Increased delinquent loans forecasted at Turkish banks during Q1, as stated by Fitch.
The Turkish banking sector faced a series of challenges in the first quarter of 2025, as reported by international credit rating agency Fitch Ratings. The deterioration in credit quality was primarily due to several factors, including increased non-performing loans (NPLs), persistently high Turkish lira interest rates, slowing economic growth, market volatility, and political instability.
Fitch observed that the sector's overall performance weakened significantly due to lower yields on loans and securities, combined with elevated deposit funding costs. As a result, the average operating profit-to-risk-weighted assets ratio for monitored banks declined from 4.7% in the prior quarter to 3.9% in Q1 2025.
The share of foreign currency deposits at the monitored banks fell to 34% by the end of the first quarter, down from 36% three months earlier. This decline was due to relative exchange rate stability before the late-March volatility, which saw foreign currency deposits increase by around $12 billion.
The average NPL ratio of the banks covered increased in the first quarter, driven by persistently high Turkish lira interest rates. The annualized NPL generation rate increased to 2.1% from 1.3% in late 2024. Specific reserve coverage of NPLs slipped slightly to 64% from 66% at the end of 2024.
Economic growth eased to 2% year-over-year from 3% in the previous quarter. The central bank's weighted average funding rate was at 46% in the first quarter. Trading income remained weak, although losses eased on reduced swap costs. Debt issuance totaled about $2.4 billion in the first quarter but slowed after the March market turbulence.
Fitch Ratings, headquartered in New York, is one of the world's three major credit rating agencies, alongside Moody's and S&P Global. The report covers 13 banks representing 83% of Turkey's total banking sector assets. The sector's performance weakened "significantly" in early 2025, driven by lower yields on loans and securities, and elevated deposit funding costs.
In conclusion, the Turkish banking sector faced a challenging start to 2025, with the credit quality decline primarily attributed to increased NPL inflows, extremely high lira interest rates, slower GDP growth, market volatility, and political instability. These factors combined to pressure Turkish banks’ asset quality and profitability.
- The Persistently high Turkish lira interest rates in 2025 have been identified as a major contributing factor to the rise in non-performing loans (NPLs) in the Turkish banking sector.
- Investing in personal-finance resources, particularly in Turkish banking sector assets, might be less appealing in the current climate of slowing economic growth, high lira interest rates, and political instability in Turkey.
- Despite the decline in foreign currency deposits at monitored banks, market volatility and instability could impact Turkish banks' stability, making them less appealing for business investors.
- In light of the significant weakness in the Turkish banking sector's overall performance, due to factors like lower yields on loans, elevated deposit funding costs, and the increase in NPL generation rate, it's crucial for the finance sector to address these challenges to stabilize the economy.
