Turkish Banking Outlook Steadies as Fitch Maintains Neutral View for 2026

Fitch Ratings has reaffirmed its neutral outlook for Turkey’s banking industry in 2026, underscoring a landscape that shows signs of gradual improvement yet remains shaped by structural challenges. The international credit rating agency highlighted that operating conditions have continued to normalize, supported by tighter policy implementation and improving macro-financial stability. However, the sector still navigates significant headwinds, particularly high inflation, elevated Turkish lira interest rates, and the persistent weight of macroprudential regulations.

In its latest assessment, Fitch pointed to declining refinancing risks, a crucial development after years in which Turkish banks faced rising external rollover pressures. The report emphasizes that access to foreign funding has improved, though the cost of external borrowing remains steep. For 2026, Fitch expects banks to maintain access to external markets on an opportunistic basis, taking advantage of windows where global sentiment and domestic conditions align favorably.

Operational Backdrop: Improving Yet Still Fragile

Fitch notes that Turkey’s improving operating environment is a central factor behind maintaining the neutral outlook. The monetary tightening cycle and a shift toward more conventional economic policies have contributed to reduced volatility. Nevertheless, inflation—still hovering at elevated levels—remains a fundamental risk, affecting funding costs, liquidity management, and uncertainty about credit demand.

The agency warns that rising political tensions could introduce additional unpredictability into the sector’s operating backdrop. Regulatory interventions, including ongoing macroprudential frameworks, also continue to influence credit allocation, pricing behavior, and the overall profitability dynamics of banks.

Despite these constraints, the broader ecosystem shows signs of easing stress. Funding stability is gradually improving, and investor perception of Turkish risk is strengthening, albeit cautiously. Fitch underscores that these improvements are supportive yet not sufficient to upgrade the sector’s outlook at this stage.

Refinancing and External Funding: Risks Easing but Costs Remain High

The report highlights a functional yet cautious external funding environment. Turkish banks are expected to retain access to international markets, but Fitch stresses that this access will remain selective and cost-sensitive. Global interest rates and Turkey-specific risk premiums are likely to continue shaping issuance decisions.

While refinancing risks have retreated from their peaks in previous years, pricing remains a pressure point. Elevated funding costs—both domestically and internationally—could compress margins if loan repricing does not keep pace. Fitch’s analysis indicates that banks will need to remain strategic in balancing funding duration, foreign currency liquidity needs, and regulatory requirements.

Asset Quality: Mild Deterioration Still on the Horizon

Fitch projects that asset quality will weaken modestly in 2026, reflecting the lagged impact of tighter financial conditions and elevated interest rates on borrowers. Consumer segments, small businesses, and corporates carrying high leverage are likely to feel the most pressure.

However, Fitch clarifies that the deterioration is expected to be manageable rather than destabilizing. As the report states, “We expect the deterioration in asset quality to remain sustainable”, pointing to banks’ historically strong capacity to restructure loans, maintain collateral buffers, and absorb periodic credit stress.

Non-performing loans (NPLs) may rise gradually, but Fitch expects provisioning levels to remain adequate. The resilience demonstrated in past cycles also supports confidence that Turkish banks can weather the softer credit environment ahead.

Profitability: Expected to Strengthen Further in 2026

One of the more upbeat elements in Fitch’s outlook is the forecast for improving profitability. The agency anticipates that banks will continue to benefit from strong core operating profits, solid fee income generation, and ongoing loan repricing reflecting higher interest rates.

Though funding costs will remain elevated, improving asset yields and disciplined balance sheet management are expected to bolster net interest margins. Additionally, the normalization of macroeconomic policies is helping stabilize expectations, reducing the volatility that has historically constrained long-term planning.

Fitch concludes that the sector’s profitability should continue to recover in 2026, projecting a more balanced and predictable earnings environment compared with prior years.