Determination of Leading Indicators in Credit Risk Management in the Turkish Banking Sector: Sectoral Risk Rating

Abstract

The aim of this study is to make sectoral risk rating based on the current period financial ratios of the industry sectors and to determine the leading indicators for the next period. Factor analysis method was used in sectoral risk rating. In 2016 to 2019, when the sectors were ranked according to the non-performing loans ratio, the Financial Intermediation, Chemical-Chemical Products and Motor Vehicles sectors, which showed the best performance, took also the best place according to the analysis results. The fact that the Energy and Construction sectors were at the bottom of the rankings of sectoral risk rating showed consistency with the rankings made according to the non-performing loans ratio. In addition, the Banking Regulation and Supervision Agency's announcement dated September 17, 2019 indicates that the loan amounting to TL 46 billion for the two sectors in question should actually be followed in the non-performing loans accounts. This announcement confirms the results of the analysis. In order to determine the leading indicators, panel data analysis was applied to the data set for the 2013-2019 period, which was created by adding the time dimension to the horizontal section data used in factor analysis. As a result of both analyzes, it was determined that Economic Profitability, Return on Assets, Equity Ratio can be evaluated as a leading indicator.