An injection of additional capital will help Ziraat Bank to spearhead President Recep Tayyip Erdoğan’s drive to boost economic growth and tackle chronic current account deficits this year, the head of Türkiye’s largest lender said.

Chief Executive Alpaslan Çakar, who is also chairperson of the Turkish Banks Association (TBB), said state banks like Ziraat were the driving force in the economy in recent years and would carry on even as they seek to pay dividends in 2023.

He downplayed concerns raised by private-sector counterparts over risks posed by an array of bond-holding regulations, and he said the credit would continue to boost sectors like manufacturing and agriculture.

Erdoğan introduced a "new economic model" in 2021 that prioritizes growth, investment and exports and is aimed at flipping Türkiye’s persistent trade deficits, a major component of the current account. The model relies on targeted loans and low interest rates and also aims at eventually helping reduce inflation.

"We will give significant support to Türkiye’s economic model. For that reason, we want to be strong in capital terms," Çakar told Reuters in an interview conducted late last month.

In December, Reuters reported, citing sources, that state-owned banks were in talks with the Treasury and the sovereign wealth fund to secure more capital, allowing them to boost lending ahead of presidential and parliamentary elections this year.

"There is no clear figure yet for the capital increase of state banks. We are consulting with the relevant institutions on this issue," Çakar said at Ziraat’s Istanbul headquarters.

The economy is expected to have expanded by 5% in 2022 but growth was set to cool toward the end of the year. The government still foresees a 5% growth in 2023 as well.

To boost growth and back the government’s economic vision, the central bank has slashed its key interest rate to 9% from 19% since September 2021.

State banks have supported the economy with low-cost financing for the last few years, increasing their dominance in the financial sector and their capital needs. State banks’ share of loans has reached a record level near 50%.

Dividends, loans

Asked about record sector profits in 2022, Çakar confirmed a Reuters report in late December that Turkish banks wanted to make dividend payouts to shareholders. The Banking Regulation and Supervision Agency (BDDK) – which makes recommendations each year regarding banks’ profit distribution – was evaluating the request, he said.

Çakar, however, said profits were set to fall in 2023 as inflation cools.

The annual inflation in Türkiye in December decelerated at its steepest pace in more than a quarter century.

Annual consumer price inflation fell sharply to 64.27% in December from the 84.39% reported in November. The decline was driven mainly by the so-called favorable base effect and marked a second straight fall after inflation hit a 24-year high of 85.5% in October.

In the January-October period, the banking sector’s net profits leaped 417% from a year earlier to TL 389 billion ($20.72 billion), boosted by inflation-indexed bond yields.

Authorities have sought to discourage foreign exchange use following the steep depreciation in the lira in 2021.

The lira lost some 44% of its value against the dollar in 2021. It declined another 30% in 2022 but held mostly stable in the last quarter.

Authorities imposed nearly 100 new regulations on banks, including a mandate to hold more treasury bonds, which drew complaints from private-sector executives.

But Çakar said these holdings would not pose risks. "The weight of fixed coupon bonds held in the balance sheet due to regulations will not reach a level that will disrupt the balance sheet," he said.

He also said that Ziraat’s selective loans policy would continue in 2023, with the priorities being manufacturing, agriculture and small- and medium-sized enterprises (SMEs).

"We have become one of the banks that gave the biggest support to the Turkish economy model," he said, noting its cash loan size rose 61% to TL 1.2 trillion in 2022.

Ziraat’s non-performing loans ratio was low at 1.1% last year, compared with 2.2% sector-wide, he said.

He also said the bank would be active in international funding this year, aiming for a 100% syndication renewal in February, and seeking to increase international funding, including via Eurobonds.