Strong Performance Despite Economic Challenges
The Turkish banking sector has shown a remarkable resilience in the face of the economic difficulties caused by the COVID-19 pandemic and the currency depreciation. According to the data from the Banking Regulation and Supervision Agency (BDDK), the combined net profit of Turkish banks increased by 41 percent in the January-July period from a year ago to 293.4 billion Turkish liras ($11.1 billion) . This is a significant improvement from the 8.4 percent decline in net profit that the sector recorded in the same period of 2022.
The main drivers of the profit growth were the increase in interest revenues from loans, the decrease in non-performing loans ratio, and the recovery of the economic activity after the easing of the lockdown measures. The banks also benefited from the supportive monetary and fiscal policies implemented by the government and the central bank to mitigate the impact of the pandemic.
Interest Revenues Boosted by High Inflation and Loan Demand
One of the key factors that contributed to the profitability of the Turkish banks was the surge in interest revenues from loans, which grew 71 percent year-on-year . The high inflation rate, which reached 21.3 percent in July , pushed up the interest rates on loans, especially on consumer and commercial loans. The average interest rate on consumer loans was 28.6 percent in July, while the average interest rate on commercial loans was 24.9 percent .
The demand for loans also increased as the economic activity picked up after the relaxation of the COVID-19 restrictions. The loan volume rose by 36.2 percent over the same period to 10.3 trillion liras . The sectors that received the most loans were manufacturing, trade, construction, and services. The consumer loans also grew by 38.6 percent, mainly driven by housing and vehicle loans .
Asset Quality Improved as Non-Performing Loans Declined
Another positive development for the Turkish banking sector was the improvement in asset quality, as reflected by the decline in non-performing loans (NPL) ratio. The NPL ratio dropped from 2.42 percent last year to 1.6 percent as of July . This was mainly due to the restructuring of some loans, the write-off of some NPLs, and the increase in loan provisions.
The banks increased their loan loss provisions by 28 percent in the first seven months of 2023, reaching 175 billion liras . This helped them to cover 86 percent of their NPLs, up from 77 percent a year ago . The higher provisioning also enhanced the resilience of the banks against potential shocks.
Outlook Remains Positive but Risks Persist
The Turkish banking sector is expected to maintain its strong performance in the coming months, as the economic recovery continues and the vaccination program progresses. The sector is also well-capitalized, with a capital adequacy ratio of 18.7 percent as of July, well above the regulatory minimum of 8 percent .
However, there are also some risks that could pose challenges for the banks, such as the exchange rate volatility, the high inflation rate, and the geopolitical tensions. The banks are exposed to currency risk, as they have a net open foreign exchange position of $44 billion as of July . The high inflation rate could also erode their profitability and erode their real capital. Moreover, the geopolitical tensions in Afghanistan, Syria, and Iraq could affect Turkey’s trade and security.
Therefore, it is important for the banks to continue to monitor their risks and take prudent measures to ensure their financial stability and soundness.
