The areas of funding and asset quality will generate the main risks for Turkish banks during this year, Standard & Poor’s said in a report published on February 9.

The rating agency expects a moderate deterioration in asset quality this year, with nonperforming loans reaching about 5% of total gross loans, up from 3.3% as of the end of 2016. “A further weakening of the lira could exacerbate this deterioration, as it could damage domestic corporate borrowers' repayment abilities owing to their large open positions in foreign currency.”

The country’s struggling currency, which fell 17% last year, has lost more than 5% of its value since the start of 2017.

Turkey’s banks have reported a 44% y/y increase in their combined net income to TRY37.5bn in 2016.

Earlier this month, S&P revised its outlook on several Turkish financial institutions to negative after it lowered its sovereign outlook for Turkey.

Also this month, fellow major rating company Fitch Ratings downgraded the ratings of 18 Turkish banks following its downgrading of Turkey's sovereign debt to junk.

“Although asset quality has remained relatively resilient to the lira depreciation up until now, it is vulnerable to a possible dip in economic growth, geopolitical instability in key neighbouring markets, rising interest rates, as well as further depreciation,” S&P said in the report.

Last week, the IMF warned that Turkish GDP growth will remain below potential this year. And the World Bank has lately slashed its 2017 GDP growth forecast for the Turkish economy to 2.7% from the 3% anticipated previously.

Further risks for Turkish banks stem from terrorism, domestic tension following last year's failed coup and the April referendum on the proposed new constitution, which would deliver an executive presidency, according to S&P. “Furthermore, because the Turkish banking sector is heavily reliant on external funding sources, shifts in global liquidity, yields, and investors' perceptions of risk in Turkey could put pressure on banks' funding and liquidity.”

“Overall, we believe that Turkish banks have adequate asset quality, sufficient earnings, and good capitalisation such that they can absorb potential moderate volatility without damaging their financial profiles unduly,” it added.