Major Turkish banks have launched internal stress tests against possible market shocks due to the May elections, industry executives said Tuesday.

The lenders are also getting ready for lower profits later in the year due to numerous recently implemented regulations.

The executives said the tests, conducted independently of yearly required reviews, are meant to weigh the impact of more than 100 new rules authorities have adopted since late 2021 to back the government’s low-interest rate policy.

While the May 14 election outcome is hard to predict, bankers are sure that the yawning gap between high-interest rates on deposits and low-interest rates on loans will hit their balance sheets in the year’s second half.

That would mark a departure from last year when lenders logged record earnings largely thanks to inflation-linked bonds.

The government has endorsed an economic program based on lower interest rates to boost loans, exports and investment. It says the model would also eventually help Türkiye solve its chronic current account deficit problem and contribute to stabilizing the Turkish lira.

President Recep Tayyip Erdoğan has called for lower borrowing costs to boost economic growth through production, investment and exports, insisting that interest rate hikes cause inflation.

The annual inflation fell to 55.18% in February, marking a notable regress from the peak of 85.5%, a 24-year high, registered last October.

The opposition bloc, however, has vowed to reverse the policy, signaling it would start with interest rate hikes in case it wins the presidential and parliamentary elections.

"The banks started to conduct stress tests against possible exchange rate, interest rate or credit shocks," a senior executive at one large lender told Reuters, speaking anonymously.

Another executive said firms are testing balance sheets against potential market volatility and its effect on outstanding loans. "Each bank has different scenarios they test against," the person said.

After high market volatility and depreciation in the lira crash in late 2021, the government doubled its economic program, including calling on the central bank to continue cutting rates to 8.5%, from 19% in mid-2021, to reverse chronic current account deficits.

It also mandated banks to extend cheap loans to specific export – and growth-oriented sectors and to maintain required reserves and long-term bonds for the loans, and it also added new restrictions on some retail loans.

The new regulations are said to have somewhat complicated risk pricing for banks and weighed on their balance sheets.

While the average commercial loan rate is around 14%-15%, lenders have raised rates on lira deposits to 30% to attract enough deposits to meet a 60% required ratio.

As this spread widens, banks’ income erodes, said a third senior banker, estimating that net sector profits will dip by 20% this year, especially after the effects are felt in the second half.

Last year the banks’ net profit was TL 433 billion ($23 billion), up 366% from the previous year due mainly to consumer price index-linked bonds, the Banking Regulation and Supervision Agency (BDDK) data shows.

So far, the main conclusion drawn from the internal stress tests is that banks may need additional capital as capital adequacy ratios shift, said the second banker.

The government has relied on lenders, as they boosted their lending throughout the pandemic, helping the economy avoid a contraction and mount a strong recovery.