The combined net income of Turkey's banks increased by 14% y/y to TRY28.9bn (€5.1bn) in H1, data from banking sector watchdog BDDK showed on July 30.

The lenders' assets rose by 24% y/y to hit TRY3.7tn while their total lending increased by 23% y/y to stand at TRY2.35tn at end-June.

The ratio of non-performing loans to total cash loans was 3.02% as of end-H1, up from 2.95% at end-2017.

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.

On July 20, Fitch Ratings has downgraded the Long-Term Foreign Currency Issuer Default Ratings (LTFC IDRs) of 24 Turkish banks and their subsidiaries, in most cases by two notches.

The banks' Long-Term IDRs were removed from Rating Watch Negative, but were assigned Negative Outlooks.

The agency also downgraded the Viability Ratings (VRs) of 12 banks.

On July 13, Fitch cut Turkey deeper into junk, downgrading its Long-Term Foreign-Currency Issuer Default Rating (IDR) to 'BB' from 'BB+' with a negative outlook. It said the downgrade was driven by increased downside risks to macroeconomic stability and the recent deterioration in economic policy credibility. 

The downgrades of the banks' VRs reflected the increased risks to performance, asset quality, capitalisation and liquidity and funding profiles, following the recent period of market volatility and given the increased risk of a hard landing for the Turkish economy and a material deterioration in investor sentiment, the rating agency said.

Fitch forecasts GDP growth of 4.5% in 2018, underpinned by solid growth seen in 4M18, but with the economy likely to contract for the rest of the year, and fall to 3.6% growth in 2019.

The Turkish banking industry's NPL ratio (loans overdue by 90+ days) was a still moderate 3% at end-1H18, with total reserve coverage of 122%. However, group 2 loans averaged 8% at the larger banks in the sector, according to the statement by Fitch. 

Fitch expects sector profitability to moderately weaken in 2H18 and into 2019 due to higher funding costs—which banks may not be able to fully pass on—slower credit growth and higher impairment charges. Performance could deteriorate more significantly in the case of a marked weakening of asset quality. The sector's return on average equity (ROAE) was a solid 14.7% in 2017 and 15.9% in 5M18, supported by Credit Guarantee Fund-driven loan growth in 2017 (21%), solid margins and manageable impairment charges. 

The downgrades of the LTFC IDRs of Akbank and Isbank to 'BB-' from 'BB+' were driven by the downgrades of the banks' VRs.

The LTLC IDRs of the state-owned commercial banks (Ziraat, Halk, Vakifbank and Vakif Katilim) and development banks (Turkiye Kalkinma Bankasi-TKB, Turk Eximbank, TSKB) are aligned with those of the Turkish sovereign and, as a result, have been downgraded by one notch to BB-, except TKB.

The two-notch downgrade (one notch for Denizbank) of the foreign-owned banks' (Garanti, Yapi Kredi, TEB, QNB, ING, Kuveyt Turk, Alternatifbank, Turkiye Finans, Burgan Bank, ICBC Turkey and BankPozitif) LTFC currency IDRs and FC senior debt ratings, to the level of the sovereign LTFC IDR, reflected Fitch's view that it was no longer appropriate to rate banks above the sovereign in Turkey. 

Fitch Ratings also downgraded Istanbul Takas ve Saklama Bankasi A.S.'s (Takasbank) Long-Term Foreign-Currency (LTFC) Issuer Default Rating (IDR) to 'BB' from 'BB+', the rating agency said in a separate statement.