Esteemed shareholders, customers and employees,
The global economic crisis in 2008, which left an indelible mark on the modern history of the economy and sent shockwaves through the global financial markets, gave way to a new era in 2013; while, for the first time in the last 5 years, developed economies began to exhibit healthy and sustainable signals of a recovery from the crisis, what had been a relatively strong performance among emerging markets was replaced by uncertainty and volatility, particularly in the second half of the year.
The FED’s announcement in 2013 regarding the termination of the bond purchase program paved the way for capital outflows from emerging markets, resulting in the devaluation of the currencies of these countries.
As a consequence of a period of weak performance in global economic activity, a decline in commodity prices was observed, accompanied by low rates of inflation globally. However, as recent fluctuations in capital flows negatively affect expectations, there is now some debate over whether there is upward pressure on the global inflation rate.
Asset purchase program and the US economy
The quantitative easing (QE) program which has been applied in USA for five years has become the principal focal point of the economic improvement. In the last 5years, the FED raised the money supply by nearly US$ 2 trillion. As indicated by the unemployment rate, which stood at 6.6% as of January 2014, increasing money supply provided much needed relief to the US economy, allowing for the creation of new employment opportunities in a sustainable manner. On the other hand, despite some concerns among economists that increasing money supply would lead to high inflation rates, the inflation rate - which stood at around 1.5% at the end of 2013 - would suggest that such concerns are unfounded.
Exiting the QE policy will be the most critical process facing the US economy in 2014. In its meeting on January 29th, 2014, the Federal Open Market Committee tapered monthly asset purchases by US$ 10 billion to US$ 65 billion and is expected to complete the entire program by tapering in tranches of US$ 10 billion per month until the end of the year. The FED aims to complete the QE program without causing alarm to the markets. This process, which is expected to take place in 2014, could prove a determining factoring setting the course of events in the global economy, including Turkey.
1% growth in the EU-28
There were also strong signals from Europe that the continent was finally overcoming the recession in 2013. According to Eurostat data announced in February 2014, the Eurozone’s GDP grew by 0.5% (2012: -0.7%) in 2013 against a 1% rate of growth (2012: -0.4%) in the EU-28. In the same period, the inflation rate in the Eurozone stood at 0.8%. This bright picture indicates that economic recovery had got underway in Europe, which is Turkey’s most important trade partner.
In the period to come, possible steps to be taken by the European Central Bank (ECB) will prove important in avoiding a return to recession in the Eurozone. Having opted for conventional monetary policy instruments, the ECB will first find a way to eliminate conflicts between member countries in order to apply a non-traditional approach. In addition to long-term refinancing operations (LTROs), the ECB is also considering the acquisition of private sector assets as well.
As we head towards 2014, it is observed that European banks have substantially completed their program of strengthening their capital structures. However, the stress test that banks are held subject to and the Basel III capital adequacy criteria effectively compromise the banking sector’s appetite for placements. Further, in light of the experience that they have gained during the global economic crisis since 2008, banks now prefer much more conservative policies than in the past and are more cautious in extending loans to the private sector.
The Turkish economy has demonstrated efforts to adapt to international developments in 2013
It was observed that economy activity in Turkey gained momentum despite the fluctuations in global markets. According to TURKSTAT data, economic activity continued to grow in the first nine months of 2013. Turkey’s GDP increased by 3% in Q1/2013, 4.5% in Q2/2013 and 4.4% in Q3/2013. The PMI index illustrates that economic activity also remained strong in the last quarter of 2013. According to these findings, Turkey’s GDP growth rate, which is expected to reach 4% at the end of the year, will be realized at 2.2% in 2014 because of tight monetary policies.
The seasonally adjusted unemployment rate stood at 9.9% in October 2013. This compares with an unemployment rate of 12.1% in the Eurozone and 10.9% in the EU-28. According to the same data, the unemployment rate in Turkey was lower than the average unemployment rate of 13 EU countries.
The inflation rate in Turkey was higher than the CBT’s 5% target. The average inflation rate in Turkey has been hovering at around 8% since 2004. As a result of the recent devaluation of the Turkish Lira, it is projected that inflation rate will remain high at around 8% in 2014.
Having slid to as low as 6.1% in April 2013, the annual rate of CPI inflation started to edge up in the remaining months of the year. As of December 2013, the annual rates of CPI and PPI inflation had reached 7.4% and 6.9%, respectively. The rate of CPI inflation was mainly affected by the devaluation of the Turkish Lira and increasing unprocessed food prices. While the increase in global oil prices and fall in the Turkish Lira have raised energy prices, there has also been an increase in the rate of inflation in the services sector.
As one of the most important issues on the economic agenda, Turkey’s current account deficit rose by US$ 16.5 billion to US$ 65.4 billion by the end of 2013, while the current account deficit excluding non-monetary gold fell by US$ 983 million to US$ 53.2 billion. The current account deficit/GDP ratio increased from 6% at the end of 2012 to 7.8% by the end of 2013.
As a result of the expected slowdown in economic activity and the normalization of the gold trade, the current account deficit/GDP ratio is expected to fall back to 6% in 2014.
Budget discipline remains one of the most solid foundations of our national macroeconomic structure. In 2013, the budget deficit/GDP ratio was realized at 1.2%, one percentage point lower than the target specified by the government. According to the Medium Term Program, which is based on the projection that budget discipline will be strictly maintained, the budget deficit/GDP ratio is expected to fall to below 2% by 2016.
The CBT applied a cautious monetary policy in 2013, keeping an eye on both inflation indicators and the risks imposed by global uncertainty. To this end, the CBT implemented additional fiscal tightening policies in order to limit the negative impacts of the inflation indicators (which are higher than targets) on pricing behavior. In August, the CBT raised the overnight lending interest rate from 7.25% to 7.75%, expanding the interest rate corridor upward.
Volatility in exchange rate in recent months has increased the concern over the inflation outlook. In its meeting on January 28th, 2014, the CBT’s Monetary Policy Committee announced that it would steadfastly continue to implement the policies to limit the impacts of this trend on pricing, and declared that it had raised the 1-week repurchase interest rate from 4.5% to 10% and the overnight lending interest rate from 7.75% to 12%.
In the light of these developments mentioned above, the Turkish economy is expected to grow at a slower pace in 2014 than in 2013. Depending on the steps taken by the FED based on its asset purchase policy, the global economy is now on the verge of entering a new path, while actors in the Turkish economy will continue to closely monitor the current account deficit and inflation without deviating from the growth model that is based on local market dynamics.
Continued growth in 2013
Despite the slowdown in economic activity, particularly in the second half of the year, the Turkish banking system continued its healthy development. The sector’s total assets grew by 20.6% to TL 1.653 trillion in the first 11 months of 2013. Meanwhile, deposits and general funding costs increased in Q2 and Q3/2013 because of declining risk appetite and increasing interest rates in domestic and foreign markets. However, these developments did not lead to any negative impact on the sector’s asset structure.
By the end of 2013, sector loans rose by 27.1% and reached TL 1.009 trillion compared to the end of 2012. The ratio of non-performing loans continued to edge up in 2013, rising by 23.3% to TL 29.1 billion as of November. Also, in November, the banking industry’s capital adequacy ratio reached 15.6%, exceeding the legal limit of 8% and the target ratio of 12%. The sector, which has been able to manage its risks successfully, maintains its equity capital structure.
Maintaining a healthy balance sheet structure and cementing TEB’s position in the sector.
As one of the most prestigious players in the Turkish banking industry, TEB has maintained its progress with determination in line with its vision, mission, target and strategies and completed the year with a successful performance as indicated by the figures below:
While we maintained our efforts to build infrastructure in our business lines and expand our branch network throughout 2013, we have also taken steps to build a more effective and efficient organization. Our Bank has also focused on enhancing and diversifying the synergy with its strategic partner, BNP Paribas, which has continued to offer global service channels to its customers. TEB has also reinforced its collaboration with its financial subsidiaries and increased its performance by capitalizing on the opportunity to offer complementary products and services to its broad and wide client base.
TEB also injected momentum into its social responsibility efforts in 2013. We have successfully undertaken efforts to promote financial literacy, which, in our opinion, is highly important in raising the social wealth and success of the banking industry. Thus, we were able to reach a total of 105,000 people in a year through the TEB Family Academy. I would like to add that we find such projects highly useful in terms of sustainable growth and social development. TEB will continue to support these areas not only through substantial means, but also through the active participation of its qualified management teams as instructors.
Another development important to TEB was the change in the management team. Having served TEB as the CEO for a period of 10 years, Mr. Varol Civil handed over the reins to Mr. Ümit Leblebici. From now on, Mr. Civil will be sharing his broad experience and knowledge with us at a more strategic level on our Management Boards. I would like to wish the greatest success to Mr. Leblebici and Mr. Civil.
TEB has been successfully applying its strategies with the purpose of becoming a much stronger bank with its expanding and diversifying service channels. We will further cement our prestigious position in the sector by expanding our product and client portfolios. Thanks to its strong shareholding structure and resources, TEB is currently able to undertake the necessary investments for growth. Supporting this strength with flexible and swift decision making processes and the managerial competency of its professional team, TEB looks to the future with confidence.
I would like to take this opportunity to extend my sincerest gratitude to our competent team and strong shareholders for their valuable support and helping us realize our targets, as well as our customers for their unwavering trust in us.
Chairman of Board of Directors