Macro Analysis /

Turkey: Firm, household balance sheets strengthen, bank asset quality improves

  • Household indebtedness keeps falling, assets shift towards lira-based instruments

  • Corporate sector's financial leverage ratio remains low, indebtedness falls in recent months

  • Banks are resilient against liquidity and interest rate shocks, capital adequacy remains favourable

25 November 2022

The measures taken recently as part of the liraization of the financial system strategy have strengthened the balances sheets of corporates of households, CBT governor Sahap Kavcioglu said in his foreword in the CBT's bi-annual Financial Stability Report, published on the CBT website. The asset quality of the banking sector has performed at its historical best, thanks to the support of stronger household and corporate balance sheets, Kavcioglu added. The governor assessed that the liraization policy measures have been effective in making loan growth, loan composition and funding structure of the financial system more aligned with financial stability and permanent price stability. He underlined that the growth rate and share of SME, export and investment loans have positively diverged from other loan types. In the meantime, the financial system's dependence on foreign funding has decreased, Kavcioglu noted. We think the CBT's overall communication in the Financial Stability Report hints strongly that it will not step back from interventionist and unconventional policy implementations towards the financial sector in the short term.


Household indebtedness has been on a steady decline for the last 10 quarters, the CBT said in the report. It specified that the household sector's financial debt-to-GDP ratio fell to 12.5% at end-Q3 from 13.5% at end-Q1 (the previous report period) and from 15.6% a year earlier. The bank noted that fixed-income earners accounted for the largest share of household indebtedness (around 72% of loan debt at end-Q2, excluding credit card balances). It regarded the situation as positive for the debt-service performance of households. The CBT also observed some improvement in households' credit card debt-repayment performance. On household financial assets, the CBT mentioned a strong upward trend, and underlined an increase in the share of lira-based assets thanks to the FX-protected lira deposit scheme and shift of interest towards instruments alternative to deposits like investment funds and equity shares. Household savings in investment funds and equity shares reached 10.0% of GDP as of end-Q3, and their share rose by 1.7pps y/y, according to the bank. We think the recent improvement in household interest in domestic capital market instruments is the result of a motivation to protect savings against very high inflation on the back of negative real deposit rates. Total financial assets of households accounted for 49.7% of GDP as of end-Q3, according to the report.


The corporate sector's financial leverage ratio hovers around historically weak levels, as the sector's assets have been on a stronger growth path compared to liabilities, the CBT said. The corporate financial debt-to-GDP ratio rose by 0.7pps y/y to 72.6% at end-Q1 due to the effect of the lira plunge in late 2021 on FX debt, but it has been declining since then, according to the report. The bank attributed the rise in financial liabilities of corporates also to increased working capital needs due to commodity price and exchange rate developments. Regarding the corporate debt structure, the CBT noted that the sector continued to reduce FX debt, while firms' external debt rollover ratios remained high. Accordingly, it was assessed that the exchange rate risk outlook on the corporate sector continued to improve. The lira depreciation positively affected corporate financial assets, which were also boosted by increased turnover and profitability amid buoyant economic activity, the report read. Corporate financial assets accounted for 24.0% of GDP at end-Q3, and the share was up by 1pps y/y. The CBT underlined that corporate FX deposits fell y/y in USD terms thanks to the FX-protected deposit scheme.

Banking sector

The banking sector's asset quality indicators, which are at their historic best, are improving further, owing to the moderate nominal loan growth together with limited new additions to the non-performing loan (NPL) pool, the CBT said. It specified that the NPL ratio of the sector kept declining and hit 2.2% as of Oct 28, and added that the decline in the NPL ratio was observable across all loan types. The CBT commented positively about the dynamics of closely-monitored (Stage 2) loans. A significant portion of Stage 2 loans consists of loans that are not in default and banks' prudence in setting aside high levels of provisions for all loan classes since the pandemic limit risks on asset quality, it stated.

The FX-adjusted loan growth was 39.6% y/y in the current report period, the CBT said, likely referring to the end-Q3 level. The acceleration in loan growth has been curbed since the macroprudential measures taken in April 2022 and onwards, it added. Overall lending growth was driven mainly by TRY-based commercial loans, while retail loan growth was moderate, according to the bank. It expressed content with its observation that commercial loan growth shifted towards SME, export and investment loans. The CBT also noted that the FX-adjusted rate of contraction in FX loans deepened to 11.4% y/y.

The CBT's evaluations about liquidity and interest rate risks on the banking sector were favourable as well. Banks' resilience to liquidity shocks improved as they continued to reduce FX external debt together with maintaining strong FX liquidity buffers, the report read. It assessed limited interest rate risk for the sector and a healthy balance sheet sufficient to manage interest rate shocks. The CBT rebuffed increased complaints and warnings by private banks over the rules that force banks to keep more fixed-rate long-term government bonds in an environment of very high inflation. The CBT argued in the report that the regulations on security maintenance against loans and deposits had limited impact on bank balance sheets. Regarding the capital structure of the sector, the bank noted that the sector-wide strong profitability performance supported capital adequacy ratios (CAR). The sector's average standard CAR stood at 18.8% as of September, compared to the regulatory minimum of 12% in Turkey. Even if adjusted for the effects of regulatory measures, the banking sector's CAR remained above the legal limits, the CBT commented.