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Are Turkish Cypriot banks really the Wild West?

By Fiona Mullen

In an interview with the Financial Times this week, the finance minister, Harris Georgiades, referring to the Turkish Cypriot banking sector, said “It’s a bit of a wild-west situation. Nobody knows enough about ownership, capitalisation and supervision in the Turkish Cypriot banking system.”

Taken at face value, this suggests that there is no information at all on the Turkish Cypriot banks.

However, with a little bit of digging and a lot of Google Translate, it is possible to glean some facts about the banks in northern Cyprus.

 

More liquid than Greek Cypriot banks

The first conclusion from the data is that Turkish Cypriot banks are far more liquid than their Greek Cypriot counterparts, as they have more on deposit than they have handed out in loans.

Deposits in Turkish- and Turkish Cypriot-owned banks in the north amounted to TL 14.0bn (€4.2bn) in September 2015 according to figures published by the regulator, while loans amounted to TL 10.9bn (€3.3bn). The loan to deposit ratio was therefore a very comfortable 79% –  meaning no need for any Emergency Liquidity Assistance (ELA).

By comparison, deposits in the southern part of the island were €47.4bn at the end of November 2015 according to the Central Bank of Cyprus, compared with loans of €63.2bn. The loan/deposit ratio in the south is therefore 133.3% and is the primary reason why Bank of Cyprus is still depending on ELA, albeit at a rapidly declining rate.

Nor does the size of the loan book ring any alarm bells. With GDP in the north of around €3bn, the Turkish Cypriot loan book is around 110% of GDP. In the south, the loan book in November was over 360% of GDP. Moreover, as we all know, around half of that loan book is non-performing.

I could not find any statistics on non-performing loans for the north but anecdotally, I am told that the NPL ratio is only around 8%.

 

Banks seem well capitalised

Of course, applying eurozone rules on NPLs might push that figure upwards, as it has done for Greek Cypriot banks. However, even if it does, the banks seem to have enough capital to cope with any new provisions.

The banking-sector report cited the capital adequacy ratio (CAR) of the Turkish Cypriot banking sector at 17.3% in Septmeber. This is higher than the 10% regulatory requirement.

Note that the CAR is not the same as the stricter common equity tier 1 (CET1) ratio. Nevertheless, the CAR also seems to be higher than the equivalent in the south. Inferring from Central Bank of Cyprus data, it looks like the Greek Cypriot CAR is 15.7%.

In sum, therefore, the Turkish Cypriots banks appear to be in good shape, at least at aggregate level. This does not mean that individual banks will not any face issues when they all have to implement the full force of eurozone rules.

But that makes them similar to a lot of banks in the eurozone: not quite Disneyland, but not the Wild West either.

Fiona Mullen is Director of Sapienta Economics www.sapientaeconomics.com

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