Turkey’s Isbank CEO Anticipates Challenges Ahead Amid November Rate Cut, According to Reuters

By Ebru Tuncay

ISTANBUL – Turkish banks are expected to face ongoing challenges throughout the next year as the country continues its economic recovery efforts, according to the chief executive of Isbank, Hakan Aran. He anticipates that the central bank will begin reducing interest rates this November.

In an interview, Aran shared that Isbank, the largest private bank in Turkey by assets, plans to strengthen its presence in payment systems, digital platforms, and service banking, aiming to make new partnerships and acquisitions internationally. This expansion plan coincides with Isbank’s 100-year anniversary and comes at a time when Turkish authorities are striving to combat soaring inflation with high interest rates and various tightening measures that have affected financial-sector balance sheets.

"I believe the difficulties will persist into 2025. We will all have to deal with the repercussions to achieve price stability and reduce inflation," Aran stated during the interview at Isbank’s headquarters in Istanbul. He noted that banks are likely to experience a decline in net interest margins this year, accompanied by a deterioration in asset quality next year.

Indeed, asset quality began to decline in July, and net interest margins are under significant pressure, according to Aran. "The return on equity for banks is diminishing. If we had to apply ‘inflation accounting’, many banks would likely report losses," he remarked, adding that current profitability is misleading due to the lack of inflation-adjusted accounting.

The government previously excluded banks from the option of applying inflation-adjusted accounting methods to avoid potential tax revenue losses. Since June of last year, the central bank has raised its policy rate from 8.5% to 50% in an effort to reverse years of unconventional monetary policies under President Tayyip Erdogan’s support.

Recent inflation trends show a decrease below 62%, and it is expected to continue declining, potentially leading to interest rate cuts in the coming months. Aran expects the central bank to initiate monetary policy easing in November with a 250 basis-point cut, aligning with analysts’ forecasts. He predicts the policy rate will decrease to 45% by the end of the year and reach 25% by the end of 2025.

Regarding annual inflation, Aran anticipates a figure below 50% in the September data, with the policy rate remaining higher than that. He forecasted a reduction to about 42% by year-end and around 20% the following year, slightly higher than official estimates. He believes that household price expectations will adjust to align more closely with the central bank’s much lower expectations by 2025.

Unless faced with "extraordinary" risks or a resurgence of dollarization, Aran indicated that the central bank is likely to maintain its strict monetary policy stance. He also projected the Turkish lira to weaken to 38 against the dollar by the end of 2024, having recently reached a value of 34.

Founded in 1924 to support industrial development and increase household savings, Isbank holds a market value of nearly $10 billion and has set ambitious goals for international expansion. Aran, who has been CEO since 2021, envisions the bank becoming one of the top global banks in terms of geographical reach and client base.

The bank is currently exploring potential acquisitions and partnerships focused on digital banking and payment systems, particularly in the United Kingdom and the European Union.

In the medium term, Aran noted that a significant portion of Isbank’s income is expected to derive from payment systems, digital initiatives, and service banking. He highlighted the recent merger of its subsidiary Moka Payment Institution with Birlesik Odeme Hizmetleri as a step towards establishing a regional fintech hub.

“Currently, 90% of our income comes from traditional banking, while only 10% comes from these emerging platforms,” Aran stated. "We aim to balance this ratio within the next five years."