Turkish Banks Benefit from Lower Inflation Amid Economic Challenges

Recent progress in reducing inflation is helping Turkish banks withstand global and regional shocks, keeping risks manageable despite high financing costs, according to Regina Argenio, a director and lead analyst for financial institutions at S&P Global Ratings. Speaking at the Türkiye Capital Markets Conference in Istanbul on October 22, Argenio indicated that the economy is performing better than S&P had anticipated at the onset of the Middle East conflict.

S&P is closely monitoring the banks' ability to refinance their significant external debt, with Argenio warning that any disruptions could pose challenges. She welcomed the removal of regulatory relief measures that had been in place over the past year, which she believes will contribute to a more stable banking environment.

However, high real interest rates continue to constrain lending, making it more difficult for small and medium-sized enterprises as well as retail borrowers to access affordable financing. This situation creates potential risks to the quality of banks' assets. Argenio noted that lending conditions could improve by 2027 if interest rate cuts are effectively reflected in loan pricing. Additionally, she anticipates that net interest margins may enhance as lower rates decrease lira funding costs, although foreign-currency funding could become more expensive.

How Contingent Changes the Balance

The outlook for Turkish banks is contingent on the timing and pace of any rate cuts and the success of the ongoing disinflation program. Sustained reductions in inflation, coupled with greater economic stability, could lead to improved asset quality and real returns on capital, even if nominal profitability experiences a decline.

Navigating Challenges in Turkish Investment and Market Dynamics

Regarding recent investigations into investment funds, Argenio stated that the impact should remain limited as long as the issues are contained. She described the policy response as robust, with liquidity support for banks helping to mitigate potential adverse effects. However, it remains too early to evaluate the implications for external borrowing costs, as Turkish borrowers might face a slight increase in risk premiums depending on the effectiveness of the response to these challenges.

In the broader context, Türkiye has maintained its position as Europe’s sixth-largest passenger car market in the first nine months of 2026, despite a 15.45 percent decline in sales. The country also continues to hold the sixth position in battery-electric car sales, reflecting its ongoing adaptation to changing market dynamics.