TURKISH BANKS ANNOUNCE HIGHER PROFITS FOR 1986
Turkey's banks are reporting a strong
recovery in 1986 profits, but a government drive to liberalise
capital markets poses new challenges to a banking industry
seeking to broaden its earnings base.
    A dozen of Turkey's 55 banks have announced higher 1986
profits so far, a trend bankers in the financial capital of
Istanbul expect to be reflected through most of the industry.
    But while Ankara's policy of liberalising markets offers
new opportunites to expand operations, some bankers see dangers
attached to a related drive to push down Turkish interest
rates.
    Bankers said the government's policy of fostering lower
interest rates could lead to a consumer boom and reignite
inflation, currently running at about 30 pct. They worry that
this could further reduce the industry's shrinking deposit
base.
    This has given added urgency to bank moves to build up
their capital market operations as Turkey's market-oriented
Prime Minister Turgut Ozal liberalises the financial system.
    Bankers said the 1986 recovery in earnings stemmed partly
from foreign exchange operations and trade finance. But a
growing volume of trading in government securities is now also
a major source of revenue for banks.
    Bankers said the proportion of bank profits generated from
the traditional financing of commerce and industry is falling,
and some have even been making a loss on these operations.
    The major challenge to bank profits in Turkey came in 1980
when the government, faced with its worst financial crisis in
50 years, raised domestic interest rates sharply to fight an
inflation rate of over 100 pct and launched an export drive.
    Deniz Gokce, associate professor of economics at the
Bosphorus University, told Reuters that banks were forced to
pay depositors real interest rates for the first time and
profits started to fall. Previously, rates had been below
inflation.
    Turkey's domestic banks also partly missed out on the
export drive as foreign banks moved into Istanbul and reaped
the benefits of trade finance with their added expertise. The
number of foreign banks has risen to 16 from just two in 1981.
    Although local banks tried to follow suit, Turkey's exports
declined last year to 7.4 billion dlrs from 7.9 billion in 1985
and bankers doubt there is enough business to go round.
    As a result banks, including a few foreign operations, have
started moving into capital market operations to broaden their
earnings base and take advantage of the relaunch just over a
year ago of the Istanbul Stock Exchange.
    "When we saw that there was a demand and supply of money
outside the banking system, we could not envisage ourselves
excluded from these transactions," said Osman Erk, deputy
general manager of the private bank Yapi ve Kredi Bankasi AS.
    The number of banks active at the exchange, mainly trading
government securities, went up to 28 this year from 23 when the
market was revived in December 1985.
    Liberalisation went one step further last week when
parliament passed a law encouraging companies to go public.
Last month, Yapi ve Kredi Bankasi launched the country's first
commercial paper programme, for a joint-venture chemical firm.
    Medium-sized private Pamukbank AS announced a strong
recovery in 1986 pre-tax profit to 12.9 billion lira from 603
mln in 1985, while Yapi ve Kredi Bankasi profits increased to
30.6 billion lira from 6.1 billion. Bankers said both benefited
from trade finance and increased capital market operations.
    Turkey's second biggest bank, the private Turkiye Is
Bankasi, announced a profit rise to 35 billion from 32.3
billion in 1985.
    However, bankers said some banks have been "window dressing"
their balance sheets to mask non-performing loans which are
variously estimated by bankers at between 20 to 50 pct of the
industry's 9,026 billion lira in total credits.
    Non-performing loans began to mount in the early 1980s as
industry failed to cope with higher interest rates and started
to default. Some banks continued to count loans as performing.
    "After 1984 all banks started to be more careful in giving
credits, so the non-performing loans is a problem of the period
between 1980 to 1984," Erk said.
    But the problem of bad loans led to a rescue by three state
banks of medium-sized Turkiye Ogretmenler Bankasi AS earlier
this year when the Treasury, which acts as a watchdog body over
banks, discovered that the its assets were to a large extent
made up of non-performing loans.
    Some 51 billion lira out of the bank's 69 billion lira loan
portfolio was non-performing. But the bank had reported a 1986
pre-tax profit of 65 mln lira.
    Bankers cited this as a typical example of how balance
sheets could hide problems despite a drive by the central bank
to standardise accounting.
    Gokce said the only solution would be for compulsory
auditing by international accounting companies.
 REUTER
