Bank Profitability and Interest Rates: Why It Matters to Everyone

Let’s start with some mixed news—one small and good, one big and not so good. The good news is that over the past three months, we’ve seen a slight uptick in lending activity. The bad news? Bank profitability has been in steady decline for nearly two years now. And no, this isn’t just a problem for bank shareholders—it’s something that affects us all.

(Article By Emre Alpan İnan on ekonomim.com – August 22, 2025 / edited & translated by BTT)

Why You Should Care About Falling Bank Profits

At first glance, you might think declining profits only matter to investors or bank executives. But a drop in bank profitability can ripple through the economy in ways that impact businesses, households, and even public finances. So what’s behind this prolonged slump?

According to sector data from December 2023 to June 2025, Turkish banks’ return on equity (ROE) has been gradually declining. While the first few months of 2025 saw this trend stabilize somewhat, the longer-term picture still shows a downward trajectory.

What’s Dragging Down Bank Profitability?

You might expect higher interest rates to support bank profits. But that hasn’t been the case—at least not across the board. One key issue has been the real contraction in loan volumes. While nominal interest income might rise, shrinking loan portfolios in real terms means less overall revenue from lending.

Another factor: fees and commissions on loans have also fallen in real terms. While individual contracts might still carry hefty fees, the total number of loans being issued has dropped, which translates into lower overall non-interest income.

Banks are also paying higher interest on repo transactions and setting aside more loan loss provisions, especially with the risk of non-performing loans on the rise. All of this contributes to an increasingly cautious lending environment, and ultimately, lower returns.

Interest Rates: A Double-Edged Sword for Banks

There’s a common belief that higher interest rates are good for banks. After all, they charge interest on loans—so higher rates should mean higher profits, right? Not exactly.

Turkish banks are particularly sensitive to rate changes because of the structure of their funding. Deposits are generally short-term, while loans are often locked in at longer terms. This means that when rates rise, banks have to immediately pay more on deposits, but the interest they earn on loans doesn’t adjust as quickly. The result? A short-term profit squeeze.

The opposite is also true: when rates fall, banks benefit because they can lower the interest paid on deposits more quickly than the rates they earn from existing loans. That’s why the recent interest rate cuts are helping to stabilize bank profitability—and may continue to do so in the coming months.

Why Falling Bank Profits Hurt the Whole Economy

So why is this everyone’s problem, not just the banks’? Wouldn’t lower bank profits mean lower fees and rates for customers?

Not quite. The deeper issue here is that profitability is closely tied to a bank’s ability to lend. When profits fall, banks become more cautious. They lend less, tighten credit conditions, and pull back from risk. This has a direct impact on economic growth, business expansion, and household consumption.

This is a big topic, and we’ll explore that part of the equation next week. But for now, the takeaway is simple: we all have a stake in a healthy, profitable banking sector.