Turkey's banks managed to stay on a strong profit growth path across January-May, posting a 50% y/y increase in their combined net income to TRY21bn (€5bn), data from banking sector watchdog BDDK showed on July 3.

Despite the rising profits, however, Turkish banks remain under political pressure to cut interest rates. President Recep Tayyip Erdogan has been calling on the banks to offer more loans at more affordable rates to boost economic activity. On June 22, Turkish Prime Minister Binali Yildirim gave the country’s lenders a last chance to ease interest rates, stating that the government would take measures if they failed to act.

Turkey's banks have ramped up their lending since the government pledged to make TRY250bn available to businesses under the credit guarantee fund (CGF) scheme.

The lenders' assets grew by 7% to reach TRY2.93tn at end-May from TRY2.73 at the end of 2016 while their total lending rose by 25% y/y to hit TRY1.89tn at the end of May.

The NPL/total loans ratio of the Turkish banking industry edged down to 3.29% at the end of May from 3.31% at the end of April.

Last month, Moody’s Investor Services cautioned that the challenging macro environment may drive problem loans to above 4% over the next 12-18 months from 3.2% at end-2016.

The capital adequacy ratio stood at 16.68% as of end-May, up from 16.38% a month ago.

Turkish banks’ combined profits rose by 44% y/y to TRY37.5bn last year.

Turkey's banks are set to see reduced profits due to lower interest margins, Huseyin Aydin, chairman of the Turkish Banking Association (TBB), warned on May 12. Last month, Sabah newspaper reported that Turkish authorities were set to step in to end a potentially dangerous race among the country’s banks to attract deposits, fearing the aggressive strategy may hit the economy through higher lending costs.

Ersin Ozince, chairman of Turkey’s largest-listed lender Is Bankasi, warned on May 8 that Turkish banks’ funding costs were rising, endangering government efforts to engineer a credit boom. “Capital erosion is the most important issue in the Turkish banking industry, because capital has become the most important limited resource,” Ozince said in an interview with Bloomberg.