Banking Crisis Heightens TL Risk: Sector Profitability Strains and Dollarization Surge

Turkey's banking sector is facing significant financial strain, according to Commerzbank analyst Tatha Ghose's report. The sector's average Tier 1 capital ratio fell from 14.1% to 11.5% at the end of 2025, while the non-performing loan ratio increased from 3.1% to 3.3%. Ghose noted that the removal of regulatory flexibility for FX-risk-weighted assets has sharply eroded bank profitability in Q1.

Rising Profitability Pressures on Banks High funding costs, tight inflation, and credit margin pressures will further squeeze banks' profitability in Q2.

Dollarization Surge and Currency Risk Banks' dollarization ratio in total deposits rose from 35.2% to 38.1%. This surge underscores how quickly confidence in the Turkish lira could erode under adverse conditions.

The banking sector's fragility is likely to impact macroeconomic stability. The currency decline and banks' profitability issues are emerging as new risks for investors.