259. Financial services had a total of 24 deals placing it in third place overall, after energyrelated and manufacturing deals. Tourism Restaurants&Hospitality Construction In 213, a total of 217 deals were finalized. Financial services accounted for 1 deals, placing the sector in the top 1 for number of deals. Internet&Mobile Services 86 Other USD Million Source: Deloitte M&A Report 213 1

11 Major M&As in the financial services sector amounts to USD 1.6 billion in 213. Table 2: Selected Financial Services M&As in 213 Acquirer Origin Target Stake Deal Value (USD Million) Allianz SE Germany YapıKredi Sigorta 74.% 882 Commercial Bank of Qatar Qatar Alternatif Bank 7.8% 448 Khazanah Nasional Berhad Malaysia Acıbadem Sağlık ve Hayat Sigorta 9.% 252 Alternatifbank A.Ş.* Turkey Alternatif Finansal Kiralama 1.% 69 Private Investors (Enver Çevik, Hasan Özsoy) Turkey ICG Investments 1.% 6 UCP Holdings, Inc. USA Cosmos Yatırım Ortaklığı 11.9% 1 Azimut Italy Global Menkul Değerler 5.% N/D Denizbank Turkey Citibank A.Ş. ( Business) 1.% N/D Mediterra Capital Turkey ACP Sigorta ve Reasürans Brokerlığı 66.7% N/D Fibabanka Turkey Societe Generale's Turkish Loan Business 1.% N/D Source: Deloitte M&A Report 213 * Sberbank bought Dexia s shares of Denizbank, therefore the amount is not included as FDI. 11

12 USD Billion Private equity activities in Turkey reached USD 17.5 billion in 213. Figure 7: Private Equity Activity, 213 (Disclosed) Total Deal Value Financial Investor Deals 35% 3% 25% 2% 15% 1% 5% % Ratio to Total Deal Value (%) Table 3: Private Equity Activity Selected Players A total number of 35 transactions were realized in 213, which accounted for 12% of the total annual deal volume. Turkey has become one of the key destinations in the world for private equity activities. There are many major private equity and venture capital firms in Turkey. These firms include, but are not limited to, Turkven, Carlyle, 3i, Blackstone, KKR and Abraaj Capital. In regards to deal numbers, the manufacturing, e- commerce and food & beverage sectors shared the lead with 4 transactions each, followed by the real estate, technology, retail and energy sectors each with 3 transactions. For financial services, two deals were completed and are summarized in the table below. Acquirer Origin Target Stake Khazanah Nasional Berhad Mediterra Capital Malaysia Turkey Acıbadem Sağlık ve Hayat Sigorta ACP Sigorta ve Reasürans Brokerlığı Source: Deloitte M&A Report 213 Deal Value (USD Million) 9.% % N/D 12

13 B. A Detailed Look at the Financial Services Sector i. A Brief Overview of the Global Financial Services Sector ii. iii. The Sector in Turkey Funds in Turkey iv. Financial in Turkey v. in Turkey vi. in Turkey 13

14 f 215f 216f 217f USD Trillion Global asset size exceeded USD 1 trillion in 212. Figure 8: Total Global Asset Size CAGR 4.5% Figure 9: Year-Over-Year Loan Growth in Turkey and Other Regions 7% 6% 5% 4% 3% 2% 1% % -1% -2% Source: EIU Note: EIU calculation for the world is based on the 51 largest countries. f: forecast Source: EIU f: forecast North America Asia and Australia World Western Europe Turkey According to EIU, although approximately 78% of banking assets were located in developed markets in 212, and 22% in developing countries, this ratio is expected to change by 217, where the trend will shift towards emerging markets. According to estimations, emerging markets will account for 34% of banking sector assets in 217. Global assets grew almost CAGR 4% between 27 and 212 and are expected to further increase CAGR 5% from 212 to 217, surpassing USD 149 trillion in 217. Moreover, it is important to note that global outstanding bank loans are forecasted to rise in nominal terms to USD 96.3 trillion in 213 and reach USD trillion by 217. Turkey experienced higher year-over-year loan growth rates compared to the world average and other regions between 29 and 212 and yearly growth rates are projected to remain over 15% until

15 USD Million Insurance premiums grew across the globe in 212 despite the challenging global economy. Figure 1: Global Insurance Premium Volume Life Non-Life Source: TSRB, Swiss Re Life insurance premiums grew a CAGR 3.4% globally, while non-life insurance premiums had a CAGR 4.5% growth rate from 29 to 212. The total premium volume in 212 exceeded USD 4.6 trillion. In 212, the largest life insurance premium growth was witnessed in the USA, with a total of more than USD 587, million. Turkey, on the other hand, came in with more than USD 1,74 million ranking 43 rd worldwide in overall life insurance premiums. The USA also ranked number one in non-life insurance premiums with USD 73,128 million followed by Japan with USD 129,74 million and Germany with 125,597 million. Turkey was ranked 29 th worldwide with total non-life premiums of USD 9,14 million in 212, which was a nominal increase of 7.9% from the previous year. A Swiss Re Sigma study expects insurance premium growth to improve further in the near future. 15

16 CAGR Turkey is one of the fastest growing countries in terms of bank asset size, and this reflects opportunities for growth Figure 11: Sector Total Asset Growth by Country 3% Russia Figure 12: Assets Percentage of GDP Ratio Comparison, % 398% 25% 2% 15% 1% 5% UK France Brazil Turkey Poland Czech Republic Romania India 163% 16% 94% 89% 87% 63% 6% % % 5% 1% 15% 2% 25% 3% CAGR Source: EIU, Deloitte Analysis Note: Growth rates are calculated in terms of USD, bubble size represents asset size in 212 in terms of USD. Turkey s total asset size, calculated in terms of USD, is expected to increase almost CAGR 11% from 213 to 217 outpacing that of countries such as Poland, Brazil, France, the Czech Republic and the UK. Source: EIU Turkey s asset size is relatively lower than developed economies like the UK and France. Even though Turkey s banks are under penetrated are starting to reach their full potential. Therefore, it will increase its asset size and reach its full potential in the future. 16

17 Major milestones in Financial Services Industry of Turkey Figure 13: Milestones of Turkey s Financial Services Industry Capital Market Law Istanbul Stock Exchange (ISE) Market opens Regulation And Supervision Agency (BRSA) founded Consolidation of the Market from 1 Banks to 49 Banks Takasbank is Authorized by CMB as the National Numbering Agency of Turkey Start of internet banking services Personal Savings and Investment System Law Act, Law No Regulation on Measurement and Evaluation of Capital Adequacy of Banks Mortgage Law, Official Gazette No Implementation of Basel II standards in Turkey Record profitability of the banking sector in Turkey Law No regarding Financial, and Financial Institutions Establishment of Insurance Information and Monitoring Center - TRAMER, SAGMER, HATMER, HAYMER All local or foreign insurance, reinsurance and pension companies operating in Turkey are members of the Insurance Association of Turkey New Capital Market Law No Establishment of Borsa Istanbul A.Ş. with Law No Implementation of Basel III standards in Turkey Public banks will be able to establish participation banks Source: BRSA, CMB 17

18 TL Billion Turkey s powerful banking sector represents 7% of the financial sector s assets size. Figure 14: Asset Size of Turkey s Financial Sector CAGR 19% CAGR Q3 Share 212 Q % 61% 1. Central Bank 14% 9% Q3 Private Other* 16% 25% 2% 28% Source: BRSA Other includes :ISE capitalization, securities, consumer finance, real estate investments, investment trusts, asset management and venture capital investment trust assets. Turkey s financial sector is among the best in the world with an ever growing asset size, and has a strong equity structure to protect it against shocks that may arise from loans or turbulent market conditions. The financial sector s asset size has been growing. It achieved a double digit CAGR rate of almost 2% between 28 and the third quarter of 212 exceeding TL 2 trillion. Banks, including the Central Bank, represented 7% of total assets, reaching a value of TL 1,497 billion, while insurance represented 2% of total assets with TL 47 billion. 18

19 TL Billion The banking sector s asset size grew to more than TL 1.6 trillion in November 213. Figure 15: Total Asset Size for the Sector in Turkey 12% % 77% 88% 94% 97% 92% 55% 63% 66% 55% Total Assets Source: BRSA, Deloitte Analysis * As of November 213 Total Assets/GDP 1% 8% 6% 4% 2% % Figure 16: Top 1 Turkish Banks by Asset Size, September 213* Iş Bank Ziraat Bank Garanti Bank Akbank YapıKredi Bank Halk Bank Vakıf Bank Finans Bank Denizbank After the crisis in 21, the Turkish banking sector was strengthened and restructured through BRSA regulations and the Turkish banking system became one of the strongest in Europe. Moreover, the declining inflation rate, continuing budgetary discipline and overall optimistic expectations for the industry led to the growth of the banking sector. Currently, the sector is one of the most developed and competitive inturkey. Turkey enjoys strong asset growth with a stunning CAGR 21% increase between 23 and November 213 exceeding TL 1,63 billion in total assets. Moreover, there was a remarkable increase in the total assets to GDP ratio from 55% in 23 to 97% in 212. In regards to asset to GDP ratio, Turkey is below the EU-27 average by 355%, but offers much potential. The top 1 banks in Turkey represent 85% of the total assets in the sector. Iş Bank is the leader in terms of total assets with TL 24 billion, followed by the public bank Ziraat with TL 196 billion and Garanti Bank with TL 19 billion in assets. TEB Source: TBB * Non-consolidated balance sheet TL Billion 19

20 TL Billion TL Million The total asset size of participation banks was more than TL 7 billion in 212. Figure 17: Asset Growth of Participation Banks Figure 18: Lending Growth of Participation Banks ,3% 4,6% 4,% 3,3% 3,5% 2,4% 2,8% 5,4% 5,1% 6% 5% 4% 3% 2% 1% % ,2% 4,9% 4,3% 6,% 5,9% 6,% 6,% 5,6% 4,8% 7% 6% 5% 4% 3% 2% 1% % Source: BRSA * As of November 213 Participation Bank Asset Size Participation Banks' Asset/Total Assets Source: BRSA * As of November 213 Total Loans Participation Banks' Loan/Total Loan The first Islamic banking applications in Turkey started in mid 198 s. Albaraka Türk Finans Kurumu A.Ş. and Faisal Finans Kurumu A.Ş. (known today as Türkiye Finans Katılım Bankası) were the first institutions that followed Islamic banking principles. In 25, these institutions were named participation banks and were allowed to conduct banking activities under the scope of Islamic principles. Participation bank numbers in Turkey increased to four when Asya Katılım Bank and Kuveyt Türk Katılım Bank started their operations. The total asset size of participation banks was more than TL 7 billion in 212, growing at an impressive CAGR of 32% between 25 and 212 and constituting approximately 5% of total banking sector assets. The total assets surpassed TL 9 billion in November 213 constituting more than 5.4% of the total banking sector asset size. The first Sukuk auctions were conducted by the Turkish Treasury in 212. A total of TL 3 billion and TL 1.5 billion worth of Sukuk were issued in these auctions. 2

21 Through the years, Turkey s banking industry has attracted many foreigners resulting in a marked increase of foreign ownership assets Figure 19: Distribution of Assets by Ownership 1% 2% 19% 21% 2% 2% 21% 2% 23% 8% 12% 22% 25% 26% 24% 24% 26% 6% 26% 4% 37% 31% 29% 29% 29% 28% 29% 28% 2% 31% 28% 26% 26% 27% 27% 26% 23% % Open to Public Foreign Shareholders Private Turkish Shareholders State Source: CBRT, BRSA Figure 2: Type of Banks, 212 Deposit Banks Dev. & Inv Banks Participation Banks 4 Total 49 Source: BRSA As of November 213, the total assets of banks were TL 1,636 million. Moreover, in 212, 23% of the banking assets were owned by public banks, 28% by private banks, 26% by foreign banks, while 23% was opened to public. 2% of the shares that are open to public are owned by foreign investors. Adding this amount to the shares already owned by foreigners increases the total share of foreigners to more than 46% in 212. There is room for growth in shares open to the public, since banks use BIST as a mean of reaching to more capital. As of September 213, there were 49 banks in Turkey. There are a total of 32 savings banks, 13 development and investment banks and 4 participation banks. 5 of the deposit banks are state owned banks, namely, Türkiye Cumhuriyeti Ziraat Bankası, Türkiye Halk Bankası, Türkiye Vakıflar Bankası T.A.O, Adabank A.Ş and Birleşik Fon Bankası. These banks accounted for more than 27% of total assets in 212. Additionally, there are 4 state owned development and investment banks, namely, İller Bankası, İMKB, Takasbank, Türkiye İhracat Kredi Bankası A.Ş and Türkiye Kalkınma Bankası A.Ş. which held a total asset share of 2.5% in

22 Thousands TL Billion Turkey was effected slightly by the global economic crisis and loan expansion continued to grow. Figure 21: Sector Loan-Deposit Growth % 76% 85% 98% 13% 111% 12% 1% 8% 6% * 4% 2% % Source: BRSA * As of November 213 Assets Deposits Loans Loan/Deposit Turkey s loan to deposit ratio, which measures the liquidity of banks within a country, has been on the verge of increase since 28. The total ratio reached 13% in 212. Turkey s banking sector has a lot of potential as it is below the average loan to deposit ratio of the EU-28, which was 145% in 212. European banks are more reliant to wholesale funding, whereas Turkish banks have a lot of exposure to deposits, since deposits were the main funding resource for Turkish banks. However, with a powerful capital structure and commitment to international banking standards, Turkish banks are well placed to diversify their funding resources with securitization and syndication loans. Total loans increased by a stunning CAGR of 21% between 28 and 212. The increase in loans were due to decreasing interest rates and increasing capital investments in Turkey. 22

23 USD Billion Deposit and loan amounts are expected to grow further in Turkey Figure 22: Turkey s Sector Growth Projections 2. Figure 23: Loans per Person (USD Thousand), Source: EIU f: forecasts f 214f 215f 216f 217f Loans Deposits Loans and deposits are expected to expand further through 217. Total deposits are expected to grow at CAGR of 14% between 212 and 217, while total loans are expected to grow slightly above total deposits with a CAGR 15% during the same period. Loans per person and deposits per person amounts are behind some European countries but there is great potential for loans and deposits to grow as banks focus on the under banked population in Turkey Figure 24: Deposits per Person (USD Thousand), Source: EIU Note: The population aged between years have been considered for this graph. 23

24 which will positively reflect on the loan to GDP ratio. Figure 25: Loan to GDP Ratio, 212 Figure 26: Loan to GDP Ratio Forecast Scenerios Turkey Poland Czech Republic 54% 75% 76% 1% 8% 6% 4% 54% 7% 66% 6% 58% 61% 64% 57% 58% 6% Germany 11% 2% France 144% % f 214f 215f Base Median Upper UK 17% % 5% 1% 15% 2% Source: CBRT f: forecast Source: EIU Turkey s credit to GDP ratio is relatively smaller than Western European countries and also Eastern European countries. However, as the economy and the banking sector is expected to grow stronger, the CBRT expects the credit to GDP ratio to increase in the short term. The CBRT estimates the loan to GDP ratio to be between 6% and 7% by 215. According to CBRT estimates, credit growth will range between 13% and 17% in 215. Furthermore, the CBRT projects the credit to GDP ratio to be 78% by

25 TL Million TL Million Total loans increased in the double digits surpassing TL 1,2 billion Figure 27: Development of Non-Cash and Cash Loans in Turkey CAGR 23% Figure 28: Total SME Loans Source: BRSA * As of October 213 Cash Loans Non-cash Loans Total Loans Extended to Medium Size Enterprises Total Loans Extended to Micro Enterprises Total Loans Extended to Small Enterprises Source: BRSA *As of October 213 Note: SME is defined by BRSA as an entity that employs less than 25 workers and has TL 4 million or less total net sales or balance sheet size Cash and non-cash loans increased at a CAGR 2% and 24%, respectively, from 26 to October 213. Noncash loans surpassed TL 3, million as of October 213, while cash loans were more than TL 99, million during the same period. SMEs are the backbone of the Turkish economy. Turkish banks started funding SMEs at an increased rate from 26 to October 213. Total SME loan amounts increased at a CAGR of 23% during this period with more than TL 257, in

26 TL Million Banks improved risk management decreased the NPL ratio to less than 3% in 213. Figure 29: Loan Breakdown in Turkey Figure 3: NPL Ratio* in % 27% 23% 21% 24% 25% 24% 26% 3% 25% 2% 15% 1% 5% % 6% 5% 4% 3% 2% 1% % 3.6% 5.2% 3.6% 2.8% 2.7% 2.7% * Total Cash Loans Source: BRSA * As of October 213 SME Loans/ Total Cash Loans Source: BRSA Note: Problem Cash Loans/Total Loans * As of October 213 The total percentage of SME loans to total cash loans in Turkish banks increased to 26% in October 213. Turkish banks have been affected slightly by the global economic crisis of 29, and were able to maintain low levels of NPL ratios. The NPL ratio of Turkish banks decreased to 2.8% as of October 213. The main reason for this decrease was due to the comprehensive risk management framework applied by the banks as well as the increase in the amount of NPLs sold to asset management companies, which increased to 5.7% in 212 from 2% in

27 TL Million New products offered by banks increased the amount of consumer loans. Figure 31: Loan Breakdown by Type of Loan Source: BRSA Vehicle Loans Other Loans Credit Card Risk Loans Mortgage Loans Total consumer loans increased substantially with a CAGR of 3% from 25 to 212 exceeding TL 257, million. The increase in different loan product categories offered by banks supported the increase in consumer loans. Within this scope, the introduction of mortgage loans, which constitute more than 3% of total consumer loans, grew by double digits to more than TL 86, million with a CAGR of 3% from 25 to

28 Turkey is fully committed to Basel III standards Since July 212, Turkey has begun fully implementing Basel II standard of credit risk assessment. The technical requirements for Basel III are also significant. The Basel III accords aim to strengthen the capital base of the banking sector, enhance risk coverage, introduce an overall leverage ratio and global liquidity risk standards and deal with procyclicality. The new total capital ratio is set at 1.5% consisting of 4.5% for common equity and 6% for Tier 1 capital for Basel III. After Basel III, banks will maintain cash-like assets in the short term to adjust their liquidity ratios. Furthermore, Basel III requires that banks report their liquidity metrics on a daily basis. The Dodd-Frank Act, which requires banks to revise or determine the minimum leverage and risk-based capital adequacy ratios in the USA, has set the minimum risk-based capital ratio for well capitalized banks at 1% and 8% for banks that are adequately capitalized. Furthermore, the minimum leverage ratio is 5% and 4%, respectively. The USA has not fully adopted Basel II, but it has signed Basel III. The USA is expected to fully comply with main capital, leverage and liquidity standards of Basel III. However, the timetable for implementation is not certain. The Turkish banking sector has capital adequacy ratios (CAR) above the regulator limits of BRSA, which was 12% in 212. Moreover, Turkey s CAR exceeds that of Basel II, which was 8% and Basel III, which will gradually increase each year and will be set at a total capital ratio of 1.5% by January 219. Figure 32: Total Capital Basel III Basel II Source: Deloitte Analysis 8% 1.5% 25 bps % 1% 2% Basel III Figure 33: Leverage Basel II % 3% 3 bps % 5% 1% 28

29 and has even implemented a higher CAR than those set by Basel III regulation. Figure 34: Capital Adequacy Standard Ratio 65% 59,4% 6,3% 58,7% 55% 48,2% 45% 34,2% 35% 25% 16,6% 19,3% 17,7% 15,5% 17,3% 15% 5% 15,2% 15,3% 15,1% 14,% 13,9% Deposit Participation Dev & Inv Source: BRSA Savings banks in Turkey had a CAR level of 17.3%, while participation banks and development and investment banks had 13.9% and 34.2% capital adequacy ratios, respectively. Despite the global economic crisis and the Eurozone crisis, the high capital adequacy ratio of Turkish banks allowed them to achieve strong financial statements. Hence, Turkish banks were only slightly effected by both crises. Moreover, Turkish banks are already prepared to meet the new capital requirements of Basel III. The Basel Consensus has a place in the EU legal acquis under the scope of financial services. The EU aims to create compliance of the Basel Consensus with the Capital Adequacy IV (CRD-IV) package. The abovementioned package will be put in the practice on 1 January 214 and consists of 213/36/EU Directive and (EU) 575/213 legislation. Turkey is in accordance with the EU regarding the calendar for the implementation of the aforementioned standards. Turkey prepared for Basel III by organizing seminars together with KOSGEB and TBB. Working papers and regular progress reports have been published by committees delineating the implementation of the regulations within Turkey. 29

30 TL Billion The solid capital structure of Turkish banks allowed the sector to enjoy high profits. Figure 35: Sector Profit (Loss) Source: BRSA 14,9 13,4 2,2 22,1 19,8 23, Interest Income Interest Expense Non-Interest Income (Expense) Net Profit (Loss) TL Billion Figure 36: Fees, Commissions and Services Income/Total Income (Percentage) 16% 14% 12% 1% 8% 6% 4% 7% Source: BRSA 1% 14% 14% 13% 13% 12% 12% 12% 12% The strong growth in the Turkish banking sector was also reflected in its profits as it climbed at a staggering CAGR of 1% from 27 to 212 exceeding TL 23 billion. The total interest income, which includes interest received from loans given, interest received from required reserves, interest received from other banks and interest received from money market transactions increased at a CAGR of 9% between 27 and 212 surpassing TL 19 billion. Non-interest income, which includes non-core banking activities such as fees received from deposits and transactions also grew a CAGR 4% during the same period to more than TL 1 billion in 212. The banking sector not only benefits from increased income from interest but also from fees collected from other banking activities. The share from fees, commissions and banking services increased from 7% in 23 to 13% in

31 The sector grew as a result of its strong asset quality and was able to maintain high profits. Figure 37: ROA Country Comparison Figure 38: ROE Country Comparison 4% UK 28% USA 2% France 18% 1% Czech Republic Poland 8% -1% * Russia Turkey -2% * Source: IMF Financial Soundness Indicators *The latest data available on UK, France and Russia s was from December 213, Czech Republic and Turkey was from June 213 and for USA and Poland was from March 213. Note: Numerator was annualized net income before extraordinary items and taxes, from the beginning of the year until the reporting month. Denominator was an average value of total assets (financial and nonfinancial) over the same period. The Turkish banking sector s return on asset (ROA) ratio was stronger than that of banks in major financial centers as well as Eastern European countries. In 213, ROA was 2.42% in Turkey, followed by the USA with 1.63%, which was a lower margin compared to Turkey s ROA. Moreover, return on equity was, again, well above that of the USA and Europe with 2.3% in 213 followed by the Czech Republic with 18% during the same period. 31

32 Turkey s growing banking sector also resulted in the increase in the number of bank branches. Figure 39: Total Number of Bank Branches in Turkey Including Foreign Branches, Source: BRSA * As of March 213 2,9 2,9 19,6 19,2 19, Total 18,5 18,2 18,1 Branch per Employee Figure 4: Development of Cashpoints (ATMs) in Turkey, The total number of branches increased at a CAGR of 9% between 26 and 212. The highest number of branches belongs to commercial banks, followed by participation banks and development banks. Branch expansion was highest in participation banks with CAGR 21%. The per branch employee number decreased as a result of the increasing trend towards centralization of branch operations as well as the increase in automated functions. The development of the banking sector over recent years has affected the usage of cashpoints. As of October 213, there were a total of 4,937 ATM cashpoints in Turkey. Between 28 and 212, the number of ATMs grew at a CAGR of 13%. 1. Source: BKM *: As of October * 32

33 TL Billion TL Million Banks also started focusing on alternative technologies that provide low cost and faster transaction services. Figure 41: Internet Transaction Values Figure 42: Mobile Transaction Values Cash Transfers Investments Cash Transfers Investments Payments Credit Cards Other Credit Cards Payments Other Source: TBB Source: TBB The internet banking transaction value increased CAGR 23% between 28 and 212. Cash transfers had the lions share in total internet banking transactions with 69% and increased impressively by a CAGR of 26% from 28 to 212. Notwithstanding the large share from cash transfers, the fastest growth was observed in payments with a staggering CAGR of 39% during the same period. Growth in mobile banking transaction values also reached an all-time high. The transaction values increased 185% from 211Q4 to 212Q4 surpassing TL 11, million in the fourth quarter of 212. It is noteworthy to mention the development of mobile phone users and the number of 3G phone subscribers. The number is expected to increase in the future as mobile coverage increases. Between 211 and 212, the number of 3G phone subscribers increased by 33% reaching 41.8 million. According to BMI, this figure is expected to reach approximately 69 million people by

34 TL Billion TL Billion Transactions for both credit and debit cards have increased significantly. Figure 43: Development of Credit Cards and Transaction Volume, Source: BKM *As of October * Transaction Volume Total Number of Credit Cards (secondary axis) Figure 44: Development of Debit Cards and Transaction Volume, Million Million Turkey s vibrant and growing economy had a positive impact on the development of credit and debit cards, providing significant potential for banks. The number of credit cards in Turkey increased at a CAGR of 6% between 28 and 212. And, a staggering CAGR of 18% was realized during this time in transaction volume. In 212, the transaction volume for credit cards reached TL 361 billion, which accounts for a 94% increase compared to the transaction volume in 28. The sharp development was also observed for debit cards. In 212, transaction volume reached TL 311 billion and the CAGR since 28 was at 19%. Source: BKM *As of October * Transaction Volume Total Number of Debit Cards (secondary axis) 34

35 A Success Story: Odea Bank "We hope to become one of the biggest banks in Turkey by 217. Since our entrance into the Turkish market in 212, the Turkish economy remained stable and showed significant growth despite the global economic environment. The reforms made by the government and the Regulation and Supervision Agency (BRSA) enhanced our performance." Hüseyin Özkaya, Director General of Odea Bank, July 213 Odea Bank started its operations in Turkey in October 212. Odea Bank is the first bank to receive a banking license in Turkey in the last 15 years. In June 213, the bank s total assets increased by 42% compared to its assets in March 213, an increase of more than TL 11 billion. During the same period, the bank s loans rose to TL 6.4 billion with a 68% increase and its deposits to TL 8.3 billion with a 28% increase in only a three month period. In September 213, Odea Bank s total assets increased to TL 13.4 billion and the bank was ranked 16 th among 45 banks (excluding participation banks) in Turkey. 91.4% of the bank s shares are owned by Bank Audi, a Lebanese group, which has banking operations in 11 countries in the region. Source: Odea Bank 35

36 Financial Services Sector: Selected Players Iş bank Garanti Bank Akbank Ziraat Bank Iş Bank was established in 1924 and is Turkey s largest bank. The bank s shares are held by the Işbank Fund, the Republican People s Party and 32% of the shares were open to public. Iş Bank s total assets were TL 24 billion for the third quarter of 213. Iş Bank s products and services include retail, corporate banking and capital market operations and other financial services such as private pensions, insurance, asset management, leasing and factoring. Founded in 1946, Garanti is Turkey s second largest private bank with total assets worth TL 189 billion as of September 213. Garanti is jointly controlled by Doğuş Holding and the Spanish bank BBVA. Garanti provides integrated financial services in every segment of banking and has subsidiaries for pension, life insurance, factoring, leasing, brokerage and asset management on both national and international levels. Established in 1948 in Adana for cotton growers, Akbank is owned by Sabancı Holding and other shareholders including a 9% stake that belongs to Citibank Overseas Investment. Akbank provides consumer, commercial, SME, corporate and private banking services as well as foreign exchange, foreign trade financing and treasury transactions. The bank s total assets reached approximately TL 18 billion as of September 213. Homeland Funds, the origin of Ziraat Bank, was founded in 1863 to support farmers and agricultural development. The Republic of Turkey Prime Ministry Under secretariat of the Treasury is the sole owner of Ziraat Bank. Ziraat Bank has the most extensive network among Turkish banks and its total asset size is one of the largest in the country. Ziraat Bank s total assets reached TL 195 billion as of September 213. Source: ISO 5 36

37 Participation Banks: Selected Players Türkiye Finans Türkiye Finans was established in 1991 following the merger of the companies Family Finans and Anadolu Finans. It operates in credit intermediation and related activities. Türkiye Finans had assets worth TL 23.3 billion in the third quarter of 213. The bank has retail, commercial and SME banking services for both national and international customers. Albaraka Established in 1984 by Albaraka Group, Islamic Development Bank and other investors; it is a pioneer in participation banking in Turkey. Albaraka had TL 11.5 billion of total assets as of September 213. Albaraka Türk offers its customers participation accounts, personal and corporate finance, leasing and project-based profit and loss sharing services. Kuveyt Türk Kuveyt Türk started its activities in It is owned by Kuwait Finance House, the Public Institution for Social Security of Kuwait, the Turkish Directorate General of Foundations and the Islamic Development Bank. Kuveyt Türk s total assets were TL 21 billion in the second quarter of 213. The bank s main products are current and participation accounts, investment and saving accounts and leasing. Source: ISO 5 37

38 The premiums to GDP ratio in Turkey is low, demonstrating potential for growth in the future years. Figure 45: Total Premiums as a Percentage of GDP, Country Comparison, 211* Turkey Romania 1,4% 1,5% Figure 46: Total Premium Growth as a Percentage of GDP in Turkey 1,5% 1,29% 1,28% 1,33% 1,4% Russia 2,4% 1,% China 3,% Brazil 3,2%,5% Czech Republic 3,9% India Spain 4,1% 5,4%,% Germany Italy 6,8% 7,% Source: Swiss Re, Monitoring Center * Turkey s data is from the year 212. Turkey s total premiums as a percentage of GDP is 1.4%. Moreover, the percentage of private pension funds to total GDP in Turkey was also 1.4% in 212. The insurance market is still underpenetrated and unsaturated compared to peer countries and will provide significant potential as new insurers set up shop and acquire a share of the relatively untapped Turkish market. Turkey has seen strong economic growth fueled in part by a young and dynamic population that is increasingly in need of financial products and services. 38

39 TL Billion TL Billion Turkey s insurance sector asset size grew at a CAGR of 17% between 28 and 212. There are a total of 59 insurance and retirement pension companies in Turkey of which 35 are nonlife insurance companies, 6 life insurance companies, 17 retirement/pension companies and 1 reassurance company as of 212. Moreover, 43 of these companies have foreign partnerships. Figure 47: Asset Size of Turkey s Insurance Sector Source: TSRB Non-Life Insurance Companies Life Companies Total asset size increased at a CAGR of 17% between 28 and 212 in the non-life and life insurance sector surpassing TL 5 billion in 212. The asset size of non-life insurance increased a stunning CAGR 23%, while the asset size of life insurance and pension companies also reported a significant increase of a CAGR of 1% during the same period. Figure 48: Growth of Premiums in Turkey Source: TSRB CAGR 14% Life CAGR 17% Non-Life Life insurance premiums grew at CAGR of 14% between 29 and 212 to more than TL 2, million, while non-life insurance grew a CAGR 17% during the same period exceeding TL 17, million. 39

40 The size of premiums grew in every business line of non-life insurance between 29 and 212. Figure 49: Breakdown of Premiums in 212 Share of Total Premium by Type 212 Land Vehicles Liability* Land Vehicles General Losses 29% 23% 9% Premium Written (TL Million) CAGR (29-212) 21% 19% 23% Premiums grew in every business line in the non-life insurance sector between 29 and 212. The areas of general losses, land vehicles and land vehicles liability grew considerably registering CAGRs of 22%, 18% and 19%, respectively. Health 11% % Fire and Forces of Nature 13% % Life 14% % Other Non- Life** % % Source: TSRB *Land vehicles liability insurance is compulsory. **Other non-life insurance includes accident, railway rolling stock, aircraft, maritime, aircraft liability, general liability, credit, suretyship, financial losses, legal protection and assistance. 4

41 Banks are increasingly considering insurance products for cross-selling opportunities. Figure 5: Premium Distribution by Sales Channels 1% 5% % Source: TSRB *As of October 213 9% 1% 9% 1% 1% 1% 17% 19% 22% 23% 23% 24% 65% 62% 6% 59% 6% 59% 8% 1% 9% 8% 7% 7% * Direct Agency Bancassurance Broker Insurance sales in Turkey are conducted via direct sales, agencies, bancassurance and brokers. Total insurance sales reached TL 2 billion in October % of these sales were non-life insurance sales with more than TL 16.7 billion in sales, while the rest were life insurance sales with a total worth of more than TL 2.8 billion. Agencies had the biggest share in total sales constituting 59% of total sales with more than TL 11 billion. The significant amount of sales is due to the strong presence of agencies in Turkey. There were more than 16, actively operating agencies as of 212. Agency sales are followed by bancassurance sales. Bancassurance grew from 17% to 24% from 28 to October 213, exceeding TL 4.6 billion in total sales. 41

42 Axa Sigorta is the market leader in non-life insurance, the life insurance market is dominated by Ziraat Hayat ve Emeklilik. Figure 51: Non-Life Insurance Market Share, Written Premiums 14% 1% 6% 2% Source: TSRB 3% 25% 2% 15% 1% 5% % Source: TSRB * YapıKredi Sigorta and YapıKredi Emeklilik s majority shares were bought by Allianz. Axa Sigorta Anadolu Sigorta Ak Sigorta Allianz Sigorta YapıKredi Sigorta* Figure 52: Life Insurance Market Share, Written Premiums Ziraat Hayat ve Emeklilik Anadolu Hayat Emeklilik Garanti Emeklilik YapıKredi Emeklilik* Halk Hayat ve Emeklilik Axa Sigorta was the leader in non-life insurance market in terms of written premiums in 212 with a share of 14%, followed by Anadolu Sigorta and Ak Sigorta with 13% and 8%, respectively. The large scale non-life insurance companies (the top 5 companies) represent 5% of total market as of December 212. Ziraat Hayat ve Emeklilik started its operations in the life insurance business in 29. As of 21, Ziraat Hayat ve Emeklilik became the market leader in terms of life insurance premiums and continued to increase its market share thanks to its large retail customer base and branch network. Ziraat Hayat ve Emeklilik had a share of 22% in 212, followed by Anadolu Hayat ve Emeklilik with 14% and Garanti Emeklilik with 1%. 42

43 The government will fund 25% of a participant s monthly contribution in order to promote savings. In October 21, private pension plans were established in Turkey after the enactment of Law No Private Plans Savings and Investment System. The objective of the new pension regulation can be described as follows: Increase the savings behavior of the population with the new tax and financial incentives Involve and integrate the non-working population into the system Decrease the lapse issue within the system Government Grants and Advantages The government will contribute 25% of the monthly participant contribution into a separate pension contract. The government s annual contribution will be up to 25% of the gross annual minimum wage. The participant is eligible for the pension fund with the following terms: -3 years of participation (% of the fund) 3-6 years of participation (15% of the fund) 6-1 years of participation (35% of the fund) 1 years of participation and before the age of 56 (6% of the fund) 1 years of participation and after the age of 56 (retirement), death and disability (1% of the fund) Source: EGM Major Conditions for the Individual Plans A minimum 1 years in the system A minimum retirement age of 56 No more requirement of minimum 1 years of contribution payment Participants can switch funds 6 times and pension plans 4 times a year Once the participant retires, he/she can claim the amount via three different means (i.e., total payment of asset under management, installed repayment, and annuity contract) A contract is signed when the first contribution amount is transferred into the company s account. The participant has the right to withdraw the money in the fund up to 6 days after the contact has been signed. There is gradual tax on net return instead of accumulated value. Pricing is based on the riskiness of the pension fund. 43

44 In 212, Turkey s pension funds relative to the size of the economy was 3.8% Figure 53: Funds Relative to the Size of the Economy (as Percentage of GDP), 212 Figure 54: Funds Relative to the Size of the Economy (as Percentage of GDP) in Turkey France,3% 4,% 3.8% Hungary Turkey 3,3% 3,8% 3,% 2.3% 2.2% Germany 6,3% 2,% Czech Republic 7,1% Spain 8,4% 1,% Poland USA UK 17,2% 74,5% 95,7%,% Netherlands 16,% Source: OECD Source: OECD % 5% 1% 15% 2% funds in the world s developed and developing countries play a crucial role in the economy since they provide long term funds to the market. In 212, the ratio of pension funds to GDP in Turkey was 3.8%, an increase from 2.3% in 21. The figure is still significantly lower than major OECD countries. However, there is great potential for the market because of the government s promotion of savings plans to the general population. 44

45 Gross national savings make up 12.3% of Turkey s GDP and is expected to stay at the range of 13% in the future. Figure 55: Gross National Savings Percentage of GDP, 212 Greece UK Turkey USA Poland Brazil Spain France Germany Russia India 7,1% 11,4% 12,3% 13,1% 16,3% 17,6% 17,6% 18,5% 23,4% 28,7% 32,2% Source: IMF Note: Gross national savings is expressed by the IMF as gross disposable income less final consumption expenditure after taking into account an adjustment for pension funds. For many countries, the estimates of national saving are built up from national accounts data on gross domestic investment and from balance of payments-based data on net foreign investment Figure 56: Turkey s Gross National Savings Percentage of GDP Growth 14,5% 14,% 13,5% 13,% 12,5% 12,% 11,5% 11,% Source: IMF f: forecast 13,1% 13,9% 12,3% 13,4% 13,6% 13,4% 13,1% 12,9% f 214f 215f 216f 217f Gross national savings as a percentage of GDP was 12.3% in 212, which is relatively lower than other countries. The Turkish government is trying to increase savings by enhancing the private pension system and generally raising awareness and promoting household savings. Thus, Turkey s gross national savings is expected to increase slightly in the short term to approximately 13%. 45

46 TL Billion Million Both AUM and contribution amounts had rapid growth since 26 with a CAGR of 39% and 36%, respectively. Figure 57: Funds (AUM) and Contribution Growth Source: EGM AUM Accumulated Total Contribution Figure 58: Number of Participants/Contracts in Funds ,6 1,8 1,1 1,11 1,11 1,11 1, Number of Contracts Source: EGM Number of Participants Contract per Participant (secondary axis) 1,14 1,12 1,1 1,8 1,6 1,4 1,2 In 212, the number of participants in Turkey s pension funds increased at a CAGR of 19% between 26 and 212, while total contributions increased at a CAGR of 36% during the same period. As of 13 December 213, total contributions totaled TL 25,369 million, which is a staggering 57% increase from the previous year. This increase was due to the new pension regulation, in which the government funds 25% of the monthly contribution. According to the Monitoring Center s Private Development Report 212, the total number of contracts increased to 3.5 million with 3.1 million participants. Moreover, the Monitoring Center also expects a total of 4.3 million participants in the pension system with a total of TL 26.9 billion in assets under management by the end of 213. As of 29 November 213, 94% of the assets under management projection was reached. 46

47 The performance of Turkey s pension fund was better than most OECD countries. Figure 59: Fund Nominal and Real Average Annual Returns in Selected OECD Countries, Figure 6: Funds' Net Income for Selected OECD Countries, 212 (As a Percentage of Total Assets) Poland Real Nominal Turkey 22,5% UK Hungary 15,4% Italy Greece 14,7% Canada Germany Hungary Turkey -5% % 5% 1% 15% Source: OECD Note: Fund Nominal and Real 5-Year (Geometric Average) Poland Spain Germany Czech Republic Source: OECD 6,8% 5,5% 5,2% 5,% % 5% 1% 15% 2% 25% Turkey withstood the global economic crisis with the best results in pension fund returns, both in nominal terms and in real terms with returns of 11.6% and 8.5%, respectively. In 212, net income flow for pension funds in Turkey exceeded that of most OECD countries amounting to 22.5% of total investment. 47

48 The top 4 pension funds constituted 75% of the total market. Figure 61: Funds (AUM) Share, 213* Figure 62: Market Share in terms of Number of Participants, 212 Allianz Yaşam ve Emeklilik** 2% Other; 25% 13% 15% 18% Allianz Yaşam ve Emeklilik** AvivaSA Emeklilik ve Hayat Anadolu Hayat Emeklilik AvivaSA; 19% Garanti Emeklilik; 16% Anadolu Hayat ve Emeklilik; 2% 19% 36% Garanti Emeklilik ve Hayat Other Source: EGM *As of 13 December 213 **Allianz bought 8% of YapıKredi Emeklilik as of March 213 and includes Allianz Yaşam ve Emeklilik. 212 Allianz Yaşam ve Emeklilik is the market leader in the pension fund sector in terms of assets under management. However, it is not the market leader in terms of number of participants. Garanti Emeklilik ve Hayat has the highest share in terms of number of participants with 19% as of 13 December

49 Non-Life Insurance Sector: Selected Players AXA Sigorta Allianz Sigorta Anadolu Sigorta Güneş Sigorta French insurance giant Axa entered the Turkish insurance market in 1995 under the name Axa Oyak Life Insurance. In 28, AXA bought Oyak s shares. 92% of the shares of the company belong to Axa Holding A.Ş., 7% to Ziraat Bank and the rest to smaller stakeholders. In 212, Axa Sigorta s total non-life premium amounted to more than TL 2.3 billion with a non-life technical income of more than TL 1.7 billion. In 1988, the German company Allianz along with Tokio Marine Insurance from Japan bought shares of Şark Sigorta operating under Koç Holding. Since 28, Allianz owns 87% of the life insurance shares of the company. The other 11% is held by Tokio Marine and 3% by other stakeholders. TL 1.4 billion was made by Allianz from non-life insurance premiums in 212 and a total nonlife technical income of more than TL 1 billion. Anadolu Sigorta was founded in 1925 by İş Bank. 57% of the company is owned by Milli Reasürans T.A.Ş. and the rest is publicly listed. In 212, Anadolu Sigorta s non-life premium equaled TL 2.2 billion with a nonlife technical income of TL 1.8 billion. Güneş Sigorta was established in Vakıf Emeklilik owns 34% of Güneş Sigorta and Groupama, one of the leading insurance companies in France, owns 3%. The rest of the shares are owned by the Retirement Foundation of Vakıfbank s personnel and the public. It had more than TL 922 million non-life premiums in 212. Güneş Sigorta s nonlife technical income exceeded TL 471 million

50 Life Insurance Sector: Selected Players ING HAYAT ve EMEKLILIK Oyak Emeklilik A.Ş., was founded in 23. Dutch financial services group ING acquired the company in 27. Oyak Emeklilik s name changed to ING Emeklilik in 29. ING Emeklilik s total assets under management in 212 reached TL 1.9 billion. GARANTI ve HAYAT EMEKLILIK Garanti Emeklilik ve Hayat began its operations in % of Garanti Hayat ve Emeklilik s shares are owned by Garanti Bank, and the remaining are owned by Dutch insurance company Achmea. Garanti Emeklilik ve Hayat s total assets under management was more than TL 3.3 billion in 212. ANADOLU HAYAT ve EMEKLILIK Anadolu Hayat Emeklilik was founded in 199 and is Turkey s only publicly listed insurance company. 62% of the company s shares are owned by Iş Bank, 2% by Anadolu Sigorta, 17% is open to public and less than 1% is held by Milli Reasürans T.A.Ş. In 212, the company s asset under management totaled TL 4.2 billion. AvivaSA Emeklilik ve Hayat AvivaSA was established in 27 with approximately 5% percent of its shares divided between Sabancı Holding and Aviva. Aviva is a global insurance company headquartered in Britain with over 5 million customers. AvivaSA had TL 4 billion asset under management in

51 A Success Story: YapıKredi Sigorta "Turkey is one of the fastest growing insurance markets worldwide. The transaction is a unique opportunity to move into a leading position in one of Europe s key growth markets, which is also an important bridge between the Middle East and Central Asia." Oliver Baete, Allianz Board Member, March 213 Established under the name Halk Sigorta in 1943, the company changed its name to YapıKredi Sigorta in 2. Since 25, it operates within Koç Financial Services. Allianz acquired 94% of YapıKredi Sigorta s shares for USD 88 million and 8% of YapıKredi Bank s pension business, YapıKredi Emeklilik, in March 213. This acquisition, undertaken with the approval of Turkey s Competition Authority, means an increase in market share for both companies. Together, they have more than TL 3 billion in non-life insurance premiums and approximately TL 5 billion for pension funds. Lately, Allianz along with other European insurance companies have been investing in emerging countries. YapıKredi Sigorta s technical income from life insurance was TL 24 million and technical income from non-life insurance was TL 887 million in 212. Source: Bloomberg 51

52 Financial leasing, factoring and consumer financing now fall under one law. Laws and regulations regarding financial leasing, factoring and financing institutions are defined clearly in Law No regarding Financial, and Financial Institutions published in December 212. With the enactment of the new law, the parameters of the sector are now aligned with international standards, which will increase the attractiveness of the Turkish market for foreign investors. It is also important to note that the factoring sector is regulated by the Regulatory Supervision Agency (BRSA). There are several major points in the law that are crucial for investors, and they can be summarized as follows: Conditions to Establish a Company The company should be established as joint stock company and the number of founding partners should not be less than five people. The trade name of the company must have one of the following terms in it: financial leasing company, factoring company, or financing company Its paid-up capital to establish a company should not be less than TL 2 million. The business plan for the intended field of activity, the projections regarding the financial structure of the institution, the budgetary plan for the first three years and an activity program showing the establishment of the corporate structure must be submitted. Opening of Branches In order to open domestic and overseas branches, companies must acquire permission from the Regulation and Supervision Board. Principles and procedures relating to the opening of branches are determined by the Board. Internal System, Accounting, Reporting and Independent Audit Companies are obliged to send financial statements and statistical information, the form and scope of which will be determined by the Regulation and Supervision Agency Independent audit of the company shall be made within the framework of Accounting and Auditing Standards Board. 52

53 Romania Czech Rep. Turkey Netherlands Poland UK Russia France Germany USD Billion TL Billion Financial leasing assets grew at a CAGR of 8% between 27 and 212. Figure 63: Financial Transaction Volume, % 1% 5% 5% 12% 2% 28% 11% 15% 3% 25% 2% 15% 1% 5% % Figure 64: Financial Asset Size Growth in Turkey ,21%,72%,36%,44%,68%,65% 1,6% 1,2%,8%,4% ,% Source: FİDER Transaction Volume Penetration Source: FİDER Asset Size Volume/GDP Turkey s leasing transaction volume reached USD 4.3 billion in 211, which is a 52% increase from the previous year. Despite the huge year-over-year growth Turkey s leasing sector is still under penetrated but has a lot of upside potential as leasing asset size grows. The total asset size grew at an impressive CAGR of 8% from 27 to 212 to more than TL 2.2 billion in 212. Furthermore, participation banks in Turkey can also conduct financial leasing operations on tangible items. 53

54 TL Million Construction equipment had the highest share in financial leasing with 33% in 212. Figure 65: Financial Receivables in Turkey 2. 8% 5% 16. 4% 7% 5% Receivables NPL Source: BRSA 9% 8% 7% 6% 5% 4% 3% 2% 1% % Figure 66: Financial Investment Amount by Product Type, 212 4% 3% 6% 7% 2% 3% 3% 9% Source: FİDER 2% 2% 1% 25% 33% Construction Equipment Machinery and Equipment Textile Equipment Real Estate Air Transportation Medical Equipment Electronics and Optic Equipments Office Equipment Land Transportation Maritime Transportation Press and Media Equipment Tourism Equipment The Turkish government promotes financial leasing operations. As of December 211, it reduced the VAT applied for leasing operations to 1% for leasers that have investment incentive documents. The items that can be leased include steam boilers, steam turbines, concrete pumps and centrifuges among other items. In light of this support, financial leasing receivables increased from 28 to 212. Financial leasing receivables between 28 and 212 increased at CAGR of 3.2% exceeding TL 16 billion in 212. of construction equipment had the highest share in terms of investment amount with 33%, followed by machinery and other equipment with 25%. Other 54

55 Sector Operational Figures Table 4: Sector Operational Figures Number of Branches Number of Agencies Number of Personnel Number of Clients Number of Contracts ,427 1,28 1,286 1,217 1,258 73,577 6,1 5,428 43,294 45,89 121,627 98,596 82,615 76,258 72,92 Source: BRSA The leasing sector in Turkey makes up a significant part of the non-banking sector with 72,92 contracts in 212. In 212, the number of skilled personnel in the leasing sector was 1,258 and the total number of clients was 45,89. With 75 different agencies all across Turkey, leasing companies provide necessary services to their clients. 55

56 TL Million The leasing sector is a promising one with 2% growth in revenues in 212 compared to 211. Figure 67: Revenues and Net Profits/Loss, TL Million Revenues in the leasing sector in Turkey have been increasing since 29. As of 212, leasing revenues were TL 1,356 million, which corresponds to a 2% increase compared to the previous year and 68% increase compared to 29. However, net profit decreased from TL 521 million to TL 434 million in 212. Revenues Net Profit/Loss Source: BRSA 56

57 Sector: Selected Players BNP PARIBAS Solutions SIEMENS AG GARANTI YATIRIM BNP Paribas Solutions, a global leader in financial services, signed a cooperation agreement with TEB in 25. In 29, BNP acquired Fortis. TEB and Fortis then merged under the umbrella of BNP Paribas Finansal Kiralama A.Ş. in 211. BNP leases medical and data processing equipment, energy facilities, transport vehicles, construction machinery and real estate. Its total assets in 212 equaled TL 1.3 million. Siemens Finansal Kiralama A.Ş. was established in 1997 by Siemens AG, which has offices in more than 2 countries. Siemens leases printing machines, textile, tourism and office equipment, transport vehicles, computers and software, cranes and construction machinery, power stations and communication and security systems. Siemens s total assets amounted to TL 546,357 million in 212. Garanti was founded in 199. It uses Garanti Bank branches as a distribution channel. In 27, Garanti founded Garanti Fleet. Garanti aims to become the first Turkish leasing company to open offices overseas. Business premises, real estate, medical and office equipment, construction, textile and manufacturing machinery can be leased from Garanti. Garanti s total assets in 212 amounted to TL 3 million. Yatırım was founded in It joined TETAŞ Group in 24. The company offers its clients investment services in different sizes and terms and consultancy to promote leasing activities in Turkey. Yatırım provides financing for capital such as medical and construction equipment, press and packaging, appliances for metals and textile sectors. The company s total assets were TL million in

58 TL Billion The assets in the factoring sector in Turkey have been increasing significantly, reaching TL 18.2 billion in 212. Figure 68: Total Asset Development of the Sector in Turkey, Source: BRSA 7,8 1,5 CAGR 24% 14,5 15,7 18, Table 5: Sector Selected Financial Indicators, Source: BRSA TL Billion In Turkey, factoring was introduced in 1988 to support manufacturers export activities. One of the major advantages of factoring is its ability to provide companies with immediate cash flow for their accounts receivable. The total assets in factoring sector reached TL 18.1 billion in 212, which accounts for a 16% increase compared to the previous year. It is also observed that between 28 and 212 total assets grew at a staggering CAGR of 24%. Receivables in the sector grew by 94% compared to 29 and non-performing loans decreased from 9% in 29 to 5% in 212. Receivables NPLs (%) 9% 6% 4% 5% Reserves Banks Credit SE Equity Source: BRSA 58

59 TL Million revenues increased by 28% in 212 demonstrating a vast potential in the sector. Figure 69: Revenues and Net Profit, TL Million The revenue and net profit of the factoring sector have been increasing since 29. Compared to 29, factoring revenues increased 59% reaching TL 2,614 million in 212. The slight decline in 29 can be ascribed to the global financial crisis, which affected many other sectors. However, the factoring sectoring in Turkey recovered promptly and has been increasing ever since. The net profits in factoring reached TL 597 million in 212, an increase of 18% compared to the previous year. Revenues Net Profit Source: BRSA 59

60 The total numbers of clients and contracts have been increasing in the factoring sector demonstrating its high service potential. Table 6: Sector Operational Figures Number of Branches Number of Agencies Number of Personnel Number of Clients Number of Contracts ,9 2,959 3,557 3,819 4,186 5,228 4,997 57,94 66,468 67,54 146,558 65,952 89,516 91,29 84,769 Source: BRSA The table above provides some of the most crucial operational figures of the factoring sector. The sector continued its growth between 28 and 212 in almost every operational activity. For example, the number of clients in the factoring sector increased by 33% in 212 compared to 28 reaching 67,54. This also resulted in the increase of highly skilled personnel in this field reaching a total of 4,186, which is a 4% increase compared to 28. 6

61 Sector: Selected Players Garanti Garanti was established in 199 in order to provide factoring services to industrial and commercial companies. Garanti open edits shares to the public in 1993 and is traded on Borsa Istanbul. The company currently has 21 branches in 14 cities of Turkey. The total assets of the company were TL 1,955 million in 212. YapıKredi YapıKredi was established in The company provides services to commercial companies and more than 9% of its customer base is small and medium size enterprises. YapıKredi is an active member of both the Association and Factors Chain International (FCI). In 212, the total assets of YapıKredi were TL 1,791 million. TEB TEB was established in Turkey in The company provides factoring services domestically and internationally. Since 1998, TEB is a member of the Factors Chain International. The total assets of TEB in 212 amounted to TL million. Source: Official Websites 61

62 TL Billion The assets of the consumer financing sector in Turkey have been increasing since 21. Figure 7: Sector Asset Development, Source: BRSA 4,7 4,5-4% 36% 6,1 46% 8,9 11,6 3% Total Assets % Growth Table 7: Sector Selected Financial Indicators, TL Billion Receivables NPLs (%) 1% 6% 2% 3% Reserves Banks Credit SE Equity % 4% 3% 2% 1% % -1% One of the main advantages of consumer financing companies is their ability to provide fast and efficient loans for their customers. Most consumer financing companies in Turkey are focused on specific financing fields such as car loans or mortgages, which allow them to serve their customers faster and with a variety of choices targeted to them. Also, it is important to note that with the amendment of Law No regarding ", and Company Law," new benefits were introduced in the financing sector. According to the law, financing companies now have the title of credit institutions and are now allowed to provide cash loan up to 5% of their total assets. As of 212, total assets for the consumer financing sector was TL 11.6 billion increasing by 3% compared to the previous year. Regarding non-performing loans (NPLs), the percentage has decreased significantly since 29. NPLs in 212 were 3%, whereas it was as high as 1% in 29. Source: BRSA 62

63 Over the years, the operational development of the consumer financing sector in Turkey has been impressive. Table 8: Sector Operational Development Data Number of Branches Number of Personnel Number of Clients , , ,95 328, ,69 Source: BRSA Figure 71: Number of Contracts in Turkey Source: BRSA CAGR 19% The consumer financing sector has been developing in Turkey since 29. As of 212, the total number of contracts in the sector reached 411,619, which accounts for an 18% increase compared to the previous year and 7% increase compared to 29. finance companies that promote vehicle loans usually work with car dealerships that are a part of the same parent company. As the sector developed over the years, the number of highly skilled employees also increased, thereby providing professional services in the financing sector. 63

64 Companies: Major Players Name Logo Web Page What They Do Koçfinans Koçfinans offers its customers car, mortgage and education loans. Since its founding in 1995, the company has provided credit for more than 3 million customers, approximately USD 3.4 billion worth of loans. Koç Fiat Kredi MAN Financial Services Koç Fiat Kredi was founded in 2 by Koç Holding and Fiat and was later bought by Tofaş Türk Otomobil Fabrikaları A.Ş. It is a captive finance company serving 6 brands. In 212, the company made 45,453 loans worth of TL 1,8 million. Since it started its operations in 25, MAN offers consumer credits for MAN vehicles and trucks. ORFIN Mercedes Benz Finansman Orfin has been operating since 211 and has a financial portfolio of products worth EUR 22.5 billion worldwide. In Turkey, the company has TL 93 million and offers its services for the sales of the Renault and Dacia brands. Mercedes Benz Finansman was founded in 28 to lead the brand s operations in Turkey. As of 212, it had total assets worth TL 19,55 million. 64

65 Companies: Major Players Name Logo Web Page What They Do ALJ Finance ALJ Finance was founded in 211 by Saudi Arabian ALJ car distributors. The company s total assets reached TL million in 212. DD Mortgage Founded in 26 by Doğan Holding and Deutsche Bank, DD Mortgage had a credit portfolio of TL 349 million in 212. VDF Şeker Finans PSA Finance Türk Eximbank Established in 1999 by Volkswagen and Doğuş Finans, VDF offers 5 types of credit covering 15 brands for its customers across Turkey. Şeker Finans started its operations in 28 under the name Istanbul Finans and then merged with Şekerbank in 21. It offers mortgage and renovation work loans. PSA Finance was created in 21. It is a subsidiary of the French firm, PSA Financial Holding. Its total capital is TL 2 billion. In 212, it provided USD 15.1 billion loans, USD 6.9 billion insurance. Its total financial support accounted for 14.5% of Turkey s exports. As of 212, it has total assets worth of USD 8.7 billion. 65

66 Companies: Major Players Name Logo Web Page What They Do TEB Cetelem Turkish Agricultural Credit Cooperative TEB Cetelem was the product of the partnership between TEB Financial Investments A.Ş and BNP Paribas Personal Finance, which has been active in Turkey since Since 1863 the cooperative has given general purpose loans for agricultural producers including loans for pesticides, fertilizers, animal husbandry, oil, and irrigation up to TL 5,, which is to be repaid in 1-4 years with interest rates varying between 8 or 1%. 66

67 C. The Detailed Outlook on Capital Markets i. Borsa Istanbul ii. Brokerage Firms 67

68 USD Billion Borsa Istanbul has liquidity of 112%, which exceeds some major global exchanges. Figure 72: Market Value of Exchanges, Source: TSPAKB 97% 95% 214% 32% 78% 65% BIST is the Turkish stock exchange located in Istanbul. There are more than 4 different tradable shares and 395 companies that are quoted on Borsa Istanbul. The exchange aims to have 1, companies listed from a minimum of 1 different countries by 223. Thus strengthening its position and ensuring its competitiveness on the global arena. BIST had a market value of more than USD 31 billion and a stock volume of more than USD 34 billion in 212. Even though BIST has a lower market value and stock value from other major exchanges around the world, it has significant room for growth. BIST s liquidity was higher than most exchanges in 212 with a 112% market volume to market value ratio. 7% 56% 86% 45% 112% NYSE Nasdaq OMX LSE NYSE Euronext Deutsche Börse Borsa Istanbul Market Value Market Value/GDP (secondary axis) Stock Volume 4% Market Volume/Market Value (secondary axis) 24% 18% 12% 6% % 68

69 BIST-1 yielded a 61% return in 212, surpassing both emerging market and developing market stock exchanges. Figure 73: Index Return Percentages, 212** Bombay 27% India* 28% Mexico 29% Athens 36% Borsa Istanbul s BIST-1 Index had the highest index return percentage with 61% in 212 Warsaw Philippines Egypt 4% 42% 43% The top 1 highest return yielding exchanges were from emerging markets. Borsa Istanbul s BIST-1 Index yielded 61% in returns in terms of dollars and 52% in terms of Turkish lira in 212. Borsa Istanbul 61% Source: TSPAKB *National Stock Exchange Of India **Return percentage is calculated in USD terms. % 5% 1% 69

70 Revenue from the registration fees for securities rose to 17% of total revenue in 212 from 9% in 21. Figure 74: Revenue of Borsa Istanbul 1% 5% % Source: Borsa Istanbul Annual Report 212 Other Information technologies sales income Terminal fees License income Data vending income Securities listing fees Securities registration fees Securities exchange fees Borsa Istanbul s main revenue is its securities exchange fee. Between 21 and 212 more than half of the stock exchange s revenue was generated by security exchange fees, followed by registration and listing fees. Major exchanges earn considerable revenue through data vending income, licensing income, terminal fees and information technologies. However, data vending income, licensing income, terminal fees and information technologies account for only 16% of Borsa Istanbul s revenue in 212. Borsa Istanbul can earn higher revenue from these items as it develops a broader range of products, optimizes pricing strategies and restructures itself with new partnerships, for example, its partnership with Nasdaq OMX. Thus, the exchange has huge potential going forward. As Nasdaq OMX s partner, Borsa Istanbul will be able to sell IT infrastructure and services to other exchanges. This partnership will further increase revenues for Borsa Istanbul. Other fees constitute a total of less than 1% and include the public disclosure platform, share market default commission and overdue interest incomes as well as broker training and annual membership fees. 7

71 Case Study: BIST Figure 75: Growth of BIST-3 and BIST BIST Source: BIST Note: Data is from January 23 to December 213. With the new Capital Markets Law coming into effect in 212, the IMKB, the Istanbul Gold Exchange, TURKDEX merged under BIST. Because of this, BIST trades various assets such as equities, contracts written on energy and commodities, debt instruments, derivative products and precious metals and gems. A strategic partnership pre-agreement was signed with NASDAQ OMX on July 213. The agreement will establish Borsa Istanbul as a part of the global exchanges network. The settlement, risk management and surveillance systems of Borsa Istanbul will be synchronized with the world s prominent exchanges. The Borsa Istanbul staff will receive training. It will enable the trading of spot market and various financial instruments denominated in diverse currencies, including derivatives and contracts on commodities and energy. BIST 1 29 Global Economic Crisis In 212, the economy grew at a slower pace than the previous year, but its performance was stable. The IMKB equity market traded 742 securities with a total traded value of TL 622 billion in 212. The market capitalization of IMKB traded companies equaled TL 55.1 billion. The annual total traded value of the National Market was TL billion in 212, making up the 88% of the total traded value of the equity market. There are many indices on which investors can trade on BIST such as the sectorial indices, BIST- 1, BIST-3, TURKDEX, and BIST Dividend Index. Institutions using and/or willing to use BIST Indices for their financial products (including over-thecounter financial products) should sign the "BIST Indices License Agreement (License Agreement)". The licensing agreements for the BIST indices in 212 saw 47 new companies signing the agreement. Furthermore, following the reunion of the Organization of Islamic Cooperation (OIC) Member States Stock Exchanges Forum parties agreed to create a joint Islamic Index. Istanbul Traded Index was introduced with the cooperation of the Wiener Börse for the trade of 2 companies denominated in Euro, US Dollar and Turkish Lira. Another Sustainability Index was finalized and will soon be introduced by Borsa Istanbul. 71

72 TL Million In Turkey, only brokerage firms are allowed to trade equities. Brokerage Firms Fact Sheet As of 213, there are 1 brokerage firms in Turkey. 89 of these are performing in the equity market with a total trading volume of TL 1.2 billion. 82.6% of the total share of the trading volume in the equity market was generated by domestic individuals, corporations and institutional investors. Foreign corporations and institutional investors each contributed 13.4% and 3.9%, respectively. In the derivatives exchange market, 74 brokerage firms were operating as of 213. The total trading volume of intermediaries was TL 711 billion in % of the trades were made by domestic investors and 17.8% by foreign investors. In September 213, 2,648 investors made asset management operations in the brokerage sector with a portfolio size of TL 4.9 billion. During the first half of 213, the number of branches for brokerage firms increased to 231 and representative offices to 72. The total assets of brokerage firms in Turkey equaled TL 11.3 billion in 212 and had already reached TL 12.9 billion in the first three quarters of 213. Total revenue for brokerage firms in 212 was TL 1.1 billion. Approximately half of their revenue came from commissions collected from transactions. 79% of their commissions were from equities and 17% from derivatives. A small percentage was made from fixed income and foreign securities operations. Figure 76: Balance Sheet for Brokerage Firms Source : TSPAKB * As of September % Source : TSPAKB 2% * Figure 77: Breakdown of Revenue for Brokerage Firms in 212 8% Brokerage Commissions 5% Revenues from Services Proprietary Trading Profit/Loss Other Revenues 72

73 B. Turkey s Competitive Landscape i. Turkey s Workforce and Skilled Labor within Financial Services ii. Disposable Income iii. Major Projects Financed by Turkish Banks iv. The Financial Sector s 218 Targets v. Istanbul Financial Center Initiative vi. Major Financial Sector Stakeholders 73

74 Million People An important pillar for the industry is Turkey s human resources: a young and cost effective labor force. Figure 78: Employed Population, % 3% 27% 18% 8% Source: Euromonitor Number of People Employment Rate Figure 79: Monthly Minimum Wage, October 213 Belgium Netherlands France UK 35% 3% 25% 2% 15% 1% 5% 3% % The workforce in Turkey is one of the youngest and biggest in Europe. It has the necessary education, training, skills, technology and management experience required to grow the industry. More than 65% of the population is aged between 24 and 54, giving Turkey a huge advantage in this sector. In 211, the total annual labor cost for Turkey was USD 27 million, which was an increase of CAGR 1% since 26. Turkey has one of the highest percentages of young people (between the ages of 15 to 24) in the world, indicating the size of country s potential employees. Turkey brings an exceptionally well educated and highly skilled workforce to its economy. Turkey has one of the lowest minimum wage rates in Europe, with a rate of USD 551 per month as of October 213. Spain Turkey Source: Eurostat USD Note: USD/EUR FX rate of 31 July 213 was used to convert to USD. 74

75 Number of Employees Skilled labor in financial services reached 224, at the end of 212. Figure 8: Employment in the Finance Sector, Source: BRSA Insurance Companies Asset Management The increase of foreign capital to the financial sector increased the financial products offered by the sector, grew the size of financial institutions and in turn, created new job opportunities. According to BRSA, in 212 the total number of employees in the financial services sector in Turkey was 224,458, which corresponds to an increase of 6% since % of those employed in the financial services sector were in the banking sector with a total number of 2,766 employees, followed by insurance companies with 11,776 employees which accounts for 5%. It is also important to note that in the academic year there were a total of 143,953 students graduating from higher education institutions in fields relevant to finance. 112,799 students received undergraduate degrees from universities, 18,392 students graduated from vocational training schools, and 12,762 pursued graduate or doctorate degrees. Vocational training schools include graduates from public finance, accounting and business management, while university graduates included economics and business administration graduates. 75

76 USD Hundreds The average monthly disposable household income grew with a CAGR of 8% between Figure 81: Monthly Disposable Household Income in Turkey ,9 9,9 9, 6,8 4,7 2,6 33,3 3,7 27,2 26,8 24,2 24,4 15,5 14,7 13,5 12,9 13,1 11,9 11,7 11,8 11,8 1,8 1,9 1,4 1,7 7,4 8,2 9, 9,3 8,3 7,6 5,8 6,3 6,6 5,9 4,3 3,4 3,7 3,9 3,5 4,2 14, % 2 (Lowest Quantile) 2. % 2 3. % 2 4. % 2 5. % 2 (Highest Quantile) Average Source: TurkStat, Deloitte Analysis Note: Exchange rates, the Turkish Republic s Central Bank, year-end TL/ USD buying, 211(1.88), 21 (1.54), 29 (1.5), 28 (1.51), 27 (1.16), and 26 (1.4). The average monthly disposable household income grew with a CAGR of 8% between , surpassing USD 1,43 in 212. Highest 2% quantile had 46% of the total disposable income in Turkey as of

77 As Turkish banks capital, liquidity and balance sheets grew, they financed some major projects. 3 rd Bridge Istanbul - Izmir Highway Boğaziçi Distribution Region The 3rd Bridge which will be built in Istanbul will be the biggest suspension bridge in the world that also has a railway network. It will be 59 meters in width and 32 meters in height. The bridge will be built by İçtaş İnşaat Sanayi Ticaret A.Ş. Astaldi Partnership Enterprise Group with a total investment of USD 2.5 billion. The financing for the project will be completed by GarantiBank International, Garanti Bank, Halk Bank, Iş Bank, Vakıflar Bank, Ziraat Bank and YapıKredi Bank. The banks will provide a total of USD 2.3 billion in loan financing to be repaid in 9 years. Istanbul Izmir highway a USD 11 billion mega project- will reduce travel time between Istanbul and Izmir from six hours 3 minutes to about three hours when it is completed in 217. The project will be completed under the consortium consisting of Turkish construction firms Nurol, Özaltın, Makyol, Yüksel and Gökçay and Italian-based Astaldi. The first stage of the project, which is the completion of the road between Gebze and Orhangaz will need financing of USD 2.7 billion. Half of this, USD 1.35 billion, will be financed by the following 8 Turkish banks; Ziraat Bank, Halk Bank, VakıfBank, İş Bank, Garanti Bank, Akbank, YapıKredi and Finansbank. The process of liberalizing the electricity market in Turkey resulted in the privatization of 21 electricity distribution regions in the country. One of the major distribution regions, Boğaziçi, has 3.3 million customers. It was acquired by Cengiz-Kolin-Limak for USD 3.3 billion. A total of USD 2.5 billion will be financed by 7 Turkish Banks including Iş Bank, Garanti Bank, YapıKredi Bank, Halk Bank, Deniz Bank, Vakıf Bank and Ziraat Bank. 77

78 The Financial Sector s 218 Targets The financial sector goals for 218 set by the Ministry of Development are: Increase the number of skilled human resources, strengthen coordination among stakeholders and enlarge the number of financial products offered. Increase transparency, treat all stakeholders equally and protect the rights of the customers. Increase the global share of Turkey s participation banks. Strengthen the payment system through technological investments and development. Support R&D in the sector, increase mobile banking and internet banking applications. Increase cooperation between Turkey and its neighboring counterparts. Educate the public in order to increase savings. Figure 82: Turkey s 218 Targets Sector 11% Total Asset Size/GDP 125 % Total Asset Size/GDP Capital Market 41% Market Capitalization/GDP 66% Market Capitalization/GDP Source : Ministry of Development 78

79 Istanbul Financial Center Initiative As part of the 223 goals, the Turkish government s landmark project is to transform Istanbul into a prominent financial center. Turkey s youthful population, qualified labor force and rapidly developing markets in addition to its geographic location makes Istanbul an ideal candidate for a finance hub. Moreover, various financial products and services are supported by a strong regulatory body in Turkey. The Istanbul Financial Center Initiative started in 29. Its primary objective is to promote Istanbul as a regional financial hub and a center for energy and infrastructure projects. It enables knowledge to be shared between partners in Turkey and aims to attract foreign companies and elite financial experts by organizing panels and media events. IFCI s action plan consists of 4 steps: Finalize construction projects within 2 years Specialization of courts The Istanbul Stock Exchange s transformation into Borsa Istanbul as a private company Establishment of an institutional arbitration center in Istanbul. Source: Istanbul Regional Hub, Global Actor Forum We aim to make the Istanbul Financial Center one of the world s top 1 financial centers. Ali Babacan, Deputy Prime Minister, October 213 There are 8 working committees lead by Deputy Prime Minister Ali Babacan concentrating on areas such as: - Legal Infrastructure - Market Instruments - Taxation - Regulatory and Supervisory Framework - Technology and Infrastructure - Marketing and Promotion (ISPAT) - Human Resources Scale of Project: Approximately USD 2 billion 4-5 year Program Significant allocation (and re-allocation) of resources Focus and dedication of a very senior team Many funding options Goals for 225: USD 2 billion additional annual GDP 15, new financial services jobs x1.2 to x2.2 economic multiplier 79

80 Istanbul Financial Center Initiative Benefits for Foreign Investors The 2% corporate tax rate in Turkey is an attractive option for foreign investors. A very strong banking system, with no banks needing a bail out during the 29 global crisis. Since 212 enactment of the new Turkish Commercial Law, all companies must disclose their financial information in accordance with the EU Acquis. Prevention of double taxation and the promotion of cross border investments through cooperative accords. We already have capacity and connectivity; and the steps we re taking for competitiveness are going to get faster and faster. Chairman and CEO of Borsa Istanbul, Dr. Ibrahim Turhan, October 213 Recent Developments on the Road to the Istanbul Finance Center The asset management industry s Law No took effect in 212 and introduced new provisions related to the incentives to create more employment and increase savings in Turkey, such as exemption for foreign funds. Venture capital investment trusts will be incentivized under the new capital markets law. Savings will increase with the amendment for the private pension system. Risk management of insurance systems will improve their financial standing. New financial instruments like revenue sharing certificates (Sukuk) will add to growth rates Up to a 75% tax advantage for angel investors. New advantages on withholding tax for equity transactions and angel investors. The World Bank Global Islamic Finance Development Center, the Bank s first Office of Islamic Finance, opened on BIST in October 213. Source: Istanbul Regional Hub, Global Actor Forum 8

81 Major Financial Sector Stakeholders Name Logo Web Page What They Do Central Bank of the Republic of Turkey Regulation and Supervision Agency The Association of Turkey The Insurance Association of Turkey Its purpose is to create efficiency in all the financial sectors of the economy, especially money, credit and capital markets as well as determining and implementing policy contributing to financial stability, managing foreign exchange and gold reserves, printing money and overseeing payment systems. Ensures confidence, stability and competitiveness in financial markets to ensure effective operation of the credit system, protects the rights and interests of investors and takes necessary measures to make institutions subject their supervision steady and secure. Contributes to the development of banking sector and its competitiveness, prevents unfair competition and aims to make Istanbul an international financial center in the world. Specializes in the development of the insurance, reinsurance and private pension sectors, TSB provides advice to public authorities, monitors developments, conducts research, eliminates unfair competition of its members and produces a code of ethics for practices. 81

82 Major Financial Sector Stakeholders Name Logo Web Page What They Do Monitoring Center Since 27, EGM monitors the pension system on a daily basis, collects data and implements licensing exams. Capital Markets Board of Turkey Regulatory and supervisory authority in charge of the securities market, which makes detailed regulations for organizing the market and developing capital market instruments and institutions. Borsa Istanbul Borsa Istanbul A.Ş. was founded in 212. It trades capital market instruments, foreign currencies, precious metals and gems and other contracts and documents. 82

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