Fitch: Turkish Islamic banking segment growing amid economic rebalancing

International credit rating agency Fitch Ratings reported that Turkish Islamic banking is expected to continue to grow above the sector average in 2024, albeit at a slower pace compared to previous years.

In a statement made by Fitch Ratings, it was noted that the Turkish Islamic banking segment grew in a period of economic rebalancing.

The statement said that Turkish Islamic banking is expected to continue to grow above the sector average in 2024, albeit slowly compared to previous years.

Noting that the market shares of the segment have increased in recent years, the statement said that Islamic banks accounted for 8.7 percent, 7.8 percent and 10.2 percent of the banking sector's assets, financing and deposits, respectively, by the end of 2023.

FITCH RATİNGS MADE THE FOLLOWING STATEMENTS IN ITS STATEMENT;

Fitch Ratings' new report states that Turkish interest-free banking should continue to grow above the sector average, albeit at a slower pace than in previous years. This expected relative slowdown in growth stems from the authorities' efforts to reduce inflation through tighter monetary policies and macroprudential measures.

The segment's market shares have increased in recent years, mainly due to the entry and rapid growth of three state-owned banks and the government's strategic focus on the segment to reach 15% of banking sector assets by 2025. At the end of 2023, Islamic banks accounted for 8.7%, 7.8% and 10.2% of banking sector assets, financing and deposits, respectively. Limited distribution channels, product gaps and low public awareness may constrain the segment's prospects.

Risks to Islamic banks' asset quality will be the key driver of performance in 2024. We expect a moderate increase in the ratio of non-performing financing in 2024, reflecting lower GDP growth, higher interest rates in TL terms, continued high inflation and slower financing growth.

Turkish Islamic banks are largely deposit-financed, resulting in a fairly limited exposure to external FX debt and reducing refinancing risks. However, segment deposit dollarization is high and foreign currency liquidity could come under pressure from sector-wide deposit instability, unless offset by shareholder support or prolonged market closure. We expect access to external financing to increase, but this would be opportunistic as prices are still high.

Segment capitalization is adequate, supported by full coverage of total reserves of non-performing financing and profit before impairment buffers. Segment common equity Tier 1 ratio (end 2023: 15.6%) includes a 400bp and 250bp uplift (Fitch estimates), respectively, driven by the alpha factor and industry-wide forbearances. However, capitalization is sensitive to macro and asset quality risks, lira depreciation and growth.

The report, "Turkey Islamic Banks Dashboard: 2024" is available at www.fitchratings.com or by clicking here.