Fitch sees improved prospects for Turkish banks after rating upgrade

By Tuba Ongun

Turkish banks are benefiting from a recent boost in Türkiye’s sovereign credit rating, which has eased financial pressures and lifted investor confidence, according to a report from the Fitch Ratings on Thursday.

Refinancing risks for Turkish banks have decreased thanks to a shift toward more traditional economic policies, the report said.

“This is demonstrated by increased access to external markets and a rise in debt issuance,” it added.

However, banks still rely heavily on short-term foreign-currency funding and are sensitive to investor sentiment, the report said.

Noting that foreign currency deposits have decreased, including deposits that are protected against currency fluctuations, the report said: "We expect the unwinding of the FX-protected deposit mechanism by the authorities to remain gradual, given potential risks to lira stability."

While tighter monetary policy may place moderate pressure on banks’ asset quality, leading to a potential uptick in impaired loans, Fitch anticipates that the increase will remain manageable within the sector.

Profitability in the sector is likely to soften in 2024 due to higher funding costs, regulatory lending limits, and a reduced contribution from inflation-linked securities income.

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

Fitch upgraded Türkiye's long-term rating to BB- from B+ with a stable outlook, resulting in upgrades for 24 Turkish banks. This reflects improved external buffers, reduced contingent foreign exchange liabilities, the expectation of lower inflation and lower current account deficits.