Fitch’s critical assessment for Turkish banks

Fitch said continued improvements in Turkey's operating environment and the country's foreign exchange reserves position could have a positive impact on the credit ratings of Turkish banks, even without a sovereign rating upgrade. Fitch Ratings revised its operating environment (OE) score for Turkish banks to 'B+'/positive in September 2024, reflecting improvements in Turkey's macroeconomic and financial stability. A further decline in headline inflation and a reduction in external vulnerabilities are among the main factors supporting the upside expectation on this rating. However, risks remain, with high inflation and the sector's dollarization rate still limiting Turkish banks' ability to operate. In addition, regulatory measures such as loan growth limits and high reserve requirements continue to put pressure on banks. However, if these pressures ease and economic policies continue to normalize, Fitch may align the bank operating environment score with Turkey's sovereign rating (BB-/Stable).

Economic volatility continues to pose risks

Fitch predicts that bank profitability may improve as interest rates in Turkey fall. Currently, banks are under margin pressure due to high reserve requirement ratios and loan growth limits, while the easing in interest rates may alleviate this pressure by allowing margins to expand. On the other hand, inflationary pressure on operating expenses continues to weigh on profitability. In terms of asset quality, slowing economic growth and longer loan maturities may lead to a gradual increase in NPL inflows. However, Turkish banks should be able to absorb this, thanks to their robust provisions, profitability ratios and some banks' free provisions. According to Fitch's assessment, although banks' capital buffers are adequate, policy uncertainties and economic volatility continue to pose risks.