Fitch sees bright future for Turkish banks following sovereign credit rating upgrade

Turkish banks are reaping the rewards of a recent upgrade to Türkiye’s sovereign credit rating, which has eased financial pressures and bolstered investor confidence, according to a report from Fitch Ratings published Thursday.

Fitch noted that refinancing risks for Turkish banks have decreased, largely due to a shift toward more conventional economic policies. This shift has resulted in greater access to external markets and an uptick in debt issuance.

However, banks remain reliant on short-term foreign-currency funding and are sensitive to shifts in investor sentiment, Fitch warned.

While foreign currency deposits have declined, including those protected against currency fluctuations, the report said that the unwinding of the FX-protected deposit scheme is expected to occur gradually due to risks to the stability of the Turkish lira.

Fitch also highlighted potential challenges for banks as tighter monetary policies could moderately pressure asset quality, potentially leading to a rise in impaired loans. However, the agency expects the increase to remain manageable across the sector.

Profitability in the banking sector is likely to soften in 2024, Fitch said, citing factors such as higher funding costs, regulatory lending limits, and a reduced contribution from inflation-linked securities.

Despite these challenges, Fitch underscored that Turkish banks are well-capitalized with strong profits before loan losses and robust regulatory support for foreign currency assets. Nevertheless, capital levels remain sensitive to macroeconomic volatility and the potential depreciation of the lira.

Fitch recently upgraded Türkiye’s long-term rating to BB- from B+, with a stable outlook. This upgrade also led to positive adjustments for 24 Turkish banks, reflecting improved external buffers, reduced contingent foreign exchange liabilities, and expectations of lower inflation and current account deficits.