Fitch Ratings: Turkish Banks' Expectations Improve Despite Risks

According to Fitch Ratings' new report, Turkish banks are facing improving expectations following the recent rating upgrade, and decreasing short-term macroeconomic and financial stability risks are leading to a reduction in funding pressures and the renewal of investor confidence.

Fitch noted that "Refinancing risks for Turkish banks have decreased due to a more traditional macroeconomic policy mix. This is evidenced by increased access to external markets and a rise in debt issuance."

However, banks continue to be exposed to investor sentiment and significant amounts of wholesale foreign currency funding, particularly with a substantial share of short-term debts. There has also been a decline in deposit dollarization, including a decrease in the share of foreign currency-protected deposits. Considering potential risks to the stability of the Turkish Lira, we expect authorities to gradually continue relaxing the foreign currency protection deposit mechanism.

"We anticipate that the tightening monetary policy will exert moderate pressure on banks' asset quality, with a mild increase in the sector's non-performing loan ratio. Retail loans, particularly credit cards and personal loans, have already faced some deterioration, especially with potential weakening among SMEs; however, we expect the overall deterioration in asset quality to remain manageable in relation to banks' profitability and provisioning buffers," Fitch stated.

Fitch argued that banks' net interest margins are under pressure due to rising funding costs, legal limitations on loans, and relatively low yield from CPI-indexed securities, stating, "We expect profitability to remain at a reasonable level but to be weaker compared to 2023, and should hyperinflation accounting be implemented from 2025, we anticipate potential effects to be observed."

Fitch highlighted, "Turkish banks are generally well-capitalized, supported by their provisioning buffers and pre-impairment profits," and noted that regulatory leniency regarding foreign currency risk-weighted assets and securities portfolios also supports reported capital adequacy ratios. "However, capitalization remains sensitive to macroeconomic risks and the depreciation of the Lira," it added.