GCC Banks with Turkish Subsidiaries to Gain from Improved Macro Conditions

GCC banks with Turkish subsidiaries should benefit from improved operating conditions in Turkiye, as easing inflation will likely reduce the subsidiaries’ net monetary losses in 2025–2026, Fitch Ratings said.

However, this is unlikely to lead to Viability Rating (VR) upgrades in the near term, and higher-for-longer Turkish interest rates may delay the full benefits, the US credit rating agency said.

GCC banks with Turkish subsidiaries have reported more than $7 billion of net monetary losses since 2022, equivalent to about 5% of aggregated equity at end-2024. This follows the banks adopting hyperinflation reporting under International Accounting Standard (IAS) 29 in the first half of 2022, as cumulative Turkish inflation had exceeded 100% over the previous three years.

IAS 29 requires banks to restate non-monetary assets and liabilities to reflect the impact of hyperinflation, which led to the net monetary losses in their income statements, Fitch Ratings explained.

The Turkish subsidiaries of GCC banks had $2.5 billion net monetary losses in 2024 as against $2.7 billion the previous year, with Turkish inflation averaging 60% over the year. This eroded the parents’ operating profit/risk-weighted assets ratios by 40bp, on average.

QNB and KFH Worst Hit

Kuwait Finance House (KFH) and Qatar National Bank (QNB) were the worst-affected, with net monetary losses reducing their ratios by 60bp–70bp. Quarterly net monetary losses decreased by about a fifth year-on-year in 1Q25, to $630 million, as average inflation eased to 40% as against 67% in the first quarter of 2024.

“We expect a further reduction to $1.1 billion in 2025, and $920 million in 2026, assuming Turkish CPI falls to 28% at end-2025 and 21% at end-2026. If disinflation continues at least in line with our expectations after 2025, GCC banks will probably stop using hyperinflation reporting from 2027,” the rating agency averred.

The Turkish subsidiaries’ net interest margins should also improve once the Central Bank of Turkiye resumes its rate-cutting cycle, as their deposits reprice faster than loans. Under Fitch’s base case, Turkiye’s main policy rate will reduce to 33% by end-2025 and 24% by end-2026, from the current 46%.

Fitch’s domestic operating environment score for Turkish banks, which was revised up to ‘b+’/positive in September 2024, reflects Turkiye’s improving macroeconomic and financial stability as headline inflation falls and external vulnerabilities ease.

The score is still one notch below the sovereign rating (BB-/Stable) due to still-high inflation, banking sector dollarisation, and regulations that continue to constrain banks’ ability to operate. Further reduction of these pressures and continued macroeconomic policy normalisation could lead Fitch to align the score with the sovereign rating.

“We still view GCC banks’ Turkish exposures as credit-negative despite the recent improvement in the operating environment. We deduct one notch from the domestic operating environment scores for the VRs of Burgan Bank, Emirates NBD, QNB and KFH to reflect exposures to weaker international markets, particularly Turkiye. The operating environment score is our starting point for determining a bank’s VR and has a key influence on how we assess its financial position,” Fitch said.

Even if Fitch further raises the domestic operating environment score for Turkish banks, this is unlikely to trigger immediate VR upgrades for GCC banks with Turkish subsidiaries.

The subsidiaries are fairly small compared to their parents, representing between 3% and 21% of group assets, and the Turkish operating environment score would still be well below those in larger GCC banking sectors.

In the longer term, however, sustained improvements in operating conditions in Turkiye could, in conjunction with other factors, contribute to VR upgrades for some GCC banks, Fitch said.