Turkish Banks Struggle with Interest Rate Pressure and Political Uncertainty

Turkish banking stocks have shown their worst relative performance in over two years, with the BIST Banking Index down 13% since June, while the BIST Industrial Index rose 10%. The conflict in the Middle East has dampened expectations of interest rate cuts, according to ICBC Turkey Investment Research Director Burak İşyar, who notes that high interest rates and prolonged expectations of elevated rates are the biggest pressures on banks. The Central Bank's tightening of monetary policy due to rising inflation risks has pushed the effective funding rate to 40%. BofA Securities has downgraded its outlook on Turkish banks, citing delays in positive catalysts due to persistent inflation and slower-than-expected easing. Altan Aydın of Perform Portfolio Management noted that while banks had a strong start to the first quarter, high funding costs have dampened optimism in the second quarter.

Markets should brace for volatility: The Middle East conflict threatens macro stability in Turkey, while banking stocks' long-term performance remains tied to the resumption of interest rate cuts.