Simon Cox, McGuireWoods
As the pleasure cruiser gently meandered down the Bosphorus one barmy evening earlier this summer, a Turkish government official was asked “how will Istanbul solve its traffic problem if it wins the 2020 Olympic Games?” [Turkey is one of the three Bid cities along with Madrid and Tokyo. The winner is expected to be announced in September 2013]. “We will have seven years to sort it out”, replied the official barely pausing to give his answer. Such is the “can do attitude” which has pervaded Turkey in the last decade and seen it rise to become a thriving G20 player on the fringe of Europe, while providing a stepping stone to Asia and a bridgehead to the Middle East and North Africa. Against this background, however, an uncertain cloud now hangs over Taksim Square and other parts of the country. The recent disturbances around Gezi Park on the edge of Taksim Square in Istanbul have taken some of the shine off the achievements of the Prime Minister and the country, and people are starting to question where this will end and what direction Turkey will take.
“2001 – a Banking Odyssey”
The Turkish banking sector has recovered dramatically since several of the local banks were effectively nationalised by the Turkish BRSA (the Banking and Regulatory Supervision Authority) and restructured in 2001. Turkey avoided the full impact of the 2007/8 banking crisis as its banks have undergone a fundamental restructure post 2001: the residential mortgage lending industry in Turkey was still nascent and exotic banking products even rarer. The international banks, which had invested in the Turkish financial sector during the post 2001 – 2007 inward investment boom, were retrenching in their home markets leaving the field open for the local banks to operate relatively unchallenged.
“Sultans of Swing”
After years of mainly ignoring Islamic finance techniques and products partly as a consequence of it being a secular Islamic state (as required by its constitution), Turkey has begun to dabble in certain of the Islamic Finance Products. As various banks from the Middle East are starting to look at Turkey as a place to do business, several new banking licences have been issued recently and banks from Qatar and Lebanon have made local acquisitions in the past year.
Turkish Banks, March 2012
* Majority state-owned or state controlled
Source: Banks Association of Turkey
All aboard the Infrastructure express
Despite the current global economic crisis, Turkey is still in comparative growth mode (although GDP growth rates have plummeted from circa 8% per annum to a more modest
2 – 3% last year). The Government, at least pre the Taksim Square crisis, is keen to pursue a visionary infrastructure development plan with landmark projects such as the new Istanbul Airport (aiming to become a regional hub with up to six runways), the new motorways and bridges projects together with a much derided mega canal project linking the Black Sea to the Mediterranean and avoiding the congestion in the Bosphorus. These projects will require substantial bank finance with the local banks well placed to take leading mandate roles. The recent drop in the local currency (Turkish lira) only serves to strengthen their local position.
As regards international expansion, local/state-owned banks are now looking to consolidate or even open representative offices or branches abroad. Recent expansion has tended to focus on the “Stans” (eg Kazakhstan) and the republic’s contiguous to Turkey (Azerbaijan is a firm favourite) and the former Yugoslav Republic and Bulgaria especially. However now ambitions are being raised and global financial centres such as London are being considered for branch openings.
Closer to home the government is promoting a new international financial business district on a 70 hectare site on the Asian side of Istanbul, a sort of “Canary Wharf on the Bosphorus” as one person described it. The state-owned banks are relocating to the new financial district from Ankara and others with close ties to the political leadership are also moving there. What the international banks make of it remains to be seen although a new airport has been opened nearby and hotels are opening up in the area thus saving the long commute back to the European side of the city.
The New Sultans
As the modern Turkish Republic glides towards its 90th anniversary celebrations later this year the inheritors of the legacy of the founder of modern Turkey can look back on a job well done.
With the potential of the Olympics to host in 2020 and the centenary year of the foundation of modern Turkey in 2023 the next decade should prove to be a Turkish Delight and the local banks are well placed to capitalise on this growth.
Simon Cox is a corporate lawyer with international law firm, McGuireWoods.
He can be contacted at [email protected] and on 020 7632 1721.
A quarter of banking customers noted an improvement in customer service over lockdown, research shows
SAS research reveals that banks offered an improved customer experience during lockdown
This represents some good news for banks in an extremely challenging time, with 59% of customers also saying they’d pay more to buy or use products and services from any company that provided them with a good customer experience over lockdown.
The improvement in customer experience also coincides with a rise in the number of digital customers. Since the pandemic started, the number of banking customers using a digital service or app has grown by 11%, adding to an existing 58% who were already digital customers. Over half (53%) of new users plan to continue using these digital services permanently moving forward.
Brian Holden, Director, Financial Services at SAS UK & Ireland, said:
“It’s notable that in times of need customers value being able to communicate with their bank and place an even higher value on good customer service. A rise in the number of digital customers means banks can now reach a wider audience online, leveraging AI and analytics to offer a more personalised experience.
“There is work to be done, though. Even greater personalisation is needed if banks are to win over the 12% of customers who felt banking services deteriorated over lockdown. And this personalisation will need to get right down to a segment of one to properly reflect the unique circumstances some individuals now find themselves in due to the pandemic.”
While the number of digital users grew over lockdown, there is still a quarter (24%) of the banking customer base that have chosen not to make the switch to digital services.
Meanwhile, failure to offer a consistently satisfactory customer experience could prove costly for banks, with a third (33%) of customers claiming that they would ditch a company after just one poor experience. This number jumps to 90% for between one and five poor examples of customer service, so this just underlines how much retail banks can win or lose in these difficult times.
For more insight into how other industries across EMEA performed during lockdown, download the full report: Experience 2030: Has COVID-19 created a new kind of customer?
Swedish Bank Stress Tests in Line with Recent Rating Actions
The Swedish Financial Supervisory Authority’s (FSA) latest stress test results show major Swedish banks’ robust ability to absorb credit losses. The results support Fitch Ratings’ view that short-term risks have abated in recent months, and are in line with Fitch’s assessment of major Swedish banks’ capitalisation at ‘aa-‘, which was a factor when Fitch removed the ratings of Handelsbanken, Nordea (not covered by the FSA’s stress test) and SEB from Rating Watch Negative in September.
The FSA estimated about SEK130 billion of credit losses over 2020-2022 for the three largest banks (Swedbank, Handelsbanken and SEB) under its stress test. This represents about 220bp of their loans, or about 70bp annually. However, the banks’ pre-impairment profitability in the stress test could absorb credit losses of up to about 110bp of loans annually. Fitch’s baseline expectation is for credit losses below 20bp of loans in 2020 and 8bp-12bp in 2021.
Capital remained strong under the stress test. The average common equity Tier 1 (CET1) ratio fell by only 2.8pp (1.9pp if banks did not pay dividends) from 17.6% at end-June 2020. The capital decline was not driven by credit losses, which could be absorbed by pre-impairment profitability, but by risk-weighted asset inflation.
The three banks’ 3Q20 results showed that capital has been resilient despite the coronavirus crisis. The banks had a CET1 capital surplus over regulatory minimums, including buffers, of almost SEK100 billion (excluding about SEK33 billion earmarked for dividends). SEB had a CET1 ratio of 19.4% at end-September, Handelsbanken’s was 17.8% and Swedbank’s 16.8%.
The SEK130 billion credit losses under the latest stress test are lower than under the FSA’s spring 2020 stress test (SEK145 billion), which also covered a shorter period of two years. However, they are still larger than the actual losses incurred by the three banks during the 2008-2010 crisis. This is despite tightened underwriting standards by the three banks in recent years, including, in the case of SEB and Swedbank, in the Baltics, the source of most of their loan impairment charges in the previous crisis.
In its baseline economic forecasts, the FSA assumes a harsher shock to Sweden’s GDP in 2020 and 2021 (-6.9% and 1%, respectively) than Fitch’s baseline (-4% and 3.4%), although it assumes a similar recovery by end-2022. It also assumes real estate price corrections, which appears particularly conservative in light of a 11% housing property price increase over January to November 2020.
The ratings of Handelsbanken (AA), Nordea (AA-) and SEB (AA-) are on Negative Outlook due to medium-term risks to our baseline scenario. The rating of Swedbank (A+) is on Stable Outlook, reflecting significant headroom at the current rating level following a one-notch downgrade in April due to shortcomings in anti-money laundering risk controls.
Future success for banks will be driven by balancing physical and digital services
Digital acceleration due to COVID-19 has not eliminated the need for bank branches
Faster service (23%), smaller queues (26%) and longer opening hours (31%) are among customers’ biggest asks of their bank branch, new research from Diebold Nixdorf today reveals. But with 41% consumers saying they would be comfortable to engage with all banking services via an app, it is vital that banks respond to the full spectrum of customer needs – balancing and evolving their offerings on multiple fronts.
A third (35%) of customers say they will always want access to physical, in-branch banking services in some capacity and one in ten (10%) consumers will never bank predominantly online in the future. This demonstrates that there remains an important role for the services a branch provides. This role, however, continues to shift away from purely transactional banking:
A quarter (26%) value face-to-face advice when it comes to their banking needs
One in five (18%) seek advice on different products
17% want to speak to the staff or other customers.
Matt Phillips, Diebold Nixdorf vice president, head of financial services UK & Ireland, said: “The majority of banks have spent the last decade focusing on their digital strategies and investing in improving – or establishing – their online customer experience. However, the data shows that there is still an essential role for physical branches. Banks now increasingly face the challenge of continuing to provide customers with access to a range of physical and as well as digital services, giving them the flexibility to choose the best service for them at any given moment in time.”
When looking beyond the impact of COVID-19, planned branch visits by customers are expected to rebound to 28%, following a dip to 11% during lockdown. And when asked about the new services they’d like to see inside their bank, sixteen percent of respondents said more self-service machines would improve their in-branch experience.
Matt Phillips continues: “In a world that is fast evolving and where the future is digital, there’s no doubt that high street banks must, and are, responding to the needs of highly digital customers. But not every customer requirement is digital. There is still a strong need for physical bank branches and the interaction and services they offer, and striking this balance between physical and digital is where the industry must come together to provide solutions. For example, building a strong, leave-behind strategy is something we’re seeing across the board when banks have to close branches, ensuring customers have access to self-service machines to complete all their transactional needs.”
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