Global economic activity recovered in 2021 thanks to the easing of lockdown measures against the coronavirus pandemic, faster vaccination, and supportive economic policies around the world. On the other hand, global inflation rates rose due to supply chain disruptions, brisk global demand and rising commodity prices. Due to hints of change in monetary policies of major central banks, portfolio flows to emerging economies (EMEs) were volatile. Global recovery varied across sectors and firms, and corporate sector indebtedness remained high, both of which created uncertainty in terms of global financial stability.
Household debts in Türkiye increased at a lower rate than in peer economies during the pandemic. In 2021, the household financial leverage ratio declined as households’ financial assets grew stronger than their liabilities. General purpose loans and personal credit cards were the main drivers of the increase in household financial liabilities. In this period, the balance of personal credit cards climbed by 44%, while consumer loans grew by 15% year-on-year. On the other hand, the increasing rate of borrowing by fixed-income wage earners and the decrease in per capita debt in recent years prop up debt sustainability. Household financial assets registered a significant increase with the strong growth in TRY deposits and non-deposit TRY financial assets. In this period, non-deposit TRY assets grew in real terms. However, the depreciation of the Turkish lira in the fourth quarter caused the rate of currency substitution to rise.
After soaring rapidly due to the easing of financial conditions amid the pandemic in 2020, corporate sector debts fell on the back of tighter financial conditions in the first three quarters of 2021, pandemic-relief Credit Guarantee Fund (KGF) loans becoming due, and high turnovers in some sectors. Accordingly, after climbing to 72% in October 2020, the ratio of corporate financial debts to GDP dropped to 59.2% in October 2021, but rose back to 71.3% in November 2021 due to exchange rate developments. The net FX position of the corporate sector continued to improve in 2021, with the deficit declining to USD 115.5 billion in November 2021 after narrowing by a total of USD 81 billion since March 2018, when the deficit was at its widest. The total FX financial debt of firms was USD 243 billion in November 2021, of which domestic FX loans and external FX loans accounted for USD 140 billion and USD 103 billion, respectively.
In this period, domestic corporate loans decreased, the share of external loans in total financial borrowing increased, and the rollover ratio of external corporate debts increased to 137% in September before falling to 108% in November. Moreover, FX assets of non-financial firms recorded a substantial increase, reaching USD 160 billion as of November 2021. Real sector firms’ rising short-term net FX position surplus hit USD 61 billion in November, which continued to support their balance sheets. The ratio of FX deposits, a liquid asset held by firms as a hedge against the exchange rate risk, to short-term FX liabilities was still above pre-pandemic levels, while the ratio of corporate financial debts to financial assets fell below its pre-pandemic level. As of the third quarter of 2021, the debt/GDP ratio of real sector firms still remains below EME and world averages.
Having slowed in the first three quarters of 2021 due to tight financial conditions, loan growth started to recover after the revised monetary policy stance in the last quarter of the year. After declining from 23.4% at the end of 2020 to 8.7% at the end of September, the exchange rate-adjusted loan growth rose to 13% at the end of 2021. The growth of retail loans followed a strong course in 2021, while the growth of TRY commercial loans started to edge up in the last quarter of the year. The main drivers of the growth of retail loans were general purpose loans and personal credit card expenditures. To bring retail loan growth back to a moderate course, the macroprudential framework was strengthened.
The flexibility applied to deferral periods, which determine if a loan is classified as a Stage 2 loan or a nonperforming loan (NPL), and the brisk economic activity helped the NPL balance remain relatively flat until September 2021. With the expiry of the loan classification flexibility in September, the NPL balance grew by TRY 11 billion in the final quarter. The NPL ratio decreased from 4.1% at the end of 2020 to 3.2% at the end of 2021 due to growing TRY loans in spite of the limited increase in the NPL balance and the exchange rate-driven increase in the TRY equivalent of FX loans. On the other hand, the ratio of Stage 2 loans to gross loans rose from 10.4% at the end of 2020 to 11.1% at the end of 2021. Banks seem to have continued to cautiously earmark loan provisions during the pandemic. The ratio of provisions to Stage 2 loans and NPLs was 17.7% and 79.7%, respectively, as of December 2021.
The banking sector appears to have strong liquidity buffers that can counter funding and liquidity-related risks. Thanks to stronger cash inflows in the May-August period, the outlook for banks’ liquidity position remained promising, and the sector’s total and FX liquidity coverage ratios were well above the statutory minimum. Loan growth was funded by strong deposit growth and the loan-to-deposit ratio (L/D) dropped to its lowest level recorded in recent years (87.5% as of the end of December). The deposit developments in 2021 were largely led by the TRY deposit growth. TRY commercial deposits were flat in the first half of the year, when the pandemic-relief KGF loans matured, but started to rise again in the summer months amid cash inflows led by the buoyant economic activity. In 2021, savings deposits increased on account of TRY deposits. FX deposits of real persons dropped after the exchange rate developments in March, but started to increase again in the summer months with nonresident Turkish citizens visiting. In order to support financial stability by increasing the share of TRY in the deposits/participation funds composition and to prevent TRY depositors from being affected by exchange rate developments by promoting the conversion from FX deposit accounts and gold accounts to TRY deposits, the CBRT and the Ministry of Treasury and Finance launched an FX-protected deposit accounts program in December.
The banking sector’s external debt rollover was below 100% due to the strong liquidity position of the banks and the weak demand for FX loans. Of syndicated loans, 108% and 101% were renewed in the first and second halves of the year, respectively. The margins added to the reference rates for the cost of the USD tranche of syndicated loans decreased by 35 basis points from the second quarter to 215 basis points for the October-November 2021 period. With ongoing expansionary policies across the globe, the costs of accessing international funds remained moderate, and banks continued to borrow external funds according to their needs.
The capital adequacy outlook for the banking sector remained strong, and capital adequacy ratios of the sector remained above the statutory minimums. In the third quarter of the year, the BRSA announced new decisions regarding the implementation of the measures taken in 2020 in order to limit the negative effects of the pandemic on banks’ balance sheets and loan supply.
These measures helped bolster the capital adequacy of banks in a period of high uncertainty. Adjusted for the effects of the new regulations, banks still maintained a strong capital structure. The banking sector’s capital adequacy ratio (CAR) was 18.3% as of December.
After declining in the first half of 2021, banking sector profitability started to recover by mid-2021. The key driver of the improved profitability was the increase in net interest income due to the repricing of loans and the moderate course of deposit rates. On the other hand, modest NPL additions and the decrease in provisioning expenses led by cancelled loan loss provisions also supported profitability. As of December 2021, the return on equity and the return on assets were 14.4% and 1.3%, respectively.
The CBRT played a role in international financial platforms through efforts to enhance its representation and effectiveness and contribute to financial stability. During the global pandemic throughout 2021, meetings were held virtually, via videoconferences, teleconferences and in a hybrid form. Accordingly, the CBRT pursued senior level participation at the Plenary, Steering Committee and Standing Committee meetings of the Financial Stability Board (FSB), which aims to enhance global financial stability by coordinating the work of national financial authorities and international standard-setting bodies, and developing as well as implementing effective regulatory, supervisory and other financial sector policies. The CBRT also contributed to the meetings of technical subgroups of the FSB as a member.
The CBRT attended the virtual meetings of the FSB Regional Consultative Group (RCG) for the Middle East and North Africa (MENA) on 24 March 2021 and 3 December 2021, at Governor and a Deputy Governor level. The meeting held on 24 March 2021 addressed the policy measures against the coronavirus pandemic and their impacts on financial stability as well as financial vulnerabilities in the region and measures taken against these vulnerabilities in addition to the implications of the road map for G20 cross-border payments on the MENA financial system. As of 1 July 2021, the CBRT and the Central Bank of Tunisia took over the co-chairmanship of the FSB RCG MENA for two years. The virtual meeting held on 3 December 2021 addressed regional financial vulnerabilities and regional impacts of financial risks led by the climate change.
The Basel Committee on Banking Supervision (BCBS) is entrusted with the task of setting general standards applicable to bank supervision, consulting member jurisdictions, and establishing new international standards particularly regarding capital and liquidity frameworks. The CBRT attended the BCBS meetings at the senior level, and participated in and contributed to various BCBS working subgroup meetings at a technical level.
Detection and elimination of global pandemic-driven vulnerabilities and relevant policy responses as well as the preliminary findings regarding their effects were the common focus of all the work carried out in 2021 with international organizations of which the CBRT is a member. In the design of the roadmap for this work, securing financial stability was set as the main goal. The work within international institutions was carried out in active cooperation with the relevant authorities in Türkiye to gain the maximum benefit from their contributions.
In 2021, exchange of information on an international level remained critical. Works continued towards the consolidation of measures and policies of member jurisdictions of international institutions, their exit strategies from these measures as well as the effectiveness of these measures. These works, which enabled the exchange of information and experience between member jurisdictions, were shared with the relevant Turkish authorities and were done in cooperation.
In February 2021, the Participation Banking Division was established under the Banking and Financial Institutions Department. Functions of the new division are as follows: reviewing and examining the national and international legislation regarding participation banks; stating views about the legislation and drafts for amendments and conducting the work on the relevant legislation; monitoring and analyzing financial stability risks specific to participation banking; ensuring coordination among the CBRT units regarding participation banking issues and offering views to the relevant units when necessary; and closely monitoring the relations with international institutions of Islamic finance, of which we are a member or shareholder, and sharing the information obtained from them with the related domestic institutions. Following the requests from participation banks, technical and legal research was conducted and it was decided to deliver the necessary changes in the Turkish Lira Transactions Implementation Instructions in March and accept FX assets issued by HMVKŞ (Undersecretariat of Treasury Asset Leasing Company) as securities against repo.
It was proposed to provide the CBRT with the right of withdrawal unilaterally to apply for foreign exchange transactions, and participation banks with the irrevocable right of promise, for which the CBRT made due arrangements.
Recommendations made by the participation banks on medium and long-term issues and the practical needs arising in this respect are evaluated by relevant units. These efforts are made with care so as not to create arbitrage between sectors, and abstain from the area of compliance with the legal framework and monetary policy.
The CBRT participated in the meetings and workshop of the Participation Finance Institutions Working Group held on 26 April, 10 May and 24 May 2021 under the Presidency of the Turkish Republic.
The CBRT followed international conventions of the International Islamic Liquidity Management Corporation (IILM) as a shareholder as well as the Islamic Financial Services Board (IFSB) as a member and monitored developments, contributed to regulatory activities, made recommendations and supported reporting activities thereof. Accordingly, the CBRT also took part in the meetings of committees and sub-working groups of the IFSB and the IILM. Those standards developed and delivered to us by the Accounting and Auditing Organization for Islamic Financial Institutions (AAOIFI) were examined and due comments were made within the year. The CBRT attended working group meetings of the Standing Committee for Economic and Commercial Cooperation (COMCEC) under the Organization of Islamic Cooperation (OIC).
The main duty of the IILM is to facilitate the liquidity management of Islamic banks and to create indicators for Islamic financial transactions by issuing short-term sukuk that can be used as collateral in interbank borrowing transactions, bought and sold in secondary markets and accepted as collateral in short-term financing provided to Islamic banks by central banks. Throughout the year, meetings were held at the Institution’s Risk Management Committee, Audit Committee, Executive Committee, Governing Board and the General Assembly. Being a shareholder in the IILM, the CBRT also plays an active role in decision-making. Accordingly, the CBRT attended the meetings held across the year.
The IFSB promotes the development of the Islamic financial services industry by adapting international standards to Islamic rules or by creating new standards. The CBRT is a full member of the IFSB and has actively participated in and communicated views on the meetings throughout the year.
The 16th meeting of the Financial Working Group, one of the working groups within the COMCEC, was held virtually on 9-10 September 2021. The meeting focused on the main theme of “The Role of Islamic Finance in Supporting Micro Businesses and SMEs Against COVID-19”, and presentations were made about various topics. The resulting research report along with policy recommendations, the output of the report, were presented to the members and views were exchanged.