GCC banks with Turkish subsidiaries set to gain as inflation eases in Türkiye: Fitch Ratings
12 June 2025 17:39
A. SREENIVASA REDDY (ABU DHABI)Gulf banks with subsidiaries in Türkiye are poised to benefit from improving macroeconomic conditions in the Turkish market, according to Fitch Ratings. Easing inflation and signs of greater financial stability are expected to soften the financial drag these subsidiaries have imposed in recent years.Among the affected institutions is Emirates NBD, which owns DenizBank in Türkiye. Like its regional peers, Emirates NBD has suffered from what are called "net monetary losses" — accounting hits that stem from Türkiye's persistently high inflation. Under international accounting rules (specifically IAS 29 for hyperinflation), these banks must adjust the value of their Turkish assets, leading to large losses on their books.Fitch noted that since 2022, Gulf Cooperation Council (GCC) banks have reported more than $7 billion in such losses, equivalent to about 5% of their combined equity by the end of 2024. In 2024 alone, $2.5 billion in net monetary losses were recorded. Qatar National Bank (QNB) and Kuwait Finance House (KFH) were among the hardest hit, with their profitability ratios reduced by 60 to 70 basis points.However, there is now cautious optimism. Quarterly losses shrank by about 20% in Q1 2025, thanks to Türkiye's inflation cooling to around 40%, down from 67% in the same period last year. Fitch expects total losses to fall further to $1.1 billion in 2025 and $920 million in 2026, assuming continued disinflation, with inflation forecast to drop to 28% by year-end 2025 and 21% by 2026.'If disinflation continues at least in line with our expectations after 2025, GCC banks will probably stop using hyperinflation reporting from 2027,' Fitch Ratings said. Furthermore, profit margins at the subsidiaries may improve once Türkiye's central bank begins cutting interest rates, expected to fall to 33% by end-2025 from the current 46%, and then to 24% in 2026.Despite this progress, Fitch maintains a cautious view. The agency said it still treats exposure to Türkiye as a credit-negative factor. These exposures result in a one-notch deduction from their viability scores — a key measure of a bank's intrinsic financial health — due to the relatively higher risks in the Turkish market compared to the more stable GCC region.
While these Turkish subsidiaries account for only between 3% and 21% of the parent groups' total assets, any material improvement in Türkiye's economic environment could gradually ease the strain. Fitch signalled that in the long run, this might contribute to upgrades in the affected banks' ratings — but only in conjunction with other supportive factors.
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