The Turkish economy is set for better dynamics in 2025. Turkey's GDP growth is expected to pick up in 2025 compared to 2024, as the economy adjusts to domestic challenges and external developments. We expect the CBRT to continue to cut interest rates, although inflation remains a critical factor to watch in 2025, and the real appreciation of the TRY will once again be a key tool for the CBRT in its fight against inflation.
The Turkish banking sector looks set to benefit from a lower rate environment, but challenges remain. Turkish banks' largely domestic operations have exposed them to potential macroeconomic and market volatility as a result of the authorities' policy shifts in recent years. In this sense, the recent commitment to monetary tightening by Türkiye, which has boosted investor confidence and exchange rate stability, has improved the operating environment while easing external funding conditions. We expect the sector's profitability to improve in 2025, driven by a recovery in the net interest margin (NIM) as the CBRT cuts interest rates.
We see selective value in Turkish banks’ credit. In 2025, banks with higher TRY liabilities (deposits) and lower CPI linker portfolios will be better off as rates fall. Is Bankasi is our top pick in the sector, as it is well positioned to flourish in the upcoming market conditions. As such, we would recommend buying Is Bankasi’s 2029 bond.
We also would like to highlight Turkish Eximbank (Türkiye Ihracat Kredi Bankasi AS) as its bonds offer a yield pick-up of 25-70bps over similar Turkish sovereign bonds. We would recommend buying Eximbank 2026 and 2028 bonds. Similar to Turk Eximbank, Ziraat Bank's 2029 bond indicates a significant yield pick-up over the Turkish Government bond with a similar duration. We would also recommend buying Ziraat 2029.
For the subordinate bonds, secondary market pricing for the subordinated bonds currently almost matches that of the senior bonds for most high-quality names. Consequently, at the present levels, there appears to be no compelling rationale for acquiring subordinated bonds, as they do not offer enhanced risk compensation. We would, therefore, recommend waiting for primary issues to benefit from NIP on subs, which should tighten afterwards.