Fitch revises Turkish banking sector outlook to ‘improving’

LONDON

Fitch Ratings has revised its outlook for the Turkish banking sector from neutral to improving, citing reduced financial risks and increased investor confidence following the country's adoption of more conventional economic policies.

The ratings agency said in a statement on June 25 that the improved outlook is due to the Central Bank of the Republic of Türkiye's increased foreign-exchange reserves, lower dollarization, and easier access to external financing for banks.

Fitch noted that Turkish banks have issued $6.5 billion in foreign currency debt this year, which has helped to improve their liquidity and reduce their reliance on external funding.

The agency said it expects further debt issuance to be opportunistic, given banks' generally adequate capitalization and liquidity buffers.

“The recent surge in Turkish bank debt issuance has reduced external financing pressures and suggests that international investors have regained confidence in the sector. Since Turkiye’s policy shift, banks have seen reduced risk premiums, and access to external markets has improved significantly,” it said.

However, Fitch also cautioned that some uncertainty remains about the ability of Türkiye's current policy mix to deliver a sustained decline in inflation.

“Failure to improve policy consistency, for example, through tighter fiscal and income policies or premature monetary easing, could reduce investor confidence,” it said.

“Moreover, sector FC liquidity continues to face risks due to still-high, although lower, FC deposits and FX-protected deposits [a combined 52 perecnt of total deposits], and significant reliance on external funding.”

The ratings agaency It also expects sector profitability to weaken due to regulatory loan growth caps, higher funding costs and moderate asset-quality deterioration, reflecting the macro policy rebalancing process.

“However, profitability should remain reasonable relative to historical averages,” it said.