TURKISH FINANCIAL MARKETS IN PRACTISE

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1 TURKISH FINANCIAL MARKETS IN PRACTISE SECOND MEETING OF TURKISH-RUSSIAN WORKING GROUP ON BANKING AND FINANCIAL COOPERATION September 2011 EMEL GÜNEŞ HEAD OF TREASURY, DENIZBANK

2 TURKISH FINANCIAL SECTOR: BANKS ARE THE MAJOR PLAYERS Most of the activities taking place in both the money and capital markets are carried out by the banks. Consequently, Turkey's economic and historical development dictates that the financial system and the banking sector are virtually synonymous. In Turkey, commercial banks are not allowed to engage in two types of activities: first, trading goods or immovables for commercial purposes (except gold & precious metals), and second, leasing. Although Turkish banking system tripled its asset size since 2005, it still has big potential with a comperatively lower asset/gdp ratio. Source: CBT 2011 Monetary Policy Report 100% 80% 60% 40% 20% 0% 87,8% Banks TURKISH FINANCIAL SECTOR B/S DISTRIBUTION 3,1% 2,9% 1,4% 1,3% 1,0% 0,5% 0,7% 1,2% 0,1% Mutual Funds Insurance 2 Leasing Factoring 88% DOMINATION BY BANKS Pension Funds Brokerage Co. Consumer Finance Co. Real Estate Co. Investment Trust Co.

In Turkey, commercial banks are not allowed to engage in two types of activities: first, trading goods or immovables for commercial purposes (except gold & precious metals), and second, leasing.

3 TURKISH BANKING SYSTEM- Growing Fast 3

4 HIGH CONCENTRATION IN FOREIGN CURRENCY (JULY 2011) Others; 296mn; 43% Total Liabilities (695 USD bio) FX Deposits; 124mn; 31% Deposits (399 USD bio) FX Deposits %31 of Total Deposits %18 of Total Liabilities Deposits Others Deposits; 399mn; 57% TRY Deposits FX Deposits TRY Deposits; 275mn; 69% Others; 319mn; 46% Total Assets (695 USD bio) FX Loans; 107mn; 29% Loans (376 USD bio) FX Loans %29 of Total Loans %15 of Total Assets Loans Others Loans; 376mn; 54% TRY Loans FX Loans TRY Loans; 269mn; 71% 4

Deposits FX Deposits TRY Deposits; 275mn; 69% Others; 319mn; 46% Total Assets (695 USD bio) FX Loans; 107mn; 29% Loans (376

5 INCREASING SHARE IN GLOBAL FX TRANSACTIONS Share In Global Foreign Exchange Market Turnover 1,00% 0,90% 0,80% 0,70% 0,60% Turkish Lira Russian Rouble 0,60% 0,70% 0,70% 0,90% 0,50% 0,40% 0,30% 0,20% 0,10% 0,00% 0,30% 0,30% 0,20% 0,10% 0% 0% Source:BIS-Triennial Central Bank Survey-December

0,70% 0,70% 0,90% 0,50% 0,40% 0,30% 0,20% 0,10% 0,00% 0,30% 0,30% 0,20% 0,10% 0%

6 GLOBAL FX TURNOVER BY PRODUCT, DAILY AVERAGES IN MN USD 4 TRILLION $ EACH DAY Options and other products Currency Sw aps Foreign Exchange Sw aps Outright Forwards Spot Transactions 1,527 bn$ 1,239 bn$ 1,934 bn$ 3,324 bn$ 3,981 bn$ Source:BIS-Triennial Central Bank Survey-December

000 1.500 1.000 500 0 1.714 119 475 87 21 10 60 954 362 734 7 656 209 1.490 128 130 1.

7 TURKEY HAS A HIGHER SHARE IN SWAP & OPTIONS Share in Global FX by Product 6,00% 5,00% ROUBLE TURKISH LIRA 0,42% 4,00% 3,00% 2,00% 4,44% 0,51% 1,00% 0,90% 1,22% 0,48% 0,81% 1,81% 0,00% 0,74% Total FX instruments 0,53% 0,64% 0,72% Spot transactions Outright forwards Foreign exchange swaps Currency swaps Options and other products Source:BIS-Triennial Central Bank Survey-December

Total FX instruments 0,53% 0,64% 0,72% Spot transactions Outright forwards Foreign exchange

8 CONFIRMED BY BRSA FIGURES ----Derivatives Total (mn USD) ----Derivatives FX (mn USD) ----Derivatives TL (mn USD) Source:BRSA Monthly Bulletin July

9 TREASURY FINANCIAL MARKETS IN TURKEY FX MARKETS 2010 FX/TRY volume 6.3 trillion USD (including client & frwd & swap transactions) Deals mostly done through Reuters matching or FX platforms. Trades same day value till 15:30 Istanbul time Trades tom value after 15:30 Istanbul time EFT (Electronic Fund Transfer) system is used for TL settlement Back value is not possible in TL 9

10 USD/TRY- HIGHLY VOLATILE MARKET- 12% 10

11 DERIVATIVES MARKET TURKDEX (TURKISH DERIVATIVES EXCHANGE) Established in July 2002; First private exchange in Turkey. Main shareholders are official exchanges and banks volume billion TL (250 bn USD whereas FORTS aggregate volume is approximately 2.2 trillion USD in 2010). But Turkey has a wide OTC market in options. Turkdex trades between (09: ) Istanbul Stock Exchange Settlement and Custody Bank Inc. (Takasbank) is the settlement bank Currently only futures traded Contracts traded: ISE 100 Index ISE 30 Index ISE Spread TRY / Dollar TRY / Euro EUR / TRY 365 Day T-BilI 91 Day T-Bill T-Benchmark Wheat Cotton Gold Electricity Volume TL Source: Turkdex Yearly Bulletin

Turkdex trades between (09:15-17.35) Istanbul Stock Exchange Settlement and Custody Bank Inc.

12 DERIVATIVES MARKET VOLUMES BY CONTRACT TYPE FX CONTRACTS COMMODITY INTEREST RATE STOCK INDICES Mainly driven by index contracts Options and single stock futures are not trading yet Almost all FX derivatives are traded OTC VOLUMES BY CONTRACT TYPE FX CONTRACTS COMMODITY INTEREST RATE STOCK INDICES OTC DERIVATIVES No detailed official volumes Over 5 tri USD including forward, swap & options Most favorite; forwards and FX options (mainly plain vanilla currency options on USD/TRY & DCD s) Source: Turkdex Yearly Bulletin

COMMODITY INTEREST RATE STOCK INDICES OTC DERIVATIVES No detailed official volumes Over 5 tri USD including forward, swap & options

13 MONEY MARKET 2010 volume 3.7 trillion USD (5.8 trillion TL) Both OTC and Central Bank (CBOT) transactions CBOT is the net lender through 1 wk repo auctions CBOT transactions same day val btwn 10:00-12:00 & 13:00-16:00 Late Liquidity window 16:00-17:00 TL Libor market established in 2002 (13 banks) Policy Rate (1wk repo auction) 5.75% O/N borrowing 5% O/N lending 9% O/N repo lending for PDs 8% Late Liquidity Window 0%-12% EFT (Electronic Fund Transfer) system is used for TL settlement REPO MARKET 2010 volume 1.9 trillion USD (3.01 trillion TL) Both OTC and Istanbul Stock Exchange (ISE) transactions Trades same day value btwn 09:30-12:00 & 13:00-14:00 Ist time Istanbul Stock Exchange Settlement & Custody Bank Inc. (Takasbank) is the settlement bank EFT (Electronic Fund Transfer) system is used for TL settlement 13

16:00-17:00 TL Libor market established in 2002 (13 banks) Policy Rate (1wk repo auction) 5.

14 RESERVE REQUIREMENT FUNDED BY REPO & OMO -June 2011 Total ASSETS (Bn TL) 1, ,146.0 Total LIABILITIES (Bn TL) Liquid Assets Reserve Req. Other RR funded by relatively cheap 1wk repo Auctions & s-t repo Repo Funding CBT-OMO Repo 23.0 Repo w foreign c/p Loans TL Loan/Deposit 94% Deposits TL FX FX Securities Portfolio Net Securities Issued Net NPL Equity Other Assets Other Liabilities Source: BRSA Banking Sector Analysis June

0 RR funded by relatively cheap 1wk repo Auctions & s-t repo 106.0 59.0 24.0 Repo Funding CBT-OMO Repo 23.

15 FIXED INCOME MARKET DOMESTIC BONDS 2010 volume 2.3 trillion USD (3.5tri TL) Outstanding domestic debt, bn Outstanding external debt 82.6 bn Primary Dealership System Different type of auctions Both OTC and Istanbul Stock Exchange (ISE) transactions ISE trades same day val between (09:30-12:00 & 13:00-14:00) ISE trades T+1 between (14:00-17:00) Takasbank A.Ş. is the settlement bank Policy Rate & Benchmark Bond Yield Benchmark Cmp Yield Policy Rate Cmp 15

6 bn Primary Dealership System Different type of auctions Both OTC and Istanbul Stock Exchange (ISE) transactions

16 BENCHMARK COMPOUNDED RATE-HISTORICAL GRAPH 16

17 TRY DOMESTIC BONDS YIELD CURVE 15/09/ % 9.25% 8.75% 8.25% 7.75% 7.25% 6.75% 6.25% 5.75% 5.25% 4.75% Jan-20, 9.3% Nov-12, 8.1% May-13, 8.2% Jan-16, 8.6% Jan-14, 8.1% Nov-11, 7.0% 6.5% 6.7% 6.7% 6.8% 6.4% 6.3% 5.9% 6.0% 6.1% 5.9% 02/ / / / / / / / / / / / / /2021 Poly. (TBills) Poly. (Xccy Swaps) 17

5% 6.7% 6.7% 6.8% 6.4% 6.3% 5.9% 6.0% 6.1% 5.

18 50% OF DOMESTIC DEBT IS FIXED RATE Domestic Borrowing by Instruments 2010 Domestic Debt Stock by Instruments-July 2011 Fixed Coupon FX Bonds 2% Floating Rate TL Notes 14% Fixed Coupon TL Bonds 70% Floating Rate TL Notes 32,7% Fixed Coupon TL Bonds 49,2% CPI Indexed TL Bonds 15% Fixed Coupon FX Bonds 1,1% CPI Indexed TL Bonds 17,0% Source: Treasury-Public Debt Management Report

70% Floating Rate TL Notes 32,7% Fixed Coupon TL Bonds 49,2% CPI Indexed TL Bonds 15% Fixed

19 DEBT/GDP RATIO & CREDIT RATINGS, LOW FOR BOTH COUNTRIES Source:Min Fin of Russia-Public Debt Policy for

20 CAPITAL MARKETS STOCK MARKET Istanbul Stock Exchange (ISE) transactions 2010 volume 425 billion USD (635.7 bio TL) Market capitalisation of 288 billion USD as of Free float Market Cap. of 52 billion USD 2.4 million open accounts, 1 million active accounts 340 companies listed in ISE as of ISE trades T+2 between (09:30-12:30 & 14:00-17:30) ISE Settlement and Custody Bank Inc. Takasbank A.Ş. is the settlement bank Electronic system, on-line trading Foreign investors share 62% 20

4 million open accounts, 1 million active accounts 340 companies listed in ISE as of 31.01.

21 CAPITAL MARKETS-STOCK MARKET STRUCTURE Brokerage Firms Regulatory Bodies 104 Sector Associations Capital Market s Board (CMB) Brokers Turkish Capital Markets Brokers Association (TSPAKB) ISE Banks Boutique Brokers Foreign Brokers Small Size Turkish Borkers Turkish Stock Market Investors Association (BORYAD) Ministry of Finance

22 CAPITAL MARKETS MUTUAL FUNDS Market size 20 billion USD A Type Equity B Type Fixed Income Trading hours varies depending on the type of the fund A seperate portfolio management company needed to manage mutual funds by law Each bank & company has its own system Fund size in bio USD France 2123 Germany 1619 UK 1125 Italy 319 Spain 245 Poland 41 Greece 13 Turkey France Germany UK Italy Spain Poland Greece Turkey 22

Chart I.1. Difference between Primary Surplus (PS) and Bond Yield Spreads in Selected EU 1 Countries

LIST OF CHARTS Chart I.1. Difference between Primary Surplus (PS) and Bond Yield Spreads in Selected EU 1 Countries Chart I.2. Gross Debt Stock and Budget Deficits of Selected Countries as of 2010 1 Chart