GCC banks with Turkish subsidiaries are expected to benefit from enhanced operating conditions in Turkiye, as easing inflation is likely to reduce the subsidiaries’ net monetary losses during 2025–2026, according to Fitch Ratings.
However, this improvement is unlikely to result in any Viability Rating (VR) upgrades in the near future, and persistently high Turkish interest rates may delay the realization of these benefits, the report noted.
Since 2022, GCC banks with Turkish subsidiaries have reported over $7 billion in net monetary losses, which equates to roughly 5 percent of their aggregated equity by the end of 2024. This situation arose after the banks adopted hyperinflation reporting under IAS 29 in the first half of 2022, as cumulative Turkish inflation had surpassed 100 percent over the preceding three years, Fitch noted. IAS 29 requires banks to restate non-monetary assets and liabilities to reflect the effects of hyperinflation, resulting in net monetary losses reflected in their income statements.
Quarterly losses decrease in early 2025
In 2024, the Turkish subsidiaries of GCC banks experienced $2.5 billion in net monetary losses (down from $2.7 billion in 2023), with Turkish inflation averaging 60 percent throughout the year. This situation eroded the operating profit/risk-weighted assets ratios of the parent banks by an average of 40 basis points. Kuwait Finance House (KFH) and Qatar National Bank (QNB) were the most severely impacted, with net monetary losses reducing their ratios by 60 to 70 basis points.
Quarterly net monetary losses fell by approximately one-fifth year-on-year in the first quarter of 2025, amounting to $630 million, as average inflation eased to 40 percent (compared to 67 percent in the first quarter of 2024). We anticipate a further decline to $1.1 billion in 2025 and $920 million in 2026, assuming the Turkish Consumer Price Index (CPI) drops to 28 percent by the end of 2025 and 21 percent by the end of 2026 (down from 44.4 percent in 2024). Should disinflation continue in line with our expectations after 2025, GCC banks are likely to cease hyperinflation reporting by 2027.
The net interest margins of the Turkish subsidiaries should also improve once the Central Bank of Turkiye resumes its rate-cutting cycle, as their deposits tend to reprice faster than loans. Under Fitch’s base case, Turkiye’s main policy rate is projected to decrease to 33 percent by the end of 2025 and 24 percent by the end of 2026, down from the current 46 percent.
Fitch upgrades Turkish banks’ operating environment score
Fitch’s domestic operating environment score for Turkish banks, revised to ‘b+’/positive in September 2024, reflects Turkiye’s improving macroeconomic and financial stability as headline inflation declines and external vulnerabilities diminish. Nevertheless, the score remains one notch below the sovereign rating (BB-/Stable) due to persistently high inflation, the dollarization of the banking sector, and regulations that continue to limit banks’ operational capabilities. A further reduction of these pressures and ongoing macroeconomic policy normalization could prompt Fitch to align the score with the sovereign rating.
Despite the recent improvements in the operating environment, Fitch still considers the Turkish exposures of GCC banks to be credit-negative. The domestic operating environment scores for the Viability Ratings (VRs) of Burgan Bank, Emirates NBD, QNB, and KFH have been adjusted downward by one notch to account for their exposure to weaker international markets, particularly Turkiye. This operating environment score serves as the foundation for determining a bank’s VR and significantly influences the assessment of its financial position.
Even if Fitch raises the domestic operating environment score for Turkish banks further, it is unlikely to lead to immediate VR upgrades for GCC banks with Turkish subsidiaries, the report highlighted. These subsidiaries are relatively small compared to their parent banks, representing between 3 percent and 21 percent of group assets, and the Turkish operating environment score will still fall short of those in more substantial GCC banking sectors. However, in the long run, sustained improvements in operating conditions in Turkiye may, along with other factors, contribute to VR upgrades for select GCC banks.
