FINANCIAL PERFORMANCE OF TURKISH BANKS IN THE COVID-19 ERA: A CLUSTER ANALYSIS

Abstract

Purpose- Stability of the financial system and the performance of its most important constituents, namely the banks, are crucial for the wellbeing of an economy. Turkey is one of the biggest Emerging Market economies making its banking sector a good case for analysing the bank performance in the era surrounding the Covid-19 Pandemic. This paper aims to map Turkish banking sector in terms of its players’ financial strength and identify the attributes of the banks that present weaknesses in the period around Covid-19 Pandemic. Methodology- A hierarchical cluster analysis with Ward’s method and squared Euclidean distance measure is conducted to divide the Turkish banking sector into groups which display maximum between cluster variance and minimum within-cluster variance based on 14 attributes both derived from CAMEL ratios and categorical characteristics. The analysis repeated with non-hierarchical and two-steps clustering to identify the most relevant characteristics in distinguishing the banks. A subsequent ANOVA test is also applied looking at any statistically significant differences among the clusters in regard to bank credit ratings. 32 banks are included in the study which are headquartered in Turkey and regularly publish independently audited annual financial reports. Findings- Turkish banking sector can be divided into three groups in terms of their financial strength: the large local banks with strong capital levels, the large banks owned by foreigners and the small local banks with limited lending capabilities. The results of ANOVA test shows that there is a significant main association of a bank’s cluster with its potency, F (2,29) = 16.106, P=0.000. The tests reveal that 2 clusters that make up the three-fourths of Turkish banking sector have underperformed. Conclusion- The analysis provides an ease for understanding the Turkish banking sector’s structure by grouping the banks into certain categories. Such grouping enables the reader to grasp which attributes are important in evaluating the strength of the players, as well as the overall banking sector. It is found that there is room for improvement for a significant three-fourth portion of the sector. It is also shown that the key attribute which is going to play a central role in this improvement is capitalization.

Keywords

• Turkish banks
• Turkish banking sector
• Cluster Analysis
• bank performance in Turkey
• Turkish Banking in Covid19 Era

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