The U.S.-based credit rating agency Fitch revised on Tuesday its outlook for the Turkish banking sector from "neutral" to "improving," citing reduced external financing pressures and macro and financial stability risks following the country's adoption of "more conventional macroeconomic policies."
Türkiye transitioned from the period of loose monetary policy following last year's presidential and parliamentary elections. It has been pursuing efforts to rein in elevated inflation, curb budget and current account deficits and rebuild foreign exchange reserves.
"Increased investor confidence in Türkiye’s policy framework has led to an improvement in the Central Bank of the Republic of Turkiye’s (CBRT) foreign-exchange (FX) reserves position, lower dollarisation and better access to external financing for banks," Fitch said.
As a result, banks' foreign exchange swaps with the central bank have reduced significantly, it noted. "These factors should all continue to support financial stability," it added.
"Since Türkiye’s policy shift, banks have seen reduced risk premiums and access to external markets has improved significantly," the credit agency said.
As part of the shift in monetary policy, the CBRT continues to make progress in unwinding the various macroprudential regulations that have hindered banks' ability to execute strategy, Fitch said.
"Notably, the requirement for banks to maintain certain levels of securities relative to their lira and foreign currency deposits and loans (the 'securities maintenance requirement') has been abolished, and roll-over requirements for FX-protected lira deposits have been reduced," it added.
Furthermore, the agency conveyed the expectations for the unwinding of the FX-protected deposits scheme to continue, driven by lower domestic demand for foreign currency amid improved exchange rate stability expectations, but to remain gradual given the potential unfavorable impact on exchange-rate stability and FX reserves if the foreign currency demand increases.
The agency, however, remained cautious regarding inflation expectations and said that "failure to improve policy consistency, for example, through tighter fiscal and income policies or premature monetary easing, could reduce investor confidence."
The country's central bank delivered aggressive monetary tightening to cool growth in price gains, which remains the biggest challenge for authorities.
Since June last year, it has gradually lifted its benchmark policy rate to 50% from 8.5% and has said it would "do whatever it takes" to prevent the inflation outlook from deteriorating.
The bank is set to announce its latest decision on the interest rates during the committee meeting scheduled for Thursday. Economists and analysts are widely expecting it to keep the key policy rate unchanged.
Citing that banking sector profitability would weaken compared to its high levels in 2023, Fitch said the "profitability should remain reasonable relative to historical averages."