2.4 Financial Stability Developments and Activities
2.4.1 Financial Stability Developments
Household indebtedness (Household Financial Debt/GDP) in Türkiye stands at 11.8%, well below the emerging market economies (EME) average of 48%. In addition to the existing macroprudential measures implemented by the Banking Regulation and Supervision Agency (BRSA), such as loan-to-value ratios for housing and vehicle loans and limitations on maturities for vehicle and general-purpose loans, the monetary tightening in the second half of the year curbed the growth of consumer loans and personal credit card balances. In 2023, household financial assets grew stronger than their liabilities. As of the last quarter of 2023, household debt to financial assets ratio was 24%, well below its long-term average of 42%.
As of the second quarter of 2023, the corporate sector’s financial debt-to-GDP ratio stood at 55.7%, significantly well below the EME average of 108.6%. The financial indicators of BIST firms remained strong as of the third quarter of 2023, pointing to the resilience of corporate balance sheets against rising financial costs. Moreover, the long-standing improvement in the FX position of the corporate sector continued in 2023 and the sector’s net open FX position decreased by USD 4.7 billion year-on-year to USD 77.6 billion in October 2023. As of October 2023, total FX financial debt of firms stood at USD 209 billion. The 12-month cumulative external debt rollover ratio of corporate sector firms remained above 100%, indicating a sustained access to external financing.
Loan growth, which was high in the first half of 2023, slowed down significantly in the second half due to the monetary tightening that started in June, along with supportive steps such as selective credit tightening. Annual growth of Turkish lira loans, which was 80% at the end of 2022, reached 88% in May 2023 and then declined to 54% by the end of the year due to the monetary and financial tightening in the second half of 2023. The Turkish lira commercial loan growth declined to 46% in 2023, down from 2022 level of 94%. The downtrend in FX loans continued at a slower pace in 2023, while FX loans contracted by 5% in FX-adjusted terms.
The CBRT implemented selective credit policies effectively to rebalance domestic demand and support exports, investment and production. In this scope, the Bank introduced securities maintenance based on loan growth thresholds of 2.5% per month for Turkish lira commercial loans (excluding export, investment, agriculture, tradesmen loans, and loans to public institutions and organizations and loans extended in the earthquake zone), 3% per month for general-purpose loans excluding overdraft accounts, and 2% per month for vehicle loans. Moreover, loan rate thresholds for export/investment loans set up to 1.4 times the reference interest rate that is effect until at the end of 2023. As a result, credit growth diverged between regulated and unregulated loan types and the share of unregulated loans increased.
The banking sector’s asset quality outlook remained strong throughout 2023, with the non-performing loan (NPL) ratio declining from 2.1% at end-2022 to 1.6% at end-2023. The buoyant economic activity, the increase in asset prices and favorable liquidity conditions throughout 2022 and in the first half of 2023 led to a rise in NPL collections and supported the positive outlook in asset quality. The ratio of Stage 2 loans to gross loans decreased to 8% in November 2023 from 8.5% at the end of 2022. In November 2023, the provision ratios of the banking sector for Stage 2 and NPLs loans were 22.8% and 84.5%, respectively. Banks sustained their pandemic-driven prudent provisioning policies that they had started during the pandemic.
The banking sector maintained liquidity buffers above the adequate levels in 2023. Liquidity coverage ratios (LCRs), a major risk indicator for the liquidity outlook, continued to hover well above the legal limits1 of 100% and 80% for FX and total LCRs, respectively. Total and FX LCRs stood at 194% and 330%, respectively, at the end of 2023. Improving expectations and the accompanying decline in the risk premium since the second half of the year led to a decrease in costs and banks provided net USD 12.7 billion worth of financing from abroad in 2023. Following that, banks’ external debt rollover ratio rose to 116%.
In the third quarter of 2023, Turkish lira deposits recorded a significant increase due to the exchange rate-driven rise in the balanced of KKM and exchange rate difference payments to KKM deposits, resulting in excess liquidity in the system. To sterilize the existing excess liquidity, the RR ratios were raised gradually in three successive regulations. In this context, the reserve requirement obligation, which was initially introduced for all KKM accounts, was differentiated based on maturities via the second and third regulatory steps. Additionally, the weight of reserve requirements was increased for short-term deposits and was gradually raised. In December 2023, the CBRT continued to sterilize excess Turkish lira liquidity in the system by initiating Turkish lira deposit buying auctions to increase the diversity of sterilization instruments. The targets that had prioritized and encouraged the switch to Turkish lira since August 2023 led to a decrease of TRY 750 billion in the KKM balance and an increase of more than TRY 2 trillion in Turkish lira deposits in the August-December period. Thus, the share of Turkish lira deposits in total deposits rose from 31% to 42% in this period, while the share of the KKM fell to 18% from its peak of 26%.
The banking sector’s return on equity declined to 34.3% by November 2023 from 40.3% at end-2022. In 2023, the contribution of net interest income to the profitability performance decreased, while commercial profits as well as fees and commission incomes were effective in maintaining the profit performance. The ratio of net fees and commission incomes to assets increased in 2023.
The banking sector’s capital adequacy outlook remained strong, and the banking capital adequacy ratio at 18.3% continued above the regulatory threshold as of November 2023. The contribution of net profit of the period and retained earnings to the increase in regulatory capital decreased compared to 2022, but was still positive. Subordinated debt issuances of banks partly bolstered regulatory capital in 2023.
1 Statutory minimums are 100% for total LCR and 80% for FX LCR.
2.4.2 Financial Stability Activities in the International Area
The CBRT continued to take part in international financial platforms carrying out activities focused on financial stability. In 2023, meetings were mostly held in hybrid format. Accordingly, as a member since 2009, the CBRT pursued senior level participation at the meetings of the Plenary, Steering Committee and Standing Committees 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. The CBRT also contributed to the meetings of technical working groups of the FSB.
The first of the 2023 meetings of the FSB’s Regional Consultative Group for Middle East and North Africa (MENA), of which the CBRT had been co-chair with the Central Bank of Tunisia for two years since 1 July 2021, was held on 12 June 2023 in virtual format. The Governor and the Deputy Governor of the CBRT chaired the meeting. The co-chairmanship was taken over by the central banks of Saudi Arabia and Egypt as of 1 July 2023. The second FSB MENA Regional Consultative Group Meeting for 2003 was held on 22 November in virtual format.
Another international financial platform of which the CBRT is a member is the Basel Committee on Banking Supervision (BCBS). The CBRT was represented at a senior level at the meetings of the BCBS, which is entrusted with the task of setting general standards applicable to bank supervision, providing guidance to the member jurisdictions, and establishing new international standards particularly regarding capital and liquidity frameworks. The Bank also contributed to various BCBS working group meetings at a technical level.
The main agenda items of international financial institutions in 2023 were identifying and evaluating the lessons learnt from the banking crisis in March, addressing the benefits and risks of crypto assets and digital innovations, enhancing the resilience of the non-bank financial intermediation sector, improving cross-border payments, examining financial risks related to climate change, improving cyber and operational resilience, promoting resolution planning, monitoring the implementation of G20 financial reforms and evaluating the effectiveness of reforms. The CBRT effectively cooperated with relevant authorities in the country to maximize the contribution to these activities.
2.4.3 Activities in Participation Finance
The Participation Finance Division formed under the Banking and Financial Institutions Department to coordinate work regarding participation finance, carry out related legal studies and conduct analysis on the sector’s risks, continued its domestic and international operations within its remit specified by the CBRT legislation.
In 2023, various studies were carried out within the CBRT in response to participation banks’ suggestions and emerging regulatory needs. The relevant units of the CBRT provided contributions and opinions for adaptation of the regulatory amendments conducted in line with the CBRT’s Communiqués on RRs and the securities maintenance regulation to cover participation banking and participation finance principles. In 2022, as part of the Participation Finance Strategy Document published by the Presidential Circular, the CBRT took part in the work to increase participation finance liquidity facilities, for which it was nominated as the institution in charge, and to prepare proposals for legislative amendments in other laws. As a part these studies, the Bank reported to Finance Office of Presidency of the Republic of Türkiye. Additionally, the CBRT participated in meetings of the Participation Finance Legislation Working Group coordinated by the Republic of Türkiye Ministry of Treasury and Finance, and contributed to the efforts to develop a participation finance governance framework in the country.
Keeping a close track of international developments and meetings organized by international organizations to which the CBRT is a shareholder or member, the CBRT contributed to regulatory activities, made recommendations and assisted in reporting. Accordingly, throughout the year, the CBRT participated at various levels in the meetings of the General Assembly and the Governing Board of the International Islamic Liquidity Management Corporation (IILM), which are the managerial and administrative organs, as well as the Board Executive Committee, the Board Risk Management Committee and the Board Audit Committee. In 2023, CBRT Governor Hafize Gaye Erkan chaired the IILM Governing Board and the General Assembly. In this context, the CBRT hosted the Governing Board’s meeting in Türkiye in December. Following the meeting, the Bank provided support for the International Islamic Liquidity Management Workshop for national and international shareholders of the participation finance sector, and for the Capacity Building Programme for Türkiye. These meetings staged presentations by CBRT executives and specialists.
As a full member of the Islamic Financial Services Board (IFSB), the CBRT actively participated in the meetings of the Council, the highest decision-making body of the IFSB, as well as Technical Committee meetings and meetings of other sub-working groups throughout the year and expressed its views on the issues discussed.
In a bid to improve bilateral relations, the CBRT responded to training requests from abroad in the field of participation finance. In this context, the Bank delivered a training presentation on “Participation Banks in Türkiye: Legislation, Regulatory Capital and Liquidity” to the Banking and Finance Academy of the Republic of Uzbekistan in March.