Turkey has long been an attractive destination for foreign investment in its banking and financial services sector. As an emerging market with a large, young population and growing middle class, Turkey offers significant potential for growth and returns on investment. However, recent economic and political developments have created both opportunities and challenges for foreign investors in Turkey’s banking system. This article will provide an overview of the current investment climate in Turkey’s banking sector, key opportunities such as privatization and M&A activity, as well as risks such as currency volatility and geopolitics that need to be considered by foreign banks and financial institutions looking to invest in Turkey.
Privatization and M&A creating opportunities for foreign banks in Turkey
A major driver of foreign investment in Turkey’s banking sector has been the government’s privatization program. Since the 1980s, the government has steadily sold off state-owned banks to private buyers, including many foreign financial groups. Majority stakes in banks like Türkiye İş Bankası, Akbank and Yapı Kredi Bankası were acquired by foreign banks. Privatization has opened up the banking sector to greater foreign competition and investment. In addition to privatization, mergers and acquisitions (M&A) activity has also created opportunities for foreign banks. Many second-tier Turkish banks have been merged with or acquired by foreign players looking to enter the market. For example, Spain’s BBVA acquired a majority stake in Garanti Bank in 2010. The M&A route can allow foreign banks to quickly establish a presence and client base in the Turkish market.
Economic potential of Turkish market attracts foreign banks despite risks
Turkey has the 19th largest economy in the world with a GDP of over $700 billion and a population of over 80 million. It has a fast growing middle class and favorable demographics with half its population under the age of 32. This represents major potential for growth in banking services like credit cards, personal loans, mortgages and wealth management products. Turkish banks remain relatively underpenetrated compared to developed economies. Turkey’s banking system has assets totaling around 100% of GDP, versus 200-300% in western european countries. This means there is room for growth in the banking sector as incomes rise. The economic potential of the Turkish market will continue to attract foreign capital and investment into its banking system despite some of the challenges and risks.
Currency volatility poses risks for foreign investment in Turkish banks
One major risk for foreign investors in Turkey’s banking sector is the potential for currency volatility. The Turkish Lira has faced periods of weakness and devaluation against foreign currencies like the US Dollar and Euro. For foreign banks, sharp declines in the Lira can negatively impact profits when money is converted back to their home currencies. The Lira lost over 30% of value against the Dollar in 2018 amid a currency crisis. Banks can implement currency hedges as a risk management strategy. But forex volatility and the prospect of restricting capital outflows can discourage foreign banks. The Central Bank of Turkey’s moves to lower interest rates have also sparked concerns about Lira weakness.
Geopolitical factors create uncertainty for Turkey’s investment environment
Geopolitical events have also added to the risks and uncertainty for foreign investors in Turkey. Regional instability, including the conflict in Syria, has weighed on Turkey’s economy and investor confidence. An attempted coup in 2016 led to a crackdown by Turkey’s government and strained relations with allies. Disputes with the US over issues like Turkey’s acquisition of a Russian missile defense system led to sanctions and trade conflicts. While the banking sector has been mostly insulated from geopolitics, it does impact the perception of Turkey as a safe haven for foreign capital. Ongoing tensions could deter some risk averse foreign banks from investing in Turkey until stability improves.
Turkey’s banking and financial services sector will continue to present attractive opportunities for foreign investment due to economic growth potential and a relatively underpenetrated market. However privatization, M&A and new licenses will be needed for greater foreign participation. Currency volatility and geopolitical uncertainty pose risks that investors will need to factor in their strategies and planning when targeting the Turkish banking sector.