Turkish banks are facing significant challenges as the country navigates through its economic turnaround. The Chief Executive Officer of Isbank, Hakan Aran, has warned that these challenges will persist well into the next year. The Turkish banking sector is under pressure due to tightening measures by the government to tackle soaring inflation and ensure price stability. Despite efforts to combat these issues, Aran anticipates that the banking industry will continue to face hurdles in the coming years.
Aran predicts that Turkish banks will see a deterioration in their net interest margins this year, followed by a decline in asset quality in the following year. The recent erosion of asset quality has already started to manifest, putting further strain on the financial sector. According to Aran, banks’ return on equity is declining, and if ‘inflation accounting’ were to be implemented, many banks would likely be reporting losses. The absence of inflation accounting is currently masking the true profitability of banks.
The Turkish central bank is expected to start cutting interest rates this November, with Aran forecasting a 250 basis-point cut. This decision is aligned with analysts’ expectations and is seen as a step towards easing the monetary policy. Aran predicts further rate cuts in the future, with the interest rate potentially dropping to 25% by the end of 2025. The government’s exclusion of banks from inflation-adjusted accounting methods has raised concerns about tax revenue losses.
Amidst these challenges, Isbank, Turkey’s largest private bank, is planning to expand its presence internationally. The bank, founded in 1924, has grown to have a market value of nearly $10 billion. Isbank aims to become a global leader in terms of the geographies it operates in and the number of clients it serves. The bank is evaluating potential acquisitions and partnerships in digital banking and payment systems, particularly in the UK and the European Union.
Digital Transformation
Isbank is gearing up to become a regional fintech hub, focusing on enhancing its digital banking services. The recent merger of its subsidiary Moka Payment Institution with Birlesik Odeme Hizmetleri is expected to boost the bank’s position in the digital payment space. While currently, 90% of Isbank’s income comes from traditional banking, the bank is aiming to diversify its revenue streams by focusing on payments infrastructure, digital platforms, and service banking in the medium term.
The future of Turkish banks is uncertain, with several challenges ahead. The sector is grappling with issues of inflation, tightening measures, and declining asset quality. However, banks like Isbank are proactively working towards mitigating these challenges by expanding internationally, focusing on digital transformation, and adapting to the changing landscape of the financial industry. It remains to be seen how Turkish banks will navigate through these obstacles and emerge stronger in the years to come.
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