Fitch: Emerging Market Banks Defy Volatility with Stable Profits

Waleed Mansour – Fitch Ratings stated that the average aggregate indicators for the largest banks in emerging markets remained stable throughout 2025, despite persistent disparities across geographic regions. The agency expects that oil price volatility stemming from the US-Iran war, along with the continued rise in global real interest rates and borrowing costs, will impact credit and financing conditions in 2026 and 2027, affecting growth opportunities, profitability, and loan quality.

Fitch clarified that the varying exposure of regions to the repercussions of the war with Iran was reflected in its outlook for the banking sectors. In June, it downgraded its outlook for Middle Eastern and Turkish banks from “neutral” to “negative,” citing deteriorating growth prospects and mounting inflationary pressures. It maintained a “neutral” outlook for banks in Africa and emerging markets in Asia and the Pacific, while shifting its outlook for Latin American banks to “negative.” These assessments represent expectations for operating conditions and the business environment compared to the previous year.

AI Risk Scenarios

Fitch noted that the AI bubble risk scenario suggests that a sharp correction in US equities and capital spending related to this technology could significantly reduce growth in emerging markets, thereby impacting the performance of their banks, which may also be affected by currency volatility.

The agency’s report, covering 142 banks, indicated relatively stable operating profitability throughout 2025, with an average ratio of operating profit to risk-weighted assets (RWA) of 3.3%. Fitch considered this level a good buffer to withstand operating environment fluctuations in 2026. Emerging European banks led in profitability, benefiting from interest margins and fee income, particularly in Turkey. Meanwhile, banks in Kazakhstan, Azerbaijan, Armenia, and Georgia recorded strong growth in net interest income and fee and commission income.

Credit Provisions

The agency highlighted that average pre-provision operating profits reached 5.2% for the covered banks, providing a substantial margin to absorb provisions for non-performing loans (NPLs). African banks recorded the highest average NPL ratio at 5.8% of total loans by the end of 2025, yet remained among the most profitable, supported by wider interest margins and lower RWA intensity, despite a decline in their average operating profitability to 4.6%.

Asset Quality

Asia and the Pacific recorded the lowest average NPL ratio at 2.5%, while the ratio continued to decline in the Middle East and Latin America. Profitability of Latin American banks improved due to wider interest margins, increased operational efficiency in Brazil, and lower loan loss provisions at most Colombian banks.

Regional Banks

Fitch noted that falling interest rates and reduced operating environment volatility in 2025 constrained the profitability of banks in the Middle East and Asia-Pacific. Meanwhile, banks in the Middle East and Latin America recorded the highest average RWA intensity. Chinese banks remained the weakest in terms of profitability, with net interest margins ranging between 1.2% and 1.8%, and operating profits between 0.6% and 2.4% of RWA.

Capital Adequacy

Fitch reported that internally generated capital offset loan growth, keeping the average common equity tier 1 (CET1) capital ratio relatively stable at 14.9% by the end of 2025, as well as the equity-to-assets ratio at 10.8%. African banks recorded the largest gap between these two metrics, due to a higher share of non-loan assets, including low RWA-weighted government securities.

Sources of financing: The report showed that customer deposits accounted for 76% of non-equity-based financing by the end of 2025, with no significant annual change. African banks led in their reliance on deposits at 83%, with the lowest loan-to-deposit ratio of 66%. In contrast, Latin American banks recorded the lowest share of core deposits at 68%, and the highest loan-to-deposit ratio at 120%, despite their moderate reliance on wholesale funding, thanks to other stable borrowing sources similar to deposits. Credit ratings of emerging market banks: Fitch Ratings indicated that as of September 14 last year, 20 out of the 142 banks included in the study were unrated. The average long-term credit rating for the probability of issuer default for rated banks stood at “BBB-”, while the average standalone credit strength rating was “bb+”. These indicators reflect the average credit ratings of the banks covered in the study, according to data tracked by the agency.