Türkiye’s banking sector may see a gradual recovery in net interest margins by the end of the year, aided by anticipated monetary easing from the country’s central bank, according to Fitch Ratings.
Ahmet Emre Kılınç, director of banks at Fitch, said on Tuesday that the credit ratings agency now projects the Central Bank of the Republic of Türkiye (CBRT) to lower its benchmark interest rate to 33% by year-end.
"As a result, we expect an improvement in banks' net interest margins, although this recovery will be somewhat more modest compared to our initial projections at the beginning of the year," Kılınç told Anadolu Agency (AA).
The CBRT pivoted to raising its key policy rate by 350 basis points in April to 46% and pushed the overnight lending rate to 49% after Turkish assets and the lira fell sharply after Istanbul Mayor Ekrem Imamoğlu was jailed pending trial over graft charges.
Before that, the bank had begun an easing cycle and gradually cut its one-week repo rate to 42.5% in March as inflation fell from the level of more than 75% that it reached in May 2024.
A sharper-than-anticipated slowdown in annual inflation to 35.41% has reignited speculation that the bank could resume rate cuts as early as this month.
The outlook for Turkish banks is shaped by domestic market developments and the impact of global customs tariffs, Kılınç said.
Before March, he noted, there was an expectation that continued rate cuts would support banks' interest margins, but this has been somewhat delayed due to volatility in the domestic market.
While the CBRT has signaled a cautious approach, analysts say the decline in inflation has provided some additional room for the bank to resume the rate cuts. Any shift, however, will likely be contingent on whether the overnight lending rate converges with the policy rate in the coming weeks.
The CBRT’s next monetary policy committee (MPC) meeting is scheduled for June 19, followed by another on July 24.
Last month, the bank kept its inflation forecast steady in its quarterly report, saying upward and downward risks balance out. Governor Fatih Karahan said the bank is ready to tighten policy if inflation worsens.
The bank’s year-end mid-point estimate stands at 24%, with an upper band of 29%. Turkish officials continue to emphasize that inflation will remain within this forecast band. Market surveys see a higher rate of around 30%, though estimates have recently been revised down modestly.
Kılınç highlighted that the persistence of high interest rates leads to increased risk costs.
"We have begun to closely monitor banks' asset quality for the second half of the year. Currently, we believe that the risks to asset quality remain manageable for banks. In this regard, we maintain our neutral outlook for Turkish banks from the beginning of the year," he said.
Fitch's operating environment score for the Turkish banking sector remains positive, and the agency is keeping it unchanged, according to Kılınç.
"Profitability could improve this year. However, recent market volatility has somewhat disrupted the positive trajectory. Due to this volatility, Türkiye's five-year credit default swap (CDS) had risen, but has since declined again to around 300 basis points," he added.
Despite concerns over short-term external debt levels, Turkish banks have retained strong access to foreign financing, according to Kılınç.
He pointed out that the high level of short-term external debt poses a refinancing risk, though he emphasized that this is not a new concern.
"Last year, market access was strong, with many banks issuing both Eurobonds and subordinated loans. Since March, syndication loans have been renewed at rates exceeding 100%, indicating that banks continue to secure external financing," Kılınç said.
"However, long-term bond issuances have slowed, with costs being a key factor. In this context, banks are likely to wait for a more favorable environment before proceeding with further issuances."
Kılınç also mentioned that global developments, including U.S. interest rate policy, geopolitical risks, and tariffs, could indirectly impact the outlook for Turkish banks. However, he emphasized that tariffs were unlikely to have a significant direct effect on Turkish financial institutions.
