Turkish Banks: An Overview of Funding Trends

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After focusing on expectations, risks and valuations in Turkish banks, here the funding trends across the industry becomes the theme of this post.

In the above-mentioned post, we showed that much faster rise in loans compared with domestic savings rates would be creating liquidity and funding risk for the banking system. At the end of third quarter of this year loan to deposit ratio was reportedly over 115%. The banks in Turkey is bridging this funding gap with borrowing from abroad and by recycling maturing government debt securities, leading liquidity risks rise thanks to increasing maturity mismatches between short-term borrowing and long-term funding. Simply, loans are outstripping deposits.

Apart from the key risks including declining GDP growth projections, vulnerability of Turkish lira, and geopolitical risks, there may be some other industry-specific headwinds to face. First, the loan to deposit ratio in Turkish banks have stayed above normal since 2012 which is now 115% leaving the companies with in sufficient liquidity to cover any unexpected fund requirements.

 Turkish Banks LD Spread

Turkish banks are funded largely by relatively diversified and and stable core customer deposits. On the other hand, the term structure of deposits is a potential source of risk. In particular, one may foresee a mismatch between short-term liabilities and longer term assets at risk.  As of end of September, only 4.1% of deposits were due to mature after one year. As seen from the chart below, averagely 85% of deposits are due to mature in 6 months.

Turkish Banks - Term Structure of DepositsBelow is the chart showing the sources of funding of banks, and specifically commercial banks.

Turkish Banks - Sources of Fundingand the leverage… Unlike the past years, total assets of the banking system clearly saw its assets growing faster than its equity in 2014.

Turkish Banks Leverage

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