Fitch: Rate hikes and inflation narrowed profit margins of Turkish banks

According to the 'Turkish Banks Monitoring Report' published by Fitch Ratings, the average operating profit to risk-weighted assets ratio of Turkish banks showed a weakening in the second quarter of 2026.

Fitch Ratings' quarterly report noted that the average operating profit to risk-weighted assets ratio of Turkish banks declined further in the second quarter of 2026. The main reasons for this drop were cited as increased funding costs following the Iran war, swap expenses, and inflationary pressures on operating expenses. The average ratio of the banks covered in the report fell from 3.9 percent in the first quarter of 2026 to 2.6 percent at the end of the second quarter, while the industry-wide average dropped from 4.6 percent to 3.3 percent.

The report forecasts that high lira interest rates and inflationary pressures will continue to limit bank profitability throughout 2026, but this pressure may ease in 2027 with potential interest rate cuts towards the end of the year. On the other hand, the non-performing loans (NPL) ratio of the covered banks rose from 3.3 percent to 3.5 percent in the second quarter of 2026, while new NPL formation recorded a moderate increase from 2.1 percent to 2.2 percent.

The average Tier 1 capital ratio remained stable at 11.5 percent in the second quarter of 2026, while the share of foreign currency deposits decreased from 38.1 percent to approximately 35.3 percent. Wholesale foreign currency funding remained flat at around 20 percent of total funding.