External view of the Fitch Ratings headquarters in Canary Wharf, London, UK, February 3, 2019. (Adobe Stock Photo)
August 09, 2025 01:32 PM GMT+03:00
International credit rating agency Fitch Ratings reported Friday that Turkish banks experienced a deterioration in credit quality in the first quarter of 2025, with rising inflows of non-performing loans (NPLs) adding pressure on the sector.
The report, which covers 13 banks representing 83% of Türkiye’s total banking sector assets based on primarily from the BRSA, said the average NPL ratio of the banks covered increased in the first quarter, driven by persistently high Turkish lira interest rates — with the central bank’s weighted average funding rate at 46% — and slowing economic growth, which eased to 2% year-over-year from 3% in the previous quarter.
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Turkish banks’ profitability eroded
Fitch also observed that Türkiye’s market volatility intensified following the arrest of then-Istanbul Mayor Ekrem Imamoglu in March following a corruption probe, warning that persistent instability or a policy shift could affect the disinflation process and trigger renewed pressure on the lira.
Fitch said the sector’s performance weakened “significantly” in early 2025, driven by lower yields on loans and securities as well as elevated deposit funding costs, despite a reduction in lira deposit rates. The average operating profit-to-risk-weighted assets (RWA) ratio for the monitored banks fell to 3.9% in the first quarter from 4.7% in the previous quarter, the agency highlighted.
Net interest margins contracted further due to lower returns and rising impairment costs. Trading income remained weak, although losses eased on reduced swap costs, resulting in a marginal positive contribution on average, it noted.
A view of Istanbul Financial Center in Atasehir, Istanbul, Türkiye. (Adobe Stock Photo)
Credit risks increased, share of FX deposits fell
The annualized NPL generation rate increased to 2.1% from 1.3% in late 2024. Stage 2 loans — those with heightened credit risk but not yet classified as non-performing — remained stable at 9.1% of gross loans. Specific reserve coverage of NPLs slipped slightly to 64% from 66% at the end of 2024.
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, helped by relative exchange rate stability before late-March volatility. Since March, however, these deposits have increased by around $12 billion.
Debt issuance totaled about $2.4 billion in the first quarter but slowed after the March market turbulence.
Headquartered in New York, Fitch Ratings is one of the world’s three major credit rating agencies, alongside Moody’s and S&P Global.
August 09, 2025 01:33 PM GMT+03:00
