Turkey's banking sector expected to display strong performance in 2020

Turkey's banking sector is signaling a strong future performance for 2020 after weathering a challenging period in 2018-2019 with success, according to KPMG's report Monday.

The sector is expected to spearhead economic recovery due to its open channels to international financial sources and to show better performance compared to the other industries, according to KPMG's Sectoral Overview 2020 Banking report.

KPMG's Financial Services Sector Leader Kerem Vardar said that Turkish banks have moved to a better position in 2019 in terms of having better access to foreign financial assets.

"After overcoming the 2018-2019 period successfully, the banking sector's 2020 focus will now be on preserving its asset quality," Vardar said, adding that the economic activity by various sectors renewed after the turbulent period will make a significant contribution to the banking sector's profitability.

Vardar underlined that it was natural for the banking sector to be the first industry to reflect the overall recovery in the economy, which performed better than expectations despite the international pressure over Turkey's Operation Peace Spring in Syria, domestic political tensions and expectations over a contraction in the economy.

Having remained under the pressure of internal and external uncertainties throughout the year, the sector kept its asset size at the same level as of the end of the 3rd quarter of 2019 with total assets of the sector reaching TL 4.27 trillion.

Despite the growing assets, profitability failed to show a similar positive performance. The banking sector recorded a profit of TL 36 billion in the first three quarters of 2019, a 13% decline compared to the same period the previous year. Banks' inability to increase interest margins due to the maturity mismatch played a significant role in the decline in profits, KPMG reported.

However, the report forecasted a 15% increase in net profits thanks to productivity increases and effective cost management in the sector but warned that net interest margins will be limited due to uncertainties over the inflation outlook.

KPMG said the banking sector's strengths were its diverse and reliable foreign capital sources, asset quality, high liquidity as well as strong corporate and technological capabilities, which successfully managed past crises and adapted to new developments.

"Despite the high level of liquidity, maturing external debt payments pose certain threats to the sector," the report warned.

Turkey's proximity to conflict areas in the region and the internal economic dynamics' increased sensitivity to external threats were cited as potential threats to the banking sector in 2020.

DIGITAL TRANSFORMATION TOPS AGENDA

Digital transformation remains to be at the top of the sector's agenda as many of the Turkish banks have become "digital champions," leading the adoption of digital technologies.

The report said that the banks continue to allocate a significant portion of their investment expenditures and budgets to improve their digital platforms.

"The current performance shows the magnitude of the Turkish banking sector's appetite for digitalization and that the growth will not slow down in the short term," it added.

According to KPMG, Turkish banks should not only see digitalization as "enhanced internet banking" but should consider automating their internal operations and therefore, optimizing their operational expenses.