1. 03.09.20151 Loan and Income Diversification Strategies and Performances of Turkish Banks Yetkin ÇINAR, Ph.D. Asst. Prof., Faculty of Political Sciences, Ankara University, Turkey Post-Doctoral Researcher, HSE, Moscow

2. 03.09.20152 Introduction Recent Trends and Structural Characteristics in Turkish Banking Sector

3. 03.09.20153 3 Recent Trends and Structural Characteristics of Turkish Banking Sector Structural Chracteristics of Turkish Banking Sector Number of Banks Number of Branches Total Assets$ Share of 10 largest banks by Total Assets (%) Share of Foreign Equity$ Deposits$ Loans$ Non-Performing Loans (Net)$ Shareholders’ Equity$ ROA

4. 03.09.20154 4 Recent Financial Crisis and TBS After overcoming the impacts of the 2001 crisis, i.e., between the years 2003 and 2012; Turkish Banking Sector showed a rapid growth performance, except from the effects of global crisis in 2008 and fluctuations in 2005 and 2006. Turkish Banking Sector showed a rapid growth performance, except from the effects of global crisis in 2008 and fluctuations in 2005 and 2006. Rapid growth in the banking sector raise foreign fund entry but, incurred lower profit margins. Rapid growth in the banking sector raise foreign fund entry but, incurred lower profit margins. Faced with a more competitive environment, banks had to account for loan losses while increasing their loan supply to become more profitable.. Faced with a more competitive environment, banks had to account for loan losses while increasing their loan supply to become more profitable..

5. 03.09.20155 What is the Role of Diversification? & Its relationships between Performance and Risk Diversification and Performance of Banks – Previous Studies Possible Relations between Performance, Risk and Diversification The Objective and The Scope of This Research

6. 03.09.20156 6 Diversification and Performance of Banks – Previous Studies Acharya et.al. (2006), Meyer & Yeager (2001), Stiroh & Rumble (2006), Mercieca et al. (2007), Hayden et al. (2007), Kamp et al. (2007), Baele et al. (2007), Berger et al. (2010), Tabak et al. (2011).… analyze the relationship between diversification and performance…. in Italy, Germany, Brasil, EU-15, US Canada, China … However, the empirical findings assert that diversification of bank’s assets or incomes is not guaranteed to produce superior performance and/or greater safety for banks However, the empirical findings assert that diversification of bank’s assets or incomes is not guaranteed to produce superior performance and/or greater safety for banks

7. 03.09.20157 7 The Objective and The Scope of Research n the effects of loan and income diversification strategies on the performance (and risk) of Turkish banks n over the period 2005–2011, which includes the fluctuations in 2006 and 2008-2009 global financial crisis. This paper empirically analyzes;

8. Our Sample n In Turkish banking sector, there are 45 banks, 32 of them are commercial banks. n They consist of 3 state-owned, 11 private (Turkish), 17 foreign banks in terms of ownership characteristics and one of them is under the control of Savings Deposit Insurance Fund. n 20 commercial banks can be taken into account in 7 years: 2005-2011. However, they represent %95 of total assets in Turkish Banking Sector. 03.09.20158

9. 9 Methodology & Application Diversification Measure and Its “Related” and “Unrelated” Components: Entropy Models Relationships between bank returns, risk and diversification: Panel Data Analyses

10. Diversification Measure and Its “Related” and “Unrelated” Components: Entropy Models n In this paper, diversification is measured by Entropy methodology (Shannon, 1948; Palepu, 1985), so as to distinguish the total diversification into related and unrelated components. n Entropy indices distinguishes between diversification within groups which consist of highly-related components and diversification across these groups. 03.09.201510

11. Formally; n Let the amount of exposure of bank b at time t to each sector / product (or the amount of each type of earning) i denoted as X ibt, where (i = 1…m). n Then, relative amount of the exposure / earnings in total amount of loan exposure / earnings will be; 03.09.201511 n The total diversification (TD) of this bank, at the given point of time is measured by this equation, by the entropy measure:

12. The Meaning of Entropy; 03.09.201512 n If TD is near to 0 then it means the loan portfolio of the bank is highly concentrated (low diversified or highly focused). n On the other side, if relative exposures very close to each other, then TD takes higher values; at the extreme point if they are equally distributed, then TD takes its highest value (perfect diversification).

13. Calculation of the Components of Diversification;  IF there is, m type of loans / earnings in n group, where m > n. Then in any jth group the diversification of is measured by; “Within Group Diversification” or “Related Entropy” measure  AGD: Across Groups or Unrelated Diversification (AGD) 03.09.201513 It’s been shown that;

14. Relationships between bank returns, risk and diversification: Panel Data Analyses n This paper’s aim is to show empirically that the relationship between diversification strategy and a bank’s performance (profitability and risk) depends on the degree or type of diversity; q diversification in interest and non-interest incomes, q industrial, q borrowers q diversification with respect to financial products and q related versus unrelated diversification. 03.09.201514

15. 03.09.201515 Measures calculated from Diversification Strategies: Independent Variables

16. Diversification Strategies -1: Loan Diversification in terms of Financial Products 03.09.201516 Loan Diversification in terms of Financial Products (Borrowers) Gr. (A): Consumer Loans - Housing, - Vehicle, - Consumer, - Credit Cards, - Other -Gr. (B): Commercial - Business Loans; - Vehicle - Corporate Credit Cards - Other

17. Diversification Strategies -2: Loan Diversification in Industries (Sectors) 03.09.201517 Loan Diversification in Industries (Sectors) Gr. (A): Agricultural sector; - Farming and raising livestock, - Forestry, - Fishing Gr. (B): Manufacturing sector; - Mining - Production - Electric, gas and water Gr. (C): The Construction sector (in a single item) Gr. (D): Wholesale and retail trade; - Hotel, food and beverage services, - Transportation and telecommunication, - Financial institutions, - Real estate and rental services, - Self-employement services, - Education services, - Health and social services in the Services sector Gr. (E): Other sectors which are not classified above (in a single item )

18. Diversification Strategies -3: Income Diversification – Interest vs. non-Interest Revenues 03.09.201518 Income Diversification w.r.t. interest and non-interest revenues Gr. (A): Interest based revenues; revenues from; - borrowers (loans) - banks - financial market operations - treasury bonds and issues - other Gr. (B): Non-Interest based revenues; revenues from; - dividends - Fees and Commissions revenues from - dividends - Fees and Commissions

19. 03.09.201519 Performance Measures: Dependent Variables and Control Factors

20. Panel Data Analyses: Performance and Risk Measures n In panels, performance of the banks is evaluated in two dimensions: q Profitability: Return On Assets (ROA) of banks q Loan Risk: Measured in terms of ln (NPL / Assets) Consistency (Stability): The standart deviation and the differences between actual data and trend values of the mean values of performance measures (ROA and ROE) are also calculated and used in a Linear regressions. 03.09.201520

21. Panel Data Analyses: Control Factors In this study different control variables are used. These are the banks’; n Size: In order to observe whether size of the bank is important in the relationship between diversification and risk or return, we control for size by using a variable measured by Assets in the regressions. n Ownership Structure: In order to test whether ownership structure of the banks affects the results, the ownership dummies are used, i.e. state-owned, private (Turkish) or foreign-owned banks. n Macroeconomic Factors: In order the capture the crisis and fluctuation period effects, time dummy is used which reflects the changes in the years 2008 - 2010 and 2006. 03.09.201521

22. Panel Data Analyses: Formulations Relationship between banks’s return and diversification measures is investigated by running two type of regressions: 03.09.201522

23. Panel Data Analyses: Formulations Relationship between banks’s risk and diversification measures is investigated by running the following regressions: 03.09.201523

24. 03.09.201524 Summary of Results

25. Diversification (sector means) Patterns vs. ROA

26. Diversification Components

27. Diversification Trends All diversification measures are normalized with the ln (m), where m stands for number of loan type in the groups (they are different). When we compare them, we see that in years total (mean) sectoral diversification were raising. Income and product diversification have been falling in total terms. However we realize different patterns when we consider them w.r.t. their components. It is consistent with our assumption that components of diversification should also be taken into account in regressions. 03.09.201527

28. 03.09.201528 Main Results

29. 03.09.201529 Diversification Component ROARISK AGD – Product N/Sig.N/Sig. TWGD – Product N/Sig. AGD (-1) – Product N/Sig. TWGD (-1) – Product N/Sig. AGD – Sector N/Sig. TWGD – Sector N/Sig.N/Sig. AGD (-1) – Sector N/Sig.N/Sig. TWGD (-1) – Sector N/Sig.N/Sig. AGD – Income N/Sig. TWGD – Income N/Sig. AGD (-1) – Income N/Sig.N/Sig. TWGD (-1) – Income N/Sig.N/Sig. SUMMARY of RESULTS

30. Main Results -1 n Results summarized in Table show that there is a little evidence that diversification positively effects the returns and risks, increases ROA and reduces NPL. In total terms no significant effect is found. But when using its components some significant effects can be realized. n For instance in total terms since there is no significant effect in total terms by means of product diversification; evidences are obtained in its components. However they are opposite. In terms of across groups diversification a negative effect on ROA is observed, while within group diversification has positive effects on ROA. This indicates that the total effect is neutralized. 03.09.201530

31. Main Results -2 n The evidence about income diversification effects found in this study means that if a bank’s exposures are to the individual consumers rather than corporate clients and the bank changes her decision and shifts to the corporate banking it has negative affects the risk of loan losses, n But if it stands in the retail (consumer) banking and diversify in terms of products and shows the benefit of measuring diversification in distinguished terms. n This result is also in consistent with the previous studies asserting that noninterest revenues have more crucial role in bank management in a more competitive environment. Fees and commissions are the in the innovative instruments of return in the new era of banking. 03.09.201531

32. Main Results -3 n There is no substantial evidence about the effects of sectoral diversification on performance. The only significant finding is that across group diversification reduces risk. n It could be suggested that all sectors effected from economic conditions in a similar way. n Therefore loan losses or returns gained from the sectors, especially within one group, are not differentiated. Only, if possible, across group diversification can give a benefit. 03.09.201532

33. 03.09.201533 Conclusion

34. 03.09.201534 Conclusion  In conclusion, the main results show that; there are only little evidences that diversification increases ROA and reduces NPL, however they are found with respect to the components of diversification measures. Therefore it is shown in this study that when investigating the effects of diversification using different dimensions of this factor is more beneficial than using only total measures.

35. 03.09.201535 Thank You… Comments and Questions?