Turkish Isbank chief sees challenges ahead, interest rate cut in November

Photo credit: Ahmet Bolat/Getty Images

Turkish banks will pay the price for this throughout next year as the country's economic turnaround remains challenging, the CEO of Turkish bank Isbank said in an interview. He expects the central bank to start cutting interest rates in November this year.

CEO Hakan Aran told Reuters that Turkey's largest private bank by assets plans to expand its presence in payment system infrastructure, digital platforms and service banking by making new partnerships and acquisitions abroad.

The growth plan comes as Isbank celebrates its 100th anniversary and Turkish authorities seek to curb rising inflation with high interest rates and other tightening measures that have strained the financial sector's balance sheets.

“I think the difficulties will continue in 2025. We will all continue to pay the price for maintaining price stability and reducing inflation,” Aran said in the interview at Isbank's Istanbul headquarters.

“Banks will cope with this process with a deterioration in net interest margin this year and a deterioration in asset quality next year.”

Asset quality had already deteriorated in July and interest margins were under severe pressure, Aran added.

“Banks' return on equity is falling. If we were required to do inflation accounting, many banks would probably report losses,” he said. “Banks appear to be profitable at the moment because there is no inflation accounting.”

Last year, the government barred banks from companies that use inflation-adjusted accounting methods because it feared it would result in lost tax revenue.

Since June last year, the central bank has raised its key interest rate from 8.5 percent to 50 percent in an effort to reverse years of unorthodox cheap money policies under President Tayyip Erdogan, who had supported the turnaround.

Inflation fell below 62 percent last month and is expected to fall further, which could lead to possible interest rate cuts in the coming months.

Aran predicted that the central bank would begin easing monetary policy in November, cutting interest rates by 250 basis points, roughly in line with analysts' expectations. The interest rate would fall to 45 percent by the end of the year and 25 percent by the end of 2025, he predicted.

Isbank CEO on annual inflation

September inflation data, due in early October, will “most likely show annual inflation below 50 percent, while the policy rate would remain above that. So I think there could be a gradual rate cut starting in November,” Aran said.

Inflation has been well above the central bank's target of 5 percent for years. Aran predicted a fall to around 42 percent by the end of the year and to 20 percent a year later, slightly more than official forecasts.

He said household price expectations are likely to converge on the central bank's significantly lower expectations in 2025.

The central bank will maintain its restrictive monetary policy unless there is an “exceptional” risk or a re-emergence of a dollarization trend, Aran said.

He expects the lira to fall to 38 per dollar by the end of 2024. On Friday it reached the 34 mark for the first time.

Founded in 1924, Isbank was primarily intended to finance industrial development and increase household savings. Today, it has a market value of almost $10 billion and has ambitious international plans.

Aran, CEO since 2021, said the lender aims to be among the world's leading banks in terms of the breadth of its geographic presence and the number of clients it serves.

Isbank is exploring possible acquisitions and partnerships in digital banking and payment systems abroad, particularly in the UK and the European Union, he said.

In the medium term, a significant portion of revenues will come from payment infrastructure as well as digital and service banking, he said. Isbank also aims to become a regional fintech hub, which will be strengthened by the recent merger of its subsidiary Moka Payment Institution with Birlesik Odeme Hizmetleri, he said.

“Currently, 90 percent of revenue comes from traditional banking and 10 percent from new platforms like these,” Aran said. “We are taking steps to approach this ratio over the next five years.”

Read: Moody's upgrades Turkey's credit rating to B1 due to restrictive monetary policy