Fitch Ratings says in a special report that rapid credit growth has contributed to improved profitability for Turkish banks. However, impaired loans have increased in absolute terms and capitalization has diminished. «Turkish banks reported improved profitability in 2006 and H1-07 due to particularly robust loan portfolio expansion, good contribution from fees and commissions, improved efficiency and controlled impairment charges,» says Ed Thompson, senior director with Fitch’s Financial Institutions team. «As the portfolios have seasoned, impaired loans have grown in absolute terms, but remained flat as a proportion of total credit and banks have provided sufficient credit loss reserves. «Regulatory capital ratios have generally weakened system-wide, due to loan growth and the implementation of an operational risk charge at end-June 2007. «Free capital continues to improve through solid internal capital generation, sale of permanent assets and capital injections from shareholders.» Foreign interest in the Turkish banking sector continued in 2006 and H1-07 and Fitch estimates that approximately 22.5 percent of the system’s equity was owned by foreign entities at end-H1-07 (excluding floating shares held by foreign owners). This percentage will increase to approximately 25 percent when two pending acquisitions are completed. Private banks (local and foreign-owned) dominated the system with 65 percent of assets at end-H1-07. The domestic private banks had a regulatory capital ratio of 16.2 percent at end-H1-07 (2006: 17.5 percent; 2005: 17.2 percent) and the foreign-owned banks had a regulatory capital ratio of 15.8 percent at end-H1-07 (2006: 16 percent; 2005: 17.4 percent). Because a new operational risk charge resulted in meaningful reduction in regulatory capital ratios, some banks have issued subordinated debt to limit the decrease. The implementation of Basel II was postponed recently by the regulators to January 1, 2009 from the original date of January 1, 2008. The report, titled «Turkish Banking Sector – Annual Review and Outlook,» is available on the agency’s public website, www.fitchratings.com.