Key Moments
- Fitch’s latest review of Turkish banks highlights weaker profitability following the removal of FX risk-weighted asset waivers, adding to negative signals for the Lira.
- Capital ratios and margins have come under strain, with the equity Tier 1 ratio falling to 11.5% from 14.1% and non-performing loans rising to 3.3% from 3.1%.
- Renewed growth in FX deposits to 38.1% of total deposits from 35.2% is seen as a sign of shifting confidence and heightened exchange-rate risk.
Heightened Vulnerability for the Turkish Lira
Tatha Ghose at Commerzbank points to Fitch’s most recent assessment of Turkish banks as an additional negative factor for the Turkish Lira (TRY). According to Ghose, the agency’s findings signal growing financial stress in the banking system that is feeding into increased exchange-rate risk for the currency.
The report indicates that profitability has deteriorated following regulatory adjustments related to foreign-exchange (FX) risk-weighted assets. At the same time, capital buffers have been reduced, and bank margins are under pressure due to prior interest rate cuts and elevated operating expenses. Rising non-performing loans (NPLs), an uptick in FX deposits, and inflation pressures linked to geopolitical conflict are all cited as elements that are adding to TRY’s vulnerability.
Fitch’s Assessment of Turkish Bank Fundamentals
“Fitch’s latest assessment of Turkish banks adds another warning signal to the lira backdrop. The agency noted that profitability weakened in Q1, partly because of removal of regulatory waivers on FX risk-weighted assets.”
“Once this was withdrawn, it weighed down on earnings and capital ratios (equity Tier 1 ratio fell to 11.5% from 14.1%).”
“Lower securities yields, squeeze in lending margins after the Q4 2025 rate cuts, and still-elevated trading losses and operating costs also kept pressure on operating profit.”
Key Bank Metrics Highlight Mounting Strains
The latest figures from Fitch underscore both asset quality and funding risks in the Turkish banking sector. NPLs have increased, and tighter conditions are expected to persist, particularly as higher domestic interest rates and conflict-driven inflation feed through to funding costs and margins.
| Indicator | Previous Level | Latest Level | Comment |
|---|---|---|---|
| Equity Tier 1 ratio | 14.1% | 11.5% | Hit by removal of FX risk-weighted asset waivers |
| NPL ratio | 3.1% (end-Q4 2025) | 3.3% (end-Q1) | Signs of rising asset quality pressure |
| FX deposits as share of total deposits | 35.2% | 38.1% | Indicates renewed preference for FX and shifting confidence |
“NPL ratio rose to 3.3% at end-Q1 from 3.1% at end-Q4 2025. Fitch expects conditions to remain difficult, with higher lira interest rates and inflationary pressure from the Iran conflict likely squeezing net interest margins further in Q2 via higher funding cost.”
FX Deposits and Confidence in the Banking System
“Another uncomfortable detail was the renewed rise in FX deposits, to 38.1% of total deposits from 35.2%, which indicates how quickly confidence can shift when external conditions deteriorate. Signs of financial stress further increase risk for the exchange rate.”
In Ghose’s view, this behavior in deposit composition illustrates how swiftly market sentiment can adjust when macroeconomic and geopolitical risks intensify. The combination of weaker bank profitability, rising NPLs, higher FX deposit ratios, and persistent cost pressures is presented as a challenging backdrop for the Turkish Lira.
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