The combined net income of Turkey's banks increased by 8% y/y to TRY18.8bn (€3.6bn) in Q1, data from banking sector watchdog BDDK showed on May 30.

The lenders' assets rose by 1.81% y/y to hit TRY3.44tn while their total lending increased by 21% y/y to stand at TRY2.24tn at end-April.

The ratio of non-performing loans to total cash loans was 2.88% as of April, improving from 3.19% in the same month of 2017. The ratio stood at 2.90% as of March.

The combined net income of Turkey's banks increased by 31% y/y to an all-time high of TRY49.1bn in 2017. The banking industry’s combined net income was TRY37.5bn in 2016, up 44% from 2015.

The lenders' assets rose by 19% y/y to TRY3.26tn while their total lending increased by 18% to TRY2.05tn at end-2017.

Turkey has experienced a severe devaluation of the Turkish lira (TRY) in the year to date. It threatens to undermine the nation’s banking industry through a rise in problematic loans.

President Recep Tayyip Erdogan, who makes regular calls for cheaper money to drive more growth despite evidence piling up that Turkey’s economy is dangerously overheated, has placed pressure on banks to keep extending loans at interest rates that hardly compensate them when the country’s double-digit inflation is taken into account.

Earlier this month, Turkish state-owned lenders Ziraat and Halkbank announced that they were cutting monthly mortgage rates to 0.98% after holding a meeting with Erdogan on May 9, who throughout his decade and a half at the top of politics has always tried to drive growth through big real estate and infrastructure expansion.

 “The concern is that the balance of payments situation worsens and that really starts to hit growth and the fiscals pretty quickly, and the banks,” Frank Gill of S&P Global told Reuters on May 22. “The large amounts of dollar loans given by the country’s banks are becoming more expensive to repay due to the lira’s slump”, he also said.

Unnamed people with the knowledge of the matter told Bloomberg on May 29 that another Turkish conglomerate, Gama Holding, was in talks with local lenders to restructure its $1bn worth of debt. Gama Holding's energy unit Gama Enerji was also in separate talks to refinance around $500mn worth of loans it took out in 2013.

Banks that provided a $4.75bn loan to the owner of Turk Telekomunikasyon AS are backing a proposal that would settle Turkey’s biggest default, people with knowledge of the matter told Bloomberg on May 22.

Meanwhile, financing needs for ongoing mega infrastructure projects increase. Possible US fines to be levied on Turkey following the conviction of Halbank Deputy CEO Mehmet Hakan Atilla for breaching sanctions aimed at Iran remains another risk item on the outlook for the domestic banking industry.

Last week, Bloomberg reported unnamed sources as saying that the consortium building what it says will be the world’s biggest airport, outside Istanbul, has secured an additional €1bn loan to help it finish the first construction phase. The banks initially provided a 16-year loan in 2015 of €4.5bn. 

Last year, the volume of the state's Credit Guarantee Fund (KGF) was boosted more than 10-fold to TRY250bn. The move was made to help Turkey fight the economic soft spot that occurred after the failed coup that took place in July 2016.

By the end of last year, the KGF was largely depleted, with banks saying they expected growth in loans to business to significantly decline this year.