Fitch: New Entrants Spur Turkish Islamic Banks' Growth 

Fitch Ratings says Turkey's participation (Islamic) banks accounted for a limited 4.9% of banking sector assets at end-9M17. However, the segment is of strategic importance to the Turkish authorities and offers reasonable medium-term prospects, in Fitch's view, considering the government's aim to increase the share of the segment to 15% of banking sector assets by 2025.

Fitch expects the Islamic segment's high financing growth to outpace the banking sector's in 2018, given rapid expansion of the two recently established state-owned Islamic banks. While competition among participation banks is set to increase, the market leaders are well-established and the overall low penetration implies room for growth.

Participation banks' non-performing financing (NPF) ratio of 3.9% was weaker than the sector average (3%) at end-9M17. Risks to asset quality continue to stem from a high watch-list of foreign-currency, SME and construction financing. Capitalisation is adequate but capital ratios are sensitive to further NPF growth and Turkish lira depreciation. Further capital injections are likely to be needed to fund growth at the state-owned Islamic banks.

Refinancing risk at Fitch-rated Islamic banks is manageable while foreign currency external funding is below-sector-average. Foreign currency liquidity is underpinned by potential shareholder support, but could come under pressure in the event of prolonged market closure.

Fitch-rated participation banks' Issuer Default Ratings are sensitivities to a change in shareholders' ability or willingness to provide support, or in the Country Ceiling (Kuveyt Turk, Turkiye Finans). A weakening of credit metrics, or improvements in franchise or risk appetite, could drive changes to Viability Ratings.

Our views on Turkey's participation banks are set out in our latest Turkish Islamic Banks Dashboard, available at www.fitchratings.com.