Fitch: Turkish Banks’ Profitability Declines as Bad Loans Rise

International ratings agency Fitch warns that Turkish banks saw weaker financial performance in Q1 2025, with shrinking margins, rising non-performing loans, and high funding costs weighing on the sector.

Profitability Hit by Margin Compression and Funding Costs

Fitch Ratings reported that high lira interest rates and slowing economic growth continued to pressure Turkish banks’ margins in early 2025.
The sector’s operating profit-to-average risk-weighted assets (RWA) ratio dropped to 3.9% in Q1 from 4.7% in the final quarter of 2024.

Fitch attributed the decline to low yields on loans and securities, combined with persistently high deposit funding costs — even after recent interest rate cuts.

Non-Performing Loans on the Rise

The agency noted that the annualized non-performing loan (NPL) generation rate rose to 2.1% in Q1 2025 from 1.3% in Q4 2024.
Stage 2 loans — which include both watchlist and impaired loans — remained steady at around 9.1% of total gross loans.

Specific provisioning coverage fell slightly, easing from 66% to 64%, signaling a modest decline in the buffer against potential losses.

FX Deposits Surge Amid Market Turbulence

Following market volatility in March, foreign currency deposits at Turkish banks jumped by roughly $12 billion. This reversed an earlier decline in the FX share of total deposits, which had dropped from 36% to 34% before the rally.

Fitch suggested that the shift reflected heightened currency and market volatility affecting banking sector dynamics.

Capital Adequacy Erodes

Average Tier 1 capital adequacy ratios fell to 12.9% at the end of Q1 2025, down from 14.6% at year-end 2024.
The drop was driven by the phasing-out of regulatory forbearance measures, changes in operational risk-weighted asset calculations, and dividend payouts.

Political and Market Risks Persist

Fitch also flagged the political shock in March 2025 — following the arrest of Istanbul Mayor Ekrem İmamoğlu — as a trigger for increased market turbulence.
The agency warned that ongoing volatility could complicate Turkey’s disinflation efforts and maintain pressure on the lira.

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