examining critical factors affecting ownership structure ...

JOURNAL OF QAFQAZ UNIVERSITY- ECONOMICS AND ADMINISTRATION 2016. Volume 4, Number 1

Pages 10-22

UOT:336.71

EXAMINING CRITICAL FACTORS AFFECTING OWNERSHIP STRUCTURE IN TURKISH BANKING SECTOR Ümit HACIOĞLU, Hasan DİNÇER Istanbul Medipol University Istanbul / TURKEY

Serhat YÜKSEL Konya Food & Agriculture University Konya / TURKEY

ABSTRACT In this paper, it is aimed to analyze the factors affecting the investment decisions of foreign banks to enter in Turkish Banking sector. Within this scope, 24 deposit banks in Turkey were selected and examined in this study. The annual data was used for the period between 2004 and 2014. The related data were provided from the Banks Association of Turkey, annual activity reports of the banks, OECD and World Bank. The application was developed on logistic regression analysis to achieve the objective of this study. This study concludes that (i) 5 independent variables (interest expense, interest revenue, non-interest revenue, NPL ratio, current account balance) are effective for foreign banks for entry decision in Turkey. In this study, it has been recommended that if more foreign banks are desired in Turkey, first of all, net interest margin should increase. Moreover, the amount of non-interest income should increase while NPL ratios should decrease. Finally, current account deficit problem of Turkey should be solved for foreign banks before making investment decision in banking sector for a long term. Key Words: Banking; Ownership; Logit model; Branch; Performance; Ratios. TÜRK BANKACILIK SEKTÖRÜNDE BANKA SAHİPLİĞİNE ETKİ EDEN KRİTİK FAKTÖRLERİN İNCELENMESİ ÖZET Bu çalışmada, Türk bankacılık sektörüne girişte yabancı bankaların yatırım kararlarını etkileyen faktörlerin analiz edilmesi amaçlanmaktadır. Bu kapsamda, Türkiye’deki 24 mevduat bankası çalışma için seçilmiş ve incelenmiştir. 2004 ile 2014 arası dönemdeki yıllık veriler kullanılmıştır. İlgili veriler, Dünya Bankası, OECD ve bankaların yıllık faaliyet raporları ve Türkiye Bankalar Birliği’nden elde edilmiştir. Çalışma amacına ulaşabilmek için lojistik regresyon analizi üzerine uygulama geliştirilmiştir. 5 bağımsız değişkenin (faiz gideri, faiz geliri, faiz dışı gelirler, takipteki krediler oranı, cari işlemler dengesi) Türkiye’de yabancı bankaların giriş kararı için etkili faktörler olduğunu, çalışma ortaya koymaktadır. Bu çalışmada, Türkiye’de daha fazla yabancı banka için net faiz marjının artması gerektiği beklentisi önerilmektedir. Bununla birlikte, takipteki kredilerin oranının azaltılması ve faiz dışı gelirlerin miktarının da artması gerekmektedir. Sonuç olarak, uzun dönemde bankacılık sektöründeki yatırım kararından önce, yabancı bankalar için Türkiye’nin cari işlemler açığı probleminin çözülmesi gerekmektedir. Anahtar Kelimeler: Bankacılık; Mülkiyet; Logit model; Branch; Performans; Oranlar. TÜRK BANK SEKTORUNDA SAHİBKARLIĞA TƏSİR GÖSTƏRƏN KRİTİK AMİLLƏRİN TƏHLİLİ XÜLASƏ Bu araşdırmada məqsəd, Türk bank sektoruna daxil olarkən xarici bankların investisiya qərarına təsir göstərən amilləri təhlil etməkdir. Bu çərçivədə, Türkiyədə fəaliyyət göstərən 24 əmanət bankı tədqiqat obyekti olaraq seçilmişdir. Analizin aparılmasında bu bankların 2004-2014-cü illəri aid illik məlumatlarından istifadə olunmuşdur. Müvafiq göstəricilər, Dünya Bankı, İƏİT, bankların illik fəaliyyət hesabatları və Türkiyə Banklar Birliyindən əldə edilmişdir. Məqsədə nail olmaq üçün loqistik reqresiya təhlili aparılmışdır. Aparılan tədqiqat, 5 sərbəst dəyişənin (faiz xərcləri, faiz gəlirləri, faiz xarici gəlirlər, riskli kreditlərin səviyyəsi, cari əməliyyatlar hesabı) Türkiyədə xarici bankların giriş qərarlarında təsirli olduğunu ortaya çıxarmışdır. Bu işdə, daha çox xarici bankın Türkiyədə fəaliy-

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Examining critical factors affecting ownership structure in Turkish banking sector

yət göstərməsi üçün xalis faiz marjasının yüksəlməsinin zəruriliyi ifadə edilir. Bununla birgə, riskli kreditlərin səviyyəsinin azaldılması və faizdən kənar gəlirlərin artırılması vacibdir. Nəticə etibarı ilə, uzun dövrdə xarici bankların bank sektoruna investisiya qoymaları üçün ilk əvvəl, Türkiyənin cari əməliyyatlar hesabı problemi həll edilməlidir. Açar sözlər: Bank sektoru; Sahibkarlıq; Logit model; Şöbə; Performans; Reşyolar.

I.

banks had high amount of open positions. Due to this situation, some banks went bank ruptcy (Çakar, 2003).

Introduction

Global financial system has been integrating intensively day to day. Deregulation in capi tal markets of advanced economies boosted banking profits and earning per shares. On the other hand, smooth integration of global financial system following the collapse of bipolar economic system by the end of 1980s helped international investors to set their targets overseas. New market conditions and advances at technology and communication held new investment opportunities for those who have been seeking more gains.

In 1990s, there were important problems in Turkish economy. Firstly, Turkey had a 3digit inflation rates and high interest rates in those years. Moreover, the amount of foreign debts reached very high levels. Because of these problems, stability program with IMF was started in 1999. Nevertheless, this program was not successful to solve those problems. As a result, devaluation was occur red in 2000. In this process, many banks went bankruptcy. After bad experience gained in 2000 crisis, banking sector was restructured in Turkey. First of all, the role of internal audit and internal control departments in the banks increased. In addition to this issue, necessary conditions to establish a bank were widened. Furthermore, personal responsibilities of top managers and partners of the bank increased. Moreover, market risk, which includes inte rest rate risk and cross currency risk, was added into the calculation of capital adequacy ratio. Because of positive developments em phasized above, a lot of foreign banks got in to the banking sector of Turkey. Most of the large-scaled banks purchased the important percentage of Turkish banks’ shares (Çakar, 2003).

Financial liberalization was started in Turkey in 1980s. After this year, Turkish economy integrated with the economy of the world. This situation increased the amount of trade between Turkey and other countries. In addition to that, banks played an essential role in this process. According to the decisions taken in 24 January 1980, it was aimed to have an improved banking system. There were important reforms related to banking sector, such as eliminating the control over interest rates of loans and deposits. This situation increased competition in banking sector (Aysan and Ceyhan, 2006). In 1989, foreign exchange transactions were liberalized in Turkey with Decision No.32. The main reason for this situation was to increase the efficiency of the banks by providing them to get loans outside of the country easily. How ever, this decision led to significant problems for Turkish banks. These banks increased their foreign currency debts, but gave loans in Turkish Lira.In other words, open position of the banks rose very much. This situation increased the foreign exchange rate risk. During the period of 1994 crisis, Turkish

The entry of foreign banks into a country has a chance for this country to increase the efficiency and effectiveness of its banking sector. Because there are new banks in the sector, there will be a severe competition in the banking sector of this country. This com petition leads interest rate for loans to decre ase and for deposit to go up. This situation provides more saving because depositors 11

Ümit Hacıoğlu, Hasan Dinçer, Serhat Yüksel

will be more willing to borrow their deposits to the banks. Additionally, it also increases investment in the country since investors have a chance to get loan (Coppel and Davis, 2003).

II. Literature Review Bank ownership structure has been one of the important managerial issues until the start of the latest economic crisis by the end of 2008. Then, it has become a major nonfinancial factor affecting banking efficiency and profitability while it has the source of major concerns on resource allocation, profit distribution and risk transmission. Ownership structure should be evaluated also for banking efficiency at financial markets during turmoil. In this part of study, it is aimed to spotlight major studies on ownership structure in banking with respect to the previous studies in literature.

Foreign banks also increase the fund in that country because new banks bring new funds. This provides more secured condition for this country in case of any financial crisis because firms need to have necessary liquidity in such a period. Furthermore, because new banks employ new employees, it can be said that entry of new banks will decrease unemploy ment rate in that country. Because of the re asons emphasized above, it was concluded that foreign banks have many benefits for the economy of this country. On the other hand, if foreign banks decide to go out from the country due to any problems, this will cause capital outflow for this country which leads to many disadvantages for the economy. The refore, the situation of foreign bank entry in a sector is essential. Hence, the studies related to foreign banks entry are crucial.

There are three types of bank ownerships, which are; public banks, domestic private banks and foreign banks.Public banks are the financial institutions which are controlled by government. All kinds of operations such as, defining interest rates, employing people and opening a branch are under the control of the state.Domestic private banks are financial organizations that are controlled by domestic investors. Nevertheless, the owners of the banks should not be foreigners in order for these banks to have a status of “domestic private banks”. On the other hand, the status of the banks is “foreign” when significant rate of shares of domestic banks is purchased by foreign investors. In addition to this situation, the operations in the banks should be under the control of foreign inves tors. Especially after liberalization, the num ber of foreign banks increased very much. The main reason behind this situation is that liberalization eliminated the barriers of capital mobility. Due to this issue, investors had a chance to access new markets to increase their profit. Similar to this situation, banks also preferred to enter into new countries. There are many advantages for foreign investors to enter into new countries. Firstly, by accessing new markets, they have the poten tial to raise their profit amount. In addition to this advantage, while accessing new people,

In the literature, there are many studies related to foreign banks. However, a few of them analyzed the motivations that affect foreign banks to enter new countries. Due to this situation, making a study about the factors which are influential in the decision process of foreign banks is essential.Therefore, in this study, we tried to examine the factors that have an impact on foreign banks to enter into Turkish banking sector. This paper is organized as follows: After ana lyzing the importance of foreign banks for an economy, we will give information about the similar studies in the literature and empirical results of them. The third section of this paper focuses on the places of foreign banks in Turkish banking sector. The fourth section reviews the empirical results of our study. The final section gives information about the conclusion of the study. 12


the diversity in customers will increase. This situation provides banks to decrease the risk of customer default.

to define the factors that affect foreign banks to enter new countries. In this study, first of all, we analyzed the studies about the motivations affect foreign banks to enter other countries due to being parallel to our study. The details of them were depicted on the following table.

There are many studies in the literature related to foreign banks. Some of them tried to analyze the effects of foreign banks to the domestic countries whereas some other tried

Table 1: Studies on the Ownership Structure of the Banks Author Aysan and Ceyhan (2006)

Method Descriptive Statistics

Coppel and Davis (2003)

Descriptive Statistics

Determinants Net Interest Income/Total Assets, Personnel Expenditure/Total Assets, Debt Securities/Total Assets, Total Loans/Total Assets, Nonperforming Loans(gross)/Total Loans, Non-cash Loans/Total Assets, Net Non-interest Income/Total Income, Net Interest Income/ Total Income, Total Expenses/ Total Income, Managerial Expenses/ Total Expenses, ROE, ROA Bank Assets, Total Deposits, Index of Bank Restriction, Net Capital Flows,

Paula and Alves (2006)


Total Deposits, Total Assets, Total Loans, Stock Market Capitalization

Buch (1999)

Panel Data Analysis

Focarelli and Pozzola (2002)


Deposit Rate, dummy variable for EU members, dummy variable for financial centers, Exports, GDP per capita, Inflation Rate, Imports, Lending Rate, Population Total Assets, ROE, ROA, Net Interest Margin, Non-interest Income, Cash Flow, Overhead, Net Charge-offs

Cerutti, et. al. (2006)

Probit

Bumin (2007)

Regression

Wezel (2004)

Regression

Kolstad and Regression Villanger (2004)

Total Assets, Parent bank internationalization strategy, Parent bank size, Parent bank business orientation, Home-country regulations on overseas branches, Host-country GDP per capita, Host-country size, Host-country political risk Total Export, Total Import, ROA, Total Loans, Net Interest Margin, Total Assets, Growth Rate, nflation Rate FDI, Total Export, Total Import, GDP, Real Interest Rate, Economic Freedom, Political Risk, Real Exchange Rate GDP, Growth Rate, Import, Export, Inflation, FDI, Politic Risk, Democratic accountability, Institutional quality, Stability

Results It was determined that high potential of growth rate, increasing population and decreasing inflation rates were the important factors that affect the decisions of foreign banks.

They concluded that deregulation in acountry is the most significant issue that affects foreign banks to enter in this country. It was concluded that financial Liberalization is the most important factor for foreign banks to make investment in Argentina and Brazil. It was determined that GDP per capita is the most significant motivation of foreign banks’ decision of going abroad. They concluded that expected growth rate in the country is the most important issue for a foreign investor to decide to enter in different country. They concluded that foreign banks are more likely to operate abroad when there are lower regulatory restrictions.

it was determined that the profit opportunity in the Turkish banking sector is the main factor of increasing the share of foreign banks. It was concluded that the non-banking foreign direct investments and low country risk are significant reasons of foreign investments for German banks. It was defined that the difference in interest rates between the home country of the investing banks and Italy positively affects the foreign bank entry.

Source: Authors

Aysan and Ceyhan analyzed the motivations of foreign banks behind entry to Turkey. The data between 1997 and 2005 was used in this study. As a result of this study, it was determined that high potential of growth rate, increasing population and decreasing inflation rates were the important factors that

affect the decisions of foreign banks (Aysan and Ceyhan, 2006). Coppel and Davis made a study related to the reasons of foreign banks’ entry in East Asia. The analysis in the study comprises the data for the period between 1990 and 2002. They concluded that deregu lation in a country is the most significant is13


Kolstad and Villanger tried to determine the reasons of foreign banks entry in Italian banking sector. In this study, the data for the period between 1983 and 1998 was used for 22 different countries. As a result, it was defined that the difference in interest rates between the home country of the investing banks and Italy positively affects the foreign bank entry (Kolstad and Villanger, 2004).

sue that affects foreign banks to enter in this country (Coppel and Davis,2003). Paula and Alves also tried to analyze the determinants of foreign bank entry in Argentina and Brazil. The data between 1980 and 2001 was used in this study. It was concluded that financial liberalization is the most important factor for foreign banks to make investment in Argentina and Brazil (Paula and Alves, 2006). Buch made a study to define the reasons why banks go abroad. In this study, he used panel data for the years 1981–1998. As a result of this study, it was determined that GDP per capita is the most significant motivation of foreign banks’ decision of going abroad (Buch, 1999).

In addition to the studies related to the factors that affect foreign banks to enter new countries, there are also many studies in the literature related to the effects of foreign banks to the domestic countries. Çakar analyzed the effects of foreign banks on Turkish banking sector. She made a regression analysis with the quarterly data for the period between 1996 and 2001. It was concluded that when the shares of foreign banks incre ase, net interest margin decreases due to the effect of the competition (Çakar, 2003). Claes sens, Demirgüç-Kunt and Huizinga made an analysis in order to see the effects of foreign entry on domestic banking markets. They used the data for the period between 1988 and 1995 for 80 different countries. Moreover, they made regression analysis so as to achieve this objective. As a result, it was defined that foreign banks have higher profits than domestic banks in developing countries whereas this situation is just the opposite with respect to developed countries (Claessens, et. al., 2001). Claessens and Horen tried to analyze the impact of foreign banks to home countries. They used the data for the period between 1995 and 2009 for 137 countries. They made regression analysis to achieve this pur pose. It was concluded that foreign banks have higher capital and more liquidity, but lower profitability than domestic banks (Cla essens and Horen, 2012).

Focarelli and Pozzola also made an analysis about the foreign investment in banking sec tors. They analyzed 260 large banks from OECD countries. They concluded that expec ted growth rate in the country is the most important issue for a foreign investor to decide to enter in different country (Focarelli and Pozzola, 2002). Cerutti, Ariccia and Peria examined the factors influencing internatio nal banks to invest another country. They made probit analysis to the world’s top 100 banks. They concluded that foreign banks are more likely to operate abroad when there are lower regulatory restrictions. (Cerutti, et.al.,2006).Bumin tried to analyze the determinants of foreign banks entry to the Turkish banking sector. Monthly data for the period between 2003 and 2006 was used in this study. As a result, it was determined that the profit opportunity in the Turkish banking sector is the main factor of increasing the share of foreign banks (Bumin,2007). Wezel analyzed the factors that affect the decisions of German banks to invest in Asia, Latin America and Eastern Europe. Monthly data for the period between 1994 and 2001 was used in this study. He concluded that the non-banking foreign direct investments and low country risk are significant reasons of foreign investments for German banks (Wezel, 2004).

Cull, D’Amato, Molinary and Clarke analyzed the effects of foreign banks entry on Argentina’s banking sector. They made a regression analysis to the data for the period between 1995 and 1997. They concluded that 14


data for the period between 1980 and 1997 was used in this study. As a result, it was concluded that foreign bank entry had the effect of reducing overhead expenses of domestic commercial banks (Denizer, 2000).

when the number of foreign banks goes up, the profitability of domestic banks decreases (Cull,et.al.,1999). Goldberg, Dages and Kinney tried to analyze the role of foreign banks in emerging markets. They made panel data analysis to the quarterly data for the period between 1996 and 1999 for Mexico and Argentina. It was concluded that foreign banks generally have higher loan growth rates than their domestic banks (Goldberg,et.al., 2000). Mathieson and Roldos made a study to define the role of foreign banks in emerging markets. They made a regression analysis so as to achieve this objective. The annual data of 1994 and 1999 was used in this study. It was concluded that foreign banks entry increases the efficiency of the banking system (Mathi eson and Roldos, 2001). Sturm and Williams made an analysis to define the impact of foreign bank entry on banking efficiency in Australia. They used data envelopment ana lysis to the data for the period between 1988 and 2001. As a result of the study, it was determined that foreign banks are more efficient than domestic banks (Sturm and Williams, 2004).

III. The Role of Foreign Banks in Turkish Banking System In order to define the role of foreign banks for Turkish banking sector better, it was decided to analyze the process in two different periods that are 1980-2003 and after 2003. After financial liberalization occurred in 1980s, it was seen that the number of foreign banks in Turkey increased. The main reason behind this issue was the regulations that make foreign banks to enter in the country easier. Some examples related to these regu lations were emphasized (Çakar, 2003): a. b. c.

Interest rates for both deposit and loan were liberated. The restrictions related to foreign currency transactions were removed. Foreign banks were accorded a right to transfer their profits to own country.

However, it can be said that the decision of removing restrictions related to foreign cur rency transactions led to significant problems for Turkish banks. The foreign currency liabilities of these banks increased, but these banks gave loans to their customers in Turkish Lira. This is to say, these banks started to have high open positions that led to the foreign exchange rate risk. As a result, many banks went bankruptcy in Turkey during the period of 1994 crisis. Hyperinflation and foreign debts were other important problems of Turkish economy in 1990s.Because of these problems, stability program with IMF was started in 1999. Nonetheless, this program could not solve these problems. As a result of bad economic conditions, another economic crisis was occurred in Turkey in 2000. Therefore, during the period of crisis, number of foreign banks decreased (Aysan and Ceyhan, 2006).

Önal and Sevimeser also tried to analyze the effects of foreign banks entry to Turkish banking system. Annual data for the period between 1980 and 2004 was used in this study. Moreover, they used data envelopment ana lysis in order to achieve this purpose. As a result, it was determined that the efficiency of foreign banks is better than domestic banks (Önal and Sevimeser, 2006). Çelik and Ürün veren made a study to analyze the effects of foreign bank to the competition in Turkish banking sector. The data for the period between 2002 and 2007 was used in this study. So as to achieve this purpose, they used a regression model developed by Panzar and Rosse in 1987. As a result, it was concluded that foreign banks entry increased competition only in 2006 (Çelik and Ürünveren, 2009). Denizer also analyzed the effects of foreign bank entry in Turkish banking sector. The 15

Ümit Hacıoğlu, Hasan Dinçer, Serhat Yüksel Table2: Data for Foreign Banks in Turkey (1980-2003) Year

Number of Foreign Banks

1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

4 6 9 10 13 15 17 17 19 21 23 21 20 20 20 18 18 18 18 19 18 15 15 15

Number of Branches in Foreign Banks 105 123 127 113 117 120 117 104 106 106 113 108 109 108 105 104 104 116 115 121 117 233 206 209

currency risk, was added into the calculation of capital adequacy ratio. For this situation, a risk management department which reports to Board of Director were formed (Çakar, 2 003). Because of the positive developments in banking sector of Turkey, a lot of foreign banks entered into the Turkish banking sector. Most of the large-scaled banks purchased the significant percentage of Turkish banks’ shares. Some examples for this situation were given below.

Number of Employees in Foreign Banks 1.842 2.034 2.453 2.603 2.769 2.652 2.901 2.721 2.810 2.929 3.012 3.011 3.010 2.408 3.256 2.985 3.170 3.799 4.051 4.185 3.805 5.395 5.416 5.481

a. b. c. d. e. f. g. h.

BNP Paribas - TürkEkonomiBankası (%42.125) Fortisbank - T. Dış Ticaret Bankası (%89.3) Uno Credito - Yapı ve Kredi Bankası (%28.7) National Bank of Greece-Finansbank (%46) Dexia – Denizbank A.Ş. (%75) Eurobank – Tekfenbank (%70) Citibank Akbank (%20) ING – Oyakbank (%100)

A.Ş. A.Ş. A.Ş. A.Ş.

The following table gives information about the foreign banks in Turkey after 2003.

Sources: TBB

As it can be seen from Table 2, there is an in crease in the number of foreign banks after 1980. Moreover, there is also a rise in the number of branches and employees of foreign banks during this period. Another important point defined from the table is that there is a decrease in all categories after 1994 and 2001 crisis. Owing to the bad experience ga ined in both 1994 and 2000 crisis, it was determined to restructure the banking sector in Turkey. Firstly, the role of internal audit and internal control departments strengthened in the banks. Within this scope, these two departments started to report to Board of Directors instead of General Manager in or der to provide independence of them. In ad dition to this situation, requirements so as to establish a bank were widened. In other words, parties should satisfy more necessities to open a bank. Moreover, personal responsi bilities of top managers and partners of the bank increased. Furthermore, market risk, which includes interest rate risk and cross

Table 3: Information Related to Foreign Banks in Turkey After 2003 Year

Number of Foreign Banks

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

13 13 13 15 18 17 17 17 16 16 17 19

Number of Branches in Foreign Banks 209 209 393 1.072 1.741 2.034 2.062 2.096 1.938 2.012 2.244 2.226

Number of Employees in Foreign Banks 5.481 5.880 10.610 25.794 36.707 40.567 39.676 42.013 37.047 38.772 44.159 43.446

Sources: TBB

According to Table 3, it was determined that number of foreign banks increased in Turkey. Moreover, there is also increase with respect to the number of branches and employees of foreign banks. As a result, it was determined 16


that the role of foreign banks in Turkey incre ased after 2003. In addition to this analysis, it would be better to make another analysis related to foreign banks regarding their sha res in total banking sector in Turkey. Table 4: The Percentages of Foreign Banks in Turkish Banking Sector (2004-2014) Year 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Total Assets (%) 3.4 5.2 12.2 15.0 14.8 13.5 14.1 13.6 13.4 15.3 15.4

Total Loans (%) 4.6 6.8 15.3 18.8 17.6 16.9 16.0 14.0 14.4 15.2 15.2

Total Deposits (%) 3.1 4.8 12.0 14.4 13.3 12.9 12.7 13.3 13.5 14.9 15.9

a.

Bank of Tokyo-Mitsubishi UFJ Turkey, Odea Bank and Rabobank were newly established in Turkey. Therefore, it was not possible to find financial ratios of them for the period between 2004 and 2014.

b.

Adabank is not an active deposit bank in Turkey because of the legal problems with its owners.

The list of 23 banks was shown in the following table. Table 5: List of Banks Analyzed in this Study Asset Size (% of deposit banks) in 2014

Asset Size (% of total banks) in 2014

Türkiye Cumhuriyeti Ziraat Bankası

13.7

13.1

Türkiye Halk Bankası

8.6

8.2

Türkiye Vakıflar Bankası

8.8

8.4

Akbank

11.4

10.9

Anadolubank

0.52

0.5

Fibabanka

0.42

0.40

Şekerbank

1.15

1.1

Tekstil Bankası

0.21

0.2

Turkish Bank A.Ş.

0.1

0.07

Bank Name

Sources: TBB

Table 4 shows the situation of the foreign banks in Turkish banking sector. It was ana lyzed that the importance of foreign banks in Turkey increased during the period between 2004 and 2014. While foreign banks comprised about 3.4% of total asset in Turkish banking sector in 2004, this ratio went up 15. 4% in 2014. Moreover, the ratio of foreign banks with respect to total loans in Turkey increased from 4.6% to 15.2% during this period. In addition to them, foreign banks had 3.1% of total deposits in banking sector whereas this ratio rose to 15.9% in 2014. As a result of all this information, it was seen that the significance of foreign banks in Turkey increased last 10 years.

IV. Research and Application

Türk Ekonomi Bankası

3.5

3.3

Türkiye Garanti Bankası

12.1

11.6

Türkiye İş Bankası

13.1

12.6

Yapı ve Kredi Bankası

10.1

9.6

Alternatifbank

0.63

0.6

ArapTürk Bankası

0.21

0.2

Burgan Bank

0.52

0.5

Citibank A.Ş.

0.38

0.37

Denizbank

3.8

3.7

Deutsche Bank

0.21

0.2

Finans Bank

4.2

4.0

HSBC Bank

1.9

1.8

ING Bank

2.1

2.0

Turkland Bank

0.31

0.3

Total

97.96

93.64

Source: Authors

The Scope and Constraints of the Study

It was seen that regarding the size of assets in 2014, 23 banks in our study comprises 97.6% of total deposit banks and 93.64% of total banks in Turkey. Annual data for the period between 2004 and 2014 was used in this study. The data was provided from the Banks Association of Turkey, annual activity reports of the banks, OECD and World Bank.

The main purpose of this study is to determine the reasons of foreign banks to enter in Turkey. We intended to analyze all of 27 deposit banks in Turkey in order to achieve this purpose. Nevertheless, 23 banks were included in this study owing to following constraints. 17


Econometric Model of the Study

the period between 1993 and 2001 was used for 20 different countries. They used logit model so as to achieve the target. In conclusion, it was determined that logit model was very successful as for predicting financial crisis (Bussiere and Fratzscher, 2006). Tunay tried to explain the relationship between competition and financial vulnerability in Turkish banking sector. He used panel logit method in order to test this relationship. Also, annual data for the period between 1988 and 2007 was used in this study. It was concluded that there was negative relationship between these two variables (Tunay, 2009).

Logit Model For the situation that independent variable takes 2 or more discrete values, 3 different models are mostly used in the literature named as linear probability method, probit and logit. These models are mainly used for the cases in which dependent variable is catego rical such as win/loss, pass/fail. With respect to linear probability model, the relationship between dependent and independent variable is linear and model is crea ted by simple linear regression. The problem related to linear probability model is that dependent variable does not always have the values of “1” and “0”. Because of this, if the value of independent variables is more than “1”, it takes the value of “1”. Similarly, if this value is less than “0”, it is accepted as “0”.

Dependent Variable: Type of Ownership in Turkish Banks In this study, it was aimed to define the rea sons of foreign banks entry in Turkey. Therefore, the dependent variable of the model is the type of the ownership of the banks. In other words, if foreign investors have more than 50% of the shares in a bank, the depen dent variable is “1”. In other cases, dependent variable is “0”. As for the following banks, the dependent variable took the value of “0” for all years because they are not owned by foreign banks or the shares of foreign banks are less than 50%.

Logit model is also named as logistic regres sion because it uses logistic distribution function. The equation of logistic distribution function is shown below. F(Yi) = 1 / (1 + e-Yi) = 1 / (1 + e-(B0 + BiXi + εi)) In this equation, “Y” refers to independent variable while “X” means explanatory variable. In addition to them, “B” is coefficient and “ε” means error term. Furthermore, “e” refers to mathematical constant that is approximately equal to 2.72. Because “e” has a between 0 and 1. Therefore, it was seen that the problem related to linear probability model is solved by using logit model. The third model named as probit model is very similar to logit model. Nevertheless, the only difference between them is that logit model uses logistic distribution function while pro bit model uses normal cumulative distribution function.



Akbank



Şekerbank



Halkbank



İş Bankası



Vakıfbank



Yapı Kredi



Ziraat Bankası



Anadolubank



Turkishbank

In addition to them, following banks got the value of “1” for all years because they are completely owned by foreign banks or the shares of foreign banks are more than 50% for this period.

Logit model was used in many studies for different subjects. Bussiere and Fratzscher tried to develop an early warning system in order to predict financial crisis. The data for 18




Arap Türk Bankası



Deutsche Bank



HSBC



Turkland Bank



Citibank

ROE

ROA Growth Rate

Moreover, the important shares (50% or mo re) of following banks were purchased by foreign banks between 2004 and 2014. Before the purchasing transaction, the value of these banks was “0” whereas they took the value of “1” after their purchasing date. 

Alternatifbank



Denizbank



Finansbank



Tekstilbank



TEB



Garanti



Burgan Bank



ING Bank

NPL

NPL/Total Loans TL deposit interest rate CurrentAccount Balance/GDP

(Aysan and Ceyhan, 2006), (Bumin, 2007) (Bumin, 2007), (Kolstad and Willanger, 2004), (Buch, 1999) (Focarelli and Pozzolo, 2005), (Bumin, 2007), (Kolstad and Willanger, 2004) (Aysan and Ceyhan, 2006) (Wezel, 2004), (Buch, 1999) (Kolstad and Willanger, 2004), (Bumin, 2007)

We made a binominal logit analysis to deter mine the reasons of foreign banks entry in Turkey by using SPSS 17 program. Firstly, we made unit root tests to our 10 explanatory variables to define whether they are stationary or not. EViews 7.1 program was used for this purpose. It was determined that all 10 variables were stationary that means there is no risk of spurious regression. In addition to this situation, we also made multicollinearity analysis of independent variables. After this analysis, we had to eliminate some vari ables from the regression analysis in order to remove this problem. The results of logit analysis were depicted on the following table.

In order to define the reasons of foreign banks entry in Turkey, we decided to use 10 independent variables in this study. It was deter mined that these variables were used in similar studies in the literature. Our explanatory variables and related studies for these variables are depicted in the following table.

Table 7: Logit Results Variables in the Equation

Table 6: Lists of Independent Variables in this Study

NonInterest Revenues

(CPIt-CPIt1)/CPIt-1

(Aysan and Ceyhan, 2006), (Focarelli and Pozzolo, 2005),

V. Empirical Results

Independent Variables

Interest Revenues

Inflation

Interest Rates Current Account Balance

Furthermore, Fibabanka was purchased by Fiba Group in Turkey from Millenium Bank in 2010. Therefore, for this bank, dependent variable got value of “1” before 2010 and “0” between 2010 and 2014.

Parameters Interest Expenses

Net Profit/ Total Shareholders’ Equity Net Profit/ Total Assets (GDPt-GDPt1)/GDPt-1

Definition Interest Expenses/ Total Expenses Interest Revenues/ Total Revenues Non-Interest Revenues /Total Assets

Ratings

Studies (Aysan and Ceyhan, 2006), (Bumin, 2007), (Focarelli and Pozzolo, 2005) (Aysan and Ceyhan, 2006), (Bumin, 2007), (Focarelli and Pozzolo, 2005) (Focarelli and Pozzolo, 2005)

1,00

19

Interest Expenses/ Total Expenses NonInterest Revenue/ Total Assets NPL/Total Loans

B

Std. Error

Wald

df

Sig.

Exp(B)

-0.134

0.020

47.276

1

0.00

0.874

0.611

0.124

24.295

1

0.00

1.842

-0.671

0.195

11.770

1

0.01

0.511

Ümit Hacıoğlu, Hasan Dinçer, Serhat Yüksel Current Account Balance/ GDP Interest Revenues/ Total Revenues ROE

0.197

0.096

4.192

1

0.04

1.218

0.113

0.018

41.291

1

0.00

1.119

0.012

0.010

1.353

1

0.25

1.012

any increase in the proportion of interest revenue leads to higher interest margin. Foreign banks will be willing to enter Turkey because of profit potential. Moreover, it was also seen that coefficient of Non-Interest Revenue/Total Assets is positive. This implies that when non-interest revenue increases, foreign banks are disposed to enter Turkish market. Non-Interest revenue in cludes commission incomes, foreign exchange incomes and capital market transactions profits. When this revenue is high in a bank it is believed that this bank will be more pro fitable.

a. The reference category is: 0,00.

Source: Authors

As it can be seen from the table, the reference category is “0” and the consideration point is “1”. This refers that this table shows the results when dependent variable changes from “0” to “1”. This is to say, it gives the results of the condition that foreign banks enter in Turkey. Firstly, it was defined that significance values of 5 explanatory variables are less than 0.05. This shows that these variables are statistically significant at 5% level. On the other hand, significance value of ROE is more than 0.05. Owing to this situation, it is not statistically significant.

Furthermore, the coefficient of NPL is less than “0”. This means that there is negative relationship between NPL ratios and foreign banks entry. High NPL ratios signal a problem about the economy of the country. The main reason behind this situation is that NPL ratio shows the payment power of customers in that country. In addition, high NPL ratio also refers to low asset quality for the banks. Due to these reasons, foreign banks become more reluctant to enter this country.

The coefficient of the variable Interest Expen ses/Total Expenses is less than “0”. It means that there is a negative relationship between foreign banks entry and interest expenses. In other words, if the proportion of interest expenses in total expenses goes up, foreign banks become reluctant to enter the banking system of Turkey. Similar to this situation, the coefficient of Interest Revenues/Total Revenues is greater than “0”. This refers that inc rease in the percentage of interest revenues out of total revenues makes foreign banks more willing to enter Turkish market.

Finally, the coefficient of the variable Current Account Balance/GDP is positive. This refers that if current balance of a country is changed in a positive way (current account surplus), foreign banks become willing to enter Turkish market. On the other side, if there is current account deficit problem, foreign banks beco me reluctant to purchase the shares of Turkish banks. High amount of current account deficit weakens the economy. Similar to this situation, if current account deficit/GDP ratio is more than 5%, this is accepted as a signal of an economic crisis. Because of these reasons, foreign investors do not prefer to enter this country.

Interest expenses include interest payments to depositors and interests for loans banks used. Moreover, interest revenue refers to interest collected from customers. The difference between interest revenue and interest expenses equals to net interest margin. The refore, if the proportion of interest expenses increase, this means that net profit margin will decrease. This situation will not be attractive for foreign banks. On the other hand,

Table 8: R-Square Results Pseudo R-Square Cox and Snell .328 Nagelkerke .437 Source: Authors

20


As it can be seen from the table above, the value of Nagelkerke R2 is 0.437. This means that independent variables can explain 43. 70% of the dependent variable.

are accepted as a bad signal about crisis for a country. Therefore, it can be said that foreign banks become more reluctant to enter Turkey if there is an increase in NPL ratios.

VI. Conclusion

Finally, it was found that “Current Account Balance” positively affect the decision of foreign investors to enter Turkish banking sys tem or not. Therefore, when current account balance is positive (current account surplus), foreign banks will be more willing to get into Turkish market. On the other hand, current account deficit makes economy more fragile. Thus, if there is current account deficit prob lem, foreign banks become reluctant to enter Turkey.

The driving factors of foreign banks entry de cisions in Turkey have been analyzed in this study. Within this context, we used binominal logistic regression method. 24 different deposit banks of Turkey were examined for the period between 2004 and 2014. According to the results of logistic regression, it was determined that 5 explanatory variab les were statistically significant. “Interest Expense” is the first meaningful explanatory variable. It was defined that there is a negative relationship between foreign banks entry and interest expenses. This is to say, if the proportion of interest expenses in total expenses goes up, foreign banks will be unwil ling to enter Turkey. Likewise, it was determined that the variable of “Interest Revenue” positively affect foreign banks entry. Because net interest margin equals to the difference between interest revenue andinterest expense, it can be said that the most important issue that affects the decision of foreign bank is net interest margin. Moreover, it was also determined that there is direct relationship between “Non-Interest Revenue” and foreign banks entry. Because when non-interest revenue is high in banking sector, foreign investors are willing to enter Turkish market. The main reason behind this situation is that non-interest revenue shows the potential pro fitability of the banking sector.

In conclusion, foreign banks have many ad vantages for an economy. Firstly, they incre ase competition among banks. Because of this issue, saving and investment ratio in an economy will increase. In addition to this situation, domestic banks have a chance to transfer the advanced technology of foreign banks. Moreover, they also have an effect to decrease unemployment rate in the country. Due to this situation, if more foreign banks are desired in Turkey, first of all, net interest margin should increase. Furthermore, the amount of non-interest income should go up and NPL ratios should lessen. Finally, current account deficit problem of Turkey should be solved for foreign banks to enter in banking sector. REFERENCES

In addition to this, it was also defined that there is negative relationship between NPL ratios and foreign banks entry. NPL ratio in a country shows the credibility of the custo mers in a country. In addition to them, if N PL amount of a bank is high, this refers that the quality of assets for that bank is very low. Owing to these situations, high NPL ratios 21

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