Effects of foreign banks entry into the domestic banking industry

Considering that one of the most important financial institutions of an economy is banks; determining the factors affecting the banking sector in general and the factors affecting its profitability as an indicator of financial performance in particular is very important for a strong economy and strong financial performance of the banking sector. The aim of this study is to determine the effect of foreign capital entry, which continues to increase in the Turkish banking sector, to the domestic banking sector and internal factors affecting the Turkish banking sector as a whole. The fact that there are many competing metrics used in the measurement of banks' financial performance both at the national and global level makes it necessary to pin down the real factors affecting profitability of the banking sector. In this study, certain ratios are selected from the CAMELS performance analysis which is used in many foreign sources to determine the internal factors influencing bank profitability. In this context, data for the period between 2008-2018 coming from 11 domestic-owned deposit banks operating in Turkey and 15 foreign-owned banks operating in Turkey is modeled using balanced panel data and modeling with random effects. ROA (Return on Assets) and ROE (Return on Equity) variables were used to represent the banks' financial performance as it reflects their profitability. To explain these variables 17 independent variables were used. According to the results obtained from the two models, there is no significant difference in financial performance in terms of profitability between domestic-owned and foreign-owned banks operating in Turkey. The variables that significantly affect ROA are; the ratio of other operating expenses to total assets, the ratio of net interest income after special provision to total assets, the ratio of non-interest income to total assets and growth of bank assets. The factors affecting ROE similarly to ROA are the ratio of other operating expenses to total assets, the ratio of net interest income after special provision to total assets, the ratio of non- interest income to total assets and growth of bank assets. In addition to these variables, the ratio of equity to total assets, the growth in the ratio of non-performing loans to total loans, the age of the bank and growth in the share of foreign banks were also determined to have significant effects on the ROE. Furthermore, for the banks operating in Turkey there is no significant relation between profitability metrics and of the growth in market share, the ratio of total loans to total assets, the ratio of total deposits to total assets, capital adequacy ratio, growth in the ratio of liquid assets to short term liabilities, net balance sheet and off balance sheet position to equity and interest expense to total assets.