Fitch Warns Turkish Banks on Capital and Asset Quality: Forbearance Ends, Risks Mount

International rating agency Fitch Ratings highlighted a decline in capital ratios and a gradual deterioration in asset quality for the Turkish banking sector in its latest report. The removal of regulatory forbearance on foreign-currency risk-weighted assets, combined with persistently high interest rates and inflationary pressures driven by geopolitical tensions, has begun to severely strain operating conditions.

The End of Regulatory Forbearance and Sharp Capital Erosion

Turkish banks' average operating profit/risk-weighted assets ratio recorded a distinct decline in the first quarter of 2026. The primary driver of this weakening was the expiration of regulatory forbearance measures applied to foreign-currency risk-weighted assets.

■The sector's average Common Equity Tier 1 (CET1) ratio fell sharply from 14.1% at the end of 2025 to 11.5% in the first quarter of 2026.

■Compressed margins resulted from repriced loans and lower securities yields following the interest rate cuts in the final quarter of 2025.

■Rising operational expenses and high commercial losses further intensified the pressure on bank profitability.

Deteriorating Asset Quality and the Looming NPL Threat

High Turkish Lira interest rates and slowing economic growth are directly threatening banks' asset quality. As the debt-servicing capacity of consumers and the real sector shrinks, non-performing loans are gaining upward momentum.

■The average non-performing loan (NPL) ratio of banks climbed from 3.1% at the end of 2025 to 3.3% by the end of Q1 2026.

■While problem loan inflows continued across all segments, the net NPL creation rate after write-offs slightly eased from 2.5% to 2.1% but remained elevated.

Resurgent Dollarization Under Geopolitical Shadows

Short-term market volatility triggered by regional conflicts and movements in the gold/dollar parity pushed depositors back toward foreign currencies. The flight of savers from the Turkish Lira is clearly reflected in the metrics.

■In the first quarter of the year, the share of foreign currency deposits in total deposits surged from 35.2% to 38.1%.

■The share of foreign currency wholesale funding within total non-equity funding remained stable at around 20%.

Banks are once again preparing to offload the burden of their eroding capital ratios and deteriorating asset quality onto everyday consumers. To mask their own operational inefficiencies and risk management failures, the banking sector keeps mortgage and consumer loan rates at extortionate levels, inflates hidden fees under the guise of processing expenses, and aggressively slashes credit card limits. This financial model, which seeks to beautify corporate balance sheets by trapping consumers in a high-interest spiral, must be met with urgent regulatory ceilings.