2010 was a year when interest margins tightened sharply on the back of faster repricing of IEAs due to maturity imbalances between assets and liabilities which weigh on top line revenues. It was the significant improvement in asset quality trends that enabled Turkish banks compensate for the pressure at the NIM level and net earningshiked 10% y/y in the first ten months of the year. NIM tightened 119bps q/q and NII declined 11% as 26% y/y loan growth could not off-set the NIM shrinkage.
Heading into 2011, the banking environment could even be more challenging as; (1) NIM should tighten further in 2011; (2) cost of risk would normalize; and (3) trading gains will vanish. Put into other perspective, 2011 could a the year when efforts to generate credit volume expansion intensifies further so as to compansate for the pressure at the NIM level and could also be a year when policies to further improve cost efficiencies become even more evident.